The Consultation closes on 3 August 2009, and stakeholders’ responses will be collected through a web-based questionnaire.

Phase III of the EU Emissions Trading Scheme (EU ETS) starts in 2013. At least half of the emissions allowances under Phase III will be auctioned instead of being allocated to businesses free of charge. The seamless introduction of auctioning is crucially important for the continued efficient functioning of the EU ETS, and for protecting confidence in the European emissions trading market.

In June 2009, the European Commission (EC) launched a public consultation (Consultation) on the rules governing the future auctioning of emissions allowances under the EU ETS. The Consultation forms part of the EC’s preparation of a forthcoming EU Regulation (Regulation), which the EC must implement by 30 June 2010, to ensure that auctioning is conducted in an open, transparent, harmonised and non-discriminatory manner.

EU ETS Auctioning System

Under the Consultation, one of the key questions is the degree of centralisation, or decentralisation, that should be mandated in the Regulation in terms of the number of separate auction processes allowed. The Consultation sets out four methods of auctioning emissions allowances for stakeholders to consider:

  • Full decentralisation: each Member State runs its own auction process, i.e., a total of 27 or more different auction processes will take place in the European Union. According to the Consultation, full decentralisation clearly poses problems with respect to the auction calendar, and risks major inefficiencies due to the lack of standardisation. Participants operating in numerous Member States will be forced to cope with a multitude of different auction processes, which increases the administrative burden and subsequent risk of error. Smaller auction processes with only a few participants could be both unattractive and uncompetitive.
  • Full centralisation: auctions are run on behalf of all Member States through a single EU-wide auction process, along a predetermined implementation calendar and standardised set of rules. The Consultation states that a single centralised EU-wide auction process will generate efficiency, simplify the process and provide the highest degree of accessibility to all bidders. Disadvantages relating to a perceived “distance between bidders and the auctioneer” could be limited by setting up relevant web-based IT tools and infrastructure coupled with targeted training for potential bidders.
  • Intermediate approach: the number of auction processes that can be run by Member States are limited (either individually or jointly) to a manageable number, e.g., three to five processes. The Consultation asserts that a system of a limited number of coordinated auction processes can overcome some of the disadvantages of full decentralisation. The efficiency of this approach largely depends upon the degree of variation and harmonisation of the rules governing the various auction processes. An advantage may arise in leveraging off existing auction infrastructure, such as established intermediaries and carbon exchanges. However, there could be risks of complexity and lack of transparency.
  • Hybrid approach: the auction process will divide into two stages. First, Member States will be responsible for collecting and submitting bids to a centralised auction platform. Second, on the basis of aggregated demand and supply, the auction platform determines the clearing price and announces the results via a centralised clearing house. Calculating the clearing price and resolving ties will be carried out at a central level, whereas registering participants and collecting bids will be overseen by Member States at a decentralised level. The Consultation states that this approach has the same advantages as the centralised process, in that it allows the auction calendar to be set as preferred by the EC. It also may allow greater use of existing auction infrastructure to collect bids.

Consultation Deadline

In addition to discussing the appropriate methodology for the EU ETS auctioning system, the Consultation covers all aspects of the auctioning process that may be relevant for the forthcoming Regulation.

The following issues are highlighted by the Consultation for consideration by stakeholders:

  • Auctioning spot or futures
  • Size and frequency of auctions
  • Clearing and reserve prices
  • Pre-registration of auction participants
  • Guarantees and financial assurances
  • Payment and delivery
  • Monitoring and reporting
  • Preventing anti-competitive behaviour
  • Auctioning aviation allowances

The Consultation marks a significant step forward for Phase III of the EU ETS. It addresses the issue of “entitlement” of free emissions allowances for pan-European businesses on which trading and profits are to be made without initial expenditure or investment by the incumbents. Currently, the United States is in the process of drafting its anticipated federal greenhouse gas cap-and-trade scheme and, therefore, it no doubt will be analysing the successes and failure of Phase II of the EU ETS, and the proposals for emissions allowances auctioning of Phase III of the EU ETS.

The Consultation closes on 3 August 2009, and stakeholders’ responses will be collected through a web-based questionnaire accessible from the internet site of the Consultation,