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EU ETS Phase 3 allocation: racing against the clock

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Phase 3 allocation: racing against the clock
17 January 2012
2 Executive summary
2 Introduction
3 Total cap
3 Free allocation: industry
5 NIM submission status
6 Free allocation: power
7 Auctioning
11 Early auctions delayed?
11 Aviation acutioning
12 Conclusions
13 Colophon
Carbon Outlook: Market volume
and value forecast for 2012-2014
CDM Programme of Activities:
Status and prospects
New allocation rules in phase 3 of the EU ETS: auctioning will
replace free allowances as the main allocation method. We
expect 8754 Mt of allowances to be auctioned and 6067 Mt to be
allocated for free over the years 2013-2020. This means auctioning
will account for 59 per cent of the overall volume for stationary
The power sector will acquire all their emission allowances
through auctioning, with the exception of eight member states
which have applied for 700 Mt of free allocation for their utilities.
The industry sector will receive free allowances based on
benchmarking. The precise amount given to each installation will
depend on how CO2 efficient it is compared to predefined efficiency
The free allocation volume will likely be decided towards the end
of 2012 once the European Commission finishes the assessment of
the member states’ National Implementation Measures. We expect
the submission of NIMs to be completed by the end of February 2012
at the earliest.
We expect phase 3 auctions to begin in autumn 2012 (or later) as
the process of selecting auctioning platforms is still in a very early
phase. Tenders need to be published and submitted, then it will take
time to select and test platforms before the auctions can start.
We believe the delays will reduce the supply in 2012, with only
70 of the planned 120 Mt of early auctions coming onto the market.
Likewise, lingering uncertainty over the free allocation volumes could
induce some industry installations to keep their phase 2 surpluses.
Together, this could provide some support for carbon prices in 2012.
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The third trading period of the EU
ETS will see several important
changes, not least with regard
to the allocation of emission
allowances. From 2013 onwards,
around 60 percent of the European
Union Allowances (EUAs) will be
auctioned, as compared to 4 per
cent today. The remainder will still
be handed out for free, but the
allocation methodology will change
substantially, from being based on
historical emissions to benchmarks.
Furthermore, the overall scope of
the ETS will expand as new sectors
such as aviation, aluminium and
petrochemicals are included.
The increased use of auctioning
in phase 3 is a bid to restore
confidence in the ETS. Free
allocation has previously allowed
many of the biggest CO2-emitters
to collect windfall profits as they
passed on the opportunity cost
of carbon allowances to their
The process for allocating phase
3 allowances will likely become a
key item on the policy agenda in
2012. The ongoing submission of
National Implementation Measures
(NIMs) and their assessment by
the European Commission will
determine the amount of free
allocation to the industry and heat
Free allocation wil also be given
to electricity producers in eight
member states. The European
Commission is currently reviewing
the submitted applications.
In Phase 3, auctions will be carried
out on a common EU wide platform
and on “opt-out” platforms that
will be set up by Germany, UK, and
Poland. Auctioning of 2012 aviation
allowances will also take place on
the new auctioning exchanges.
Whether these platforms will be
operational in time for all the
planned in 2012 however is open to
In this report, we cover all critical
stages of the phase 3 allocation
processes and discuss the
potential for delays. We also give
a full overview of the methods
for allocating free allowances
to industrial installations and
electricity producers and estimate
the potential amounts of free
allocation and auctioning.
Executive summary
Despite the nearing end of phase 2, the phase 3
allocation process is nowhere near completion.
Uncertainty remains over the volume and timing of
phase 3 auctions as well as over the amount of free
The total annual cap in phase 3 will decrease by 1.74%
of the average annual phase 2 allocation, starting
in 2010. This translates into an annual decrease in
total allocation of 36 Mt. The total cap will be 2294 in
2013, declining to 2027 in 2020. This is assuming an
emission reduction target of 20 per cent by 2020, a
scenario we currently see as most likely. Each sector
will be given a portion of the total annual phase 3
caps, equal to its share of phase 1 verified emissions.
Industrial installations will receive most of their
allocated allowances for free. This will be determined
with a bottom-up approach through the use of
benchmarks for sub-installations. Member states will
calculate the amount of free allocation for each sub-
installation based on the existing benchmarks and
historical activity levels. These preliminary allocation
volumes will not exceed the total cap of the industrial
sector which is determined “top-down” based on the
sector’s share of phase 1 emissions.
