The carbon market crash in 2005 was widely blamed on a massive over-allocation of allowances. In spite of this, many member states submitted lax caps for the second phase of the scheme, forcing the European Commission to step in and tighten national allocation plans (NAPs) (ENDS Report 383, pp 46-47 
).
Pressure has mounted for the introduction of a single EU-wide cap after 2012, when the second phase ends, but reluctance on the part of some member states to cede such an economically sensitive decision to the Commission has been a major obstacle.
But it appears this opposition is melting away. In a working group meeting of the European Climate Change Programme (ECCP) at the end of May, member states agreed that the European Commission should have responsibility for setting a central cap for the scheme’s third phase.
The ECCP is made up of representatives from member states, the European Commission and key stakeholders. Its recommendations will inform legislative proposals for the revision of the scheme which are due by the end of the year.
The cap’s level would be set to put the EU on track to meet its target to cut emissions by 20% on 1990 levels by 2020. But member states could not agree on a common model for allowance allocation and many still want to retain control over the process in order to protect national industries.
Most industries covered by the scheme oppose significant levels of auctioning because of the up-front costs involved. Some, such as steel, are pushing for benchmarking instead. However, the working group agreed that there should be a minimum level of auctioning and a single new entrant reserve.
The consensus is surprising, given that some member states are still disputing the Commission’s changes to their phase two NAPs. In June, Hungary, Poland and the Czech Republic took their complaints a step further and launched a legal challenge against the Commission’s ruling. Slovakia is the only other state to have taken this step so far.
In March, the Commission cut the Czech Republic’s proposed cap to 86.8MtCO2 per year, a reduction of 15%. The cut to the Polish NAP was even deeper - some 76MtCO2, while Hungary’s cap was cut by nearly 4MtCO2 to 26.9MtCO2.
Defending the Polish decision to take legal action, Deputy Treasury Minister Michal Krupinski complained that the Commission had used out-of-date economic data and warned that the cap imposed would harm the economy. Environment Minister Jan Szyszko claimed that Poland would have to cut its industrial output to comply with the Commission’s limit.
The Commission has previously stated that the only grounds for challenging an allocation decision are if a member state can prove it has been discriminated against.
Meanwhile, Germany, one of the most influential opponents of auctioning, appears has come around to the idea, removing one of the obstacles to mandatory auctioning after 2012.
The German parliament is set to amend the country’s second phase NAP to require 8.8% of allowances to be sold.
"We are no longer discussing whether we will auction, but how we will do it," a source in the Social Democrat party, which is part of the governing coalition, told ENDS Environment Daily.
It is likely that the allowances to be auctioned will be drawn from the power generators’ allocation. The sale should raise up to ¤730 million per year.
The source said the revenue would be spent on one or more of three things: increasing aid to Africa, supporting renewable energy or other climate protection projects, or cutting electricity taxes to offset an expected hike in prices. The latter would only apply to the domestic sector because industrial users have already benefited from tax cuts in this area.