The EU ETS Directive, which established the European Union's cap and trade program for greenhouse gas emissions, as amended by Directive 2009/29/EC of April 23, 2009, provides that from 2013 onward, EU Member States shall auction all allowances that are not allocated free of charge to stationary sources based in the EU (the aviation sector follows different rules). Such full auctioning is a significant change from the first two trading periods (2005–2012) under the EU ETS, in which allowances were allocated for free.
The EU's full auctioning principle is subject to several exceptions. One exception is for certain types of stationary activities, such as district heating, high efficiency cogeneration, or facilities in business sectors and sub-sectors exposed to a significant risk of carbon leakage (listed in Commission Decision 2010/2/EU of December 24, 2009). In addition, certain electricity production facilities are subject to a transitional free allocation of allowances. Further, the EU has established a reserve of 300 million allowances for new entrants, which is intended to stimulate investment in carbon capture and geological storage projects and in innovative renewable energy technologies in the EU.
At least 50 percent of the revenue generated by the auctioning system is to be dedicated to financing climate-related action, including innovative projects, as agreed during the last European Council of February 4, 2011.
On November 12, 2010, the EU Commission adopted Regulation No. 1031/2010 on the timing, administration, and other aspects of auctioning of greenhouse gas emission allowances pursuant to the EU ETS Directive. The Regulation lays down practical and technical rules for the implementation of allowance allocation through auctioning to both aircraft operators and stationary sources.
The Regulation provides that emission allowances shall be offered for sale on an auction platform by means of standardized electronic contracts, known as "auctioned products," which should mainly take the form of either two-day spots or five-day futures. Both such products will be traded on a single auction platform common to the EU Member States. The Regulation also provides for the possibility to create additional platforms for other allowed auctioned products, such as futures and forwards.
Common platforms will be designated for a maximum of five years, with a common auctioning infrastructure. The choice of a common platform aims to avoid distortions of the internal market and permit allocation of allowances on the basis of fully harmonized conditions. A common infrastructure is expected to be more cost-effective, ensure the predictability of the auction calendar, provide the strongest and clearest carbon price signal, and allow equitable access to small and medium-sized enterprises covered by the EU ETS. Because certain national auction platforms have already been created (such as in Germany and the United Kingdom), EU Member States may opt out of the common auction platform by appointing their own platforms, which should nevertheless be coordinated with the calendar for the common platform.
An auction monitor will control each auction and report to the Commission and EU Member States on the proper implementation of auctions conducted in the preceding month. In addition, each Member State must appoint an auctioneer who will be responsible for the auctioning of allowances, receipt of auction proceeds, and disbursement of such proceeds on behalf of that Member State.
Broad market access is provided to encourage wide participation and thereby ensure competitive auction outcomes. Admission to the auctions will be available to operators of stationary installations and aircraft operators covered by the EU ETS, business groups of such operators (such as partnerships, joint ventures, and consortia acting as agents on behalf of their members), as well as regulated financial entities (such as investment firms and credit institutions). In light of the recent series of successful cyber attacks on national EU ETS allowance registries, ensuring the security of the new auction platform and auctioned products will be a key concern for EU institutions.