The amount of free allocation in the industry sector
will become clear after the Commission assesses the
National Implementation Measures (NIMs) which
are still being submitted by member states. We
expect NIM submission to be completed by the end
of February 2012 at the earliest and the assessment
process to be finalized towards the end the year.
Auctioning will become the rule in the power sector.
Unlike industry, the power sector is not eligible for
free allocation, with the notable exception of eight
member states that have proposed to allocate 700 Mt
to their utilities over 2013-2019 for free.
Putting the necessary infrastructure in place for the
planned auctions will be a critical issue throughout
2012. Given the current pace of progress we expect
that most auctions will not start before October
(possibly later). This leaves less time for a distributed
spread of the volumes to be brought to market, and
we see it as likely that only approximately 70 of the
planned 120 Mt will be sold by the end of December.
Together with lingering uncertainties over the free
allocation volumes in industry, these delays could
provide some support for European carbon prices in
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based on its share of verified
emissions in phase 1. Most of the
sector’s cap will be allocated for
free. The volume of free allocation
will be determined based on
benchmarking. Industrial operators
will receive free allowances based
on how CO2 efficient they are
compared to a predefined efficiency
benchmark adopted by the
All of the allowances that are not
allocated for free will be auctioned
on specially designated platforms,
which will be selected through
tender processes in 2012.
Free allocation to
industrial installations
Industrial installations will
receive free allowances based on
benchmarks for CO2 efficiency.
Through benchmarking,
installations will receive a certain
amount of allowances for each
unit of output, to cover emissions
from the manufacturing of a
certain product. This amount of
free allowances is specified by
the benchmarks adopted for that
The Commission has set 52 such
product benchmarks based on the
average efficiency of the 10 per cent
most CO2 efficient installations
that manufacture each product. If
installations produce more than
one product, they will be allocated
allowances based on more than
one benchmark. The product
benchmarks will cover 75 per cent of
all emissions in the industry sector.
Installations can additionally be
covered by benchmarks based
on the units of heat and/or fuel
consumed or exported, for emissions
which are not covered by the product
benchmarks. The heat benchmark
will be more prevalent and apply to
20 per cent of industrial emissions,
while the one for fuel will cover 5 per
cent (see Table 2 for the values of
these benchmarks adopted by the
For industrial emissions not covered
by the previous three allocation
approaches (less than 1 per cent
of the sector’s emissions) free
allocation will be based on historical
The amount of free allowances
received will also depend on the
installations’ risk of carbon leakage.
Those not vulnerable to carbon
leakage will receive only 80 per
cent of their allocation for free in
2013. This percentage will decrease
linearly to reach 30 per cent in
2020. Plants which are exposed
to international competition will
receive their allocated allowances
for free. Whether the free allocation
will cover their actual emissions,
however, will still depend on their
efficiency compared to the relevant
Allocation at the
installation level
Different allocation methods can
apply to the same installation.
Member states will split plants into
sub-installations, which will be
defined according to the benchmark
that applies to them. The final
allocation to each sub-installation
will be equal to the product of the
relevant benchmark, the historical
activity level, the carbon leakage
factor, and a cross-sectional
correction factor. See Table 2
below for how these factors will be
calculated for each sub-installation
depending on the benchmark used.
The allocation for each installation
will then be determined according
to the sum of the allocation volumes
for all of its sub-installations.
Total cap
The 12,800 stationary installations
that are currently compliant to the
ETS emitted approximately 1.9
billion tonnes of CO2 equivalents
in 2010, close to half of the
total European greenhouse gas
The EU has decided that in order
to reach the 20 per cent reduction
target by 2020, EU ETS emissions
will have to decrease every year by
1.74 per cent of the average annual
cap in phase 2 starting from 2010.
This declining trajectory is what
determines the annual phase 3 caps.
We currently estimate that the
cap will be 2294 MtCO2 in 2013
and gradually decrease to 2027
in 2020 (see Table 1). The exact
phase 3 allocation will be known
once the total amount of cancelled
allowances from countries’ NERs
and JI reserves in phase 2 are
Free allowances will be allocated to
the industry and heating sectors EU-
wide, and some will also be given
to electricity producers in certain
eligible countries.
The industry sector will be allocated
a share of the phase 3 total cap,
Year Total Allocation
2013 2294
2014 2256
2015 2218
2016 2180
2017 2141
2018 2103
2019 2065
2020 2027
Table 1: Annual Phase 3 caps
Volumes include allocation to existing
sectors, aviation, new industry and
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Determining the total free
allocation volume
In the NIMs that member states
submit to the Commission, they will
propose a preliminary allocation
amount for each sub-installation.
