On October 23, 2012, the Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations 2012 (SI 2012/2661) (ETS Regulations) were made. The ETS Regulations deal with the administration of auctions under Phase Three of the EU Emissions Trading Scheme (EU ETS) and will come into force in the UK on November 14, 2012.
Operation of the EU ETS will change significantly in Phase Three. The most significant changes include:
- A reduction in free European Union Allowances (EUAs);
- A move of the decision making process on allocations of EUAs from Member States to the European Commission (EC);
- The appointment of ICE Futures Europe (ICE) as the preferred platform to conduct the auctions scheme; and
- The imposing of the requirement for certain firms to apply to the Financial Services Authority (FSA) for a variation of an existing authorisation, or requirement to seek authorisation to perform an activity regulated by the Markets in Financial Instruments Directive (MiFID).
During Phase Three, fewer free EUAs will be allocated. Any additional EUAs that are required by market participants will have to be purchased through auctions. Over the course of Phase Three, an estimated 50% of EUAs and 15% of European Union Aviation Allowances (EUAAs) will be auctioned, compared to 10% of EUAs in Phase Two
The auction process was previously operated by the UK Debt Management Office (DMO). In late 2011, the UK commenced an EU-wide open procurement process. In April 2012, ICE was selected as the preferred platform to conduct auctions on behalf of the Department of Energy and Climate Change (DECC) during Phase Three. The last auction of Phase Two conducted by the DMO took place on October 25, 2012.
Certain market participants will now have to apply to the FSA for a variation of permission to participate in the auction process, as ‘bidding in emissions auctions’ is now a regulated activity pursuant to MiFID. Undertaking a regulated activity requires FSA authorisation. Market participants who will not seek authorisation from the FSA, or a variation of an existing permission, will have to use an authorised broker or an ICE member if they wish to participate in the auctions.
On July 19, 2012, the FSA published a policy statement covering the bidding process for EUAs under Phase Three. The policy statement sets out the Emissions Allowance Auction Bidders Instrument, that implements the measures regulating to participation in the auction process, which came into force on July 27, 2012. On the same day, the FSA started accepting applications for variations of existing authorisations.
Phase Three auctions are scheduled to begin in November 2012, subject to completion of the EC’s approval process of the ICE auction platform, which is expected to happen in early November 2012.
The following are the provisional forthcoming auction dates: November 21, 2012 and December 5, 2012 for EUAs and November 26, 2012 and December 10, 2012 for EUAAs.
Those wishing to participate in the auction process in the UK must, inter alia, be members of ICE, or must conduct their trading activities through an intermediary registered with ICE.