The first auction of Phase 2 EU Emissions Trading Scheme allowances took place on 19 November. The UK Government auctioned four million allowances which were sold at £13.60 each, totalling £54m before VAT.

BACKGROUND

The electricity generation sector, along with certain other carbon-intensive industries such as steel, glass and paper production, has faced a price for emitting carbon dioxide under the EU Emissions Trading Scheme since January 2005. Phase 1 of the scheme completed at the end of 2007, with Phase 2 starting in January 2008.

Owners of generating plants with a thermal input of greater than 20MW and the other carbon-intensive industries are required to monitor and report their emissions of carbon dioxide on an annual basis. Plant owners must also ensure that, at the end of each year, they surrender to the regulators one EU ETS allowance (EUA) for each tonne of carbon dioxide emitted in that year.

EUAs can be traded between participants in the scheme throughout the EU. Because EUAs are the same in every EU country, and can be freely traded between them, there is a single EU carbon price. If the cost of reducing carbon emissions is less than the cost of allowances, it is sensible economically for a participant to reduce carbon emissions and either sell allowances or avoid the necessity of having to buy them.

TRADING

Auctioning of the allowances will become compulsory, in 2013, across the EU. However, the UK is the first Member State to voluntarily auction a portion of its allowances (up until this point, the allowances have been freely allocated). The UK has set aside 7% of its allowance cap for auctioning and will auction a further 25 million allowances during the course of next year. In total, about 86 million will be auctioned over a four-year period.

During the first auction, Energy and Climate Change Minister of State, Mike O'Brien, stated that: "Today's first Phase II auction demonstrates continued UK leadership in reducing carbon emissions as part of the fight against dangerous climate change. The EU ETS is central to keeping the price of tackling climate change as low as possible to industry and the economy. We want more auctioning in the future - and are already planning to auction 100% of the allowances needed by the power sector from 2013. This auction highlights the importance of using the market to drive down emissions and create incentives for the development of low carbon technology."

The Government is now engaged in obtaining feedback from primary participants, indirect bidders and others who might have been involved in the November auction in order to inform future auction policy. (For further information click here).

RESPONSE

Following the auction, there has been a call for the funds raised to be put into a dedicated fund to promote green measures in Britain. Unlike some other European countries, the UK has not ring-fenced the funds received for the particular purpose of tackling climate change.

Chris Stubbs, of the WSP Environment & Energy consultancy, said the Government had "missed a trick" by not ring-fencing the money for green technology. "These revenues could be used to part-fund new, cleaner bulk-generation technologies," he said.

The Department of Energy responded that central funding will reflect its ambitious plans to tackle climate change.