This will be equal to the product of
the benchmark and the historical
activity level. The total allocation
determined through this bottom-
up approach cannot exceed the
total cap for the industry sector.
Thus, the Commission could apply
a cross-sectional correction factor if
the preliminary allocation is higher
than the total cap. This factor will be
the same for all installations in the
industry sector.
The amount of free allocation will
depend on when the correction
factor is applied. There are three
possible scenarios:
1) In all years in phase 3
2) After a certain point in phase 3
3) Not at all
This will depend on how the
preliminary allocation amount
compares to the total cap. We
expect that, as a result of the
benchmarks, the preliminary
allocation will be less than the total
cap in the first years of phase 3.
Thus, we see scenario 2 as the most
likely and illustrate it in Figure 1. In
this case, the constant preliminary
allocation in the NIMs starts to
exceed the total cap at some point
in phase 3. At that point in time,
the correction factor is applied
and effectively “cuts off” the free
allocation amount, which starts
decreasing linearly thereafter.
After the correction factor is
applied, the allocation amount will
also be adjusted according to the
carbon leakage risk for industrial
installations. For installations
deemed not to be vulnerable to
carbon leakage, the free allocation
amounts determined thus far will
be discounted by the percentages
described above. Due to this, the
final free allocation amounts will
never actually be constant as in
Figure 1.
We estimate that the total amount
of free allowances that the Industry
and New industry sectors are
expected to receive will be 773 Mt
in 2013 and decrease to 622 Mt in
2020 (Table 3, next page). There is
uncertainty over the point in time
when the cut-off takes place. We
have assumed that the correction
factor will be applied in 2016.
Benchmark impacts
The method of benchmarking
will affect the way allowances are
distributed in the ETS. As emitters
no longer receive allowances based
on historical emissions, less efficient
installations could face shortages on
a year-by-year basis. This is not to
suggest that these installations will
necessarily assume buying positions
Figure 1: Time for a correction?
Illustrates how the Commission will determine the need and timing of a correc-
tion factor. Annual max allocation is the total annual cap for the industry sector.
Preliminary allocation is the amount proposed by member states in the NIMs.
Table 2: Allocation factors in phase 3
Factors for calculating the amount of free allocation to each sub-installation in
the industry sector.
installation Benchmark
Historical Activity Level
(over 2005-2008 or 2009-
2010, whichever is higher)
Carbon Leakage
Factor (in 2013)
52 product
Median annual production
level (tons of product)
Exposed = 1, Non
exposed = 0.8
benchmark 62.3 EUAs/TJ Median annual heat
consumption or export (TJ)
Exposed = 1, Non
exposed = 0.8
benchmark 56.1 EUAs/TJ Median annual fuel
consumption (TJ)
Exposed = 1, Non
exposed = 0.8
97% of
Median annual emissions
Exposed = 1, Non
exposed = 0.8
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in the market. Many industrial
installations are sitting on large
phase 2 surpluses, which can cover
future shortages. What it does imply
is that less efficient industrials might
hold on to their phase 2 surpluses to
cover phase 3 shortages caused by
the benchmarks.
How installations compare to their
benchmarks will be an important
factor in how long or short they end
up. The benchmarks are based on
intensity data from 2007 and 2008
and the technologies which existed
at the time. The Commission thus
argues that the benchmarks should
be achievable.
However, the benchmarks could
have a significant impact on the
amount of free allowances the
installations will receive. For the
steel sector for instance, Eurofer has
announced that the CO2 efficiency
of the average blast furnace plant
is 1.59 tCO2/t (for a tonne of steel
produced). In comparison, the
product benchmark for hot metal
determined by the Commission
is 1.33 tCO2/t. Given historical
production data, we estimate that
the steel sector will receive 30Mt
less per year in phase 3 than if the
average efficiency was equal to the
Commission’s benchmark.
See textbox for the current status
of two court cases raised against
NIM submission status
The NIM submission process has
so far seen a significant delay. The
formal submission deadline of 30
September 2011 was missed by
most member states. By 3 January
2012 only ten states had turned in
their allocation plans: Cyprus, Great
Britain, Estonia, Ireland, Latvia,
Lithuania, Malta, Poland, Romania,
and Slovakia.
In response, the Commission has
threatened to launch infringement
proceedings against the other 17
member states. The countries have
to provide information on their
progress to the Commission by 1
March 2012, when the Commission
will consider any further legal
The delay can be explained by
the complicated process for NIM
preparation. A member state has
to collect verified historical activity
data for each sub-installation that
falls under the ETS. Installations
within some member states missed
Table 3: Estimated free allocation volumes to each industry sector
Values in million tons.
Metals Oil and
Other New
Industry Total
2013 33 167 156 192 123 102 773
2014 33 165 153 189 121 98 758
2015 32 162 150 185 118 95 743
2016 32 159 148 182 116 91 728
2017 31 153 142 175 112 88 701
2018 29 147 137 169 108 85 674
2019 28 141 131 162 104 81 648
2020 27 136 126 156 100 78 623
Total 246 1230 1143 1410 901 719 5649
The adopted benchmarks have been the subject of two court cases brought
against the Commission, one by steel industry group Eurofer and the other by
Poland. The rules surrounding waste gases used as a heat source in production
processes have proven particularly contentious for both cases
Both plaintiffs have raised issue with the Commission’s decision to reduce
the amount of allowances given out for such use of waste gases. According to
the community wide implementation measures (CIMs), these allowances are
discounted by the amount of emissions from producing an equivalent amount
of heat from natural gas. Eurofer applied for the annulment of this decision, but
also for the suspension of its execution until the Court reaches its final verdict.
The latter plea was rejected by the Court in September 2011.
The case filed by Poland also calls for the annulment of the benchmarking
decision. In addition to contesting the rule on waste gases, Poland pleaded that
the Commission had not sufficiently taken into account the unique situation of
the fossil fuel dependent country. The court has yet to issue a judgment.
Currently, the Commission has green light to implement the benchmarks. The
court cases, which could last between one and two years, could mean some
changes to benchmarks down the road, but they will not delay the phase 3
allocation process.
Any future changes to the benchmarking rule will not affect the total supply
of allowances in the EU ETS because the share of the cap to be allocated to
industry is already determined as their share of total emissions during phase 1.
Benchmarks upheld in court NIM submission still
far from completion
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Free allocation to
power installations
The revised ETS directive includes
a derogation rule under which
ten member states were eligible
to allocate a certain number of
allowances for free to electricity
producers. Allowances could be
allocated for free to power producers
on the condition that they invest the
corresponding value of the received
free allowances in green technology.
To apply for this type of free
allocation, the eligible member
states had to submit national plans
to the Comission by 30 September
2011. This process is separate
than the NIM submission. In their
applications, member state had to
list all eligible power plants and
the investments they will make to
qualify for free allocation.
Eight out of the ten eligible
countries decided to apply for free
allocation to electricity producers.
Table 4 shows the total free
allocation proposed by each country,
as seen in submitted documents or
in pre-submission drafts published
on national authorities’ websites.
these deadlines. In Germany,
industrial operators were given until
23 January 2012 to submit data.
Thus, Germany will not be able
to submit its NIM until the end of
February 2012.
Italy is currently processing its
collected data, and could probably
submit its national plan by the end
of January 2012. Sweden could
submit soon, as its official plan was
to submit in December last year. In
addition, Finland has announced
that it will turn in its plan in early
February 2012.
Overall, we expect that the latest
NIM will be submitted towards the
end of February 2012 at the earliest,
given the progress seen from nations
so far.
Upon submission, the Commission
will assess the NIMs to determine
whether member states have
calculated the preliminary allocation
amounts correctly. It will also
determine whether to apply the
cross-sectional correction factor and
how large that will be. It is important
to note that the Commission will
not be able to determine the final
allocation to each installation
before it has received the NIMs of all
member states.
In conclusion, we expect that the
allocation figures will be complete
towards the end of 2012. There
is a risk that the process could
be postponed even further if the
Commission rejects any preliminary
allocation amounts. That will result
in a back-and-forth process between
the Commission and a member
state, much too reminiscent of
the NAP process which saw many
The proposed volumes for free
allocation fall far below the
maximum amount of free allocation
allowed under the derogation rule.
On average, the eight countries
have chosen to allocate no more
than 64 per cent of the maximum
available allowances for free. Poland
took the biggest advantage of the
derogation possibility (75 per cent),
whereas Lithuania on the other end,
proposed to allocate only 31 per cent
for free.
We have estimated the maximum
amount of free allocation based on
the “derogation package” adopted
by the Commission on 29 March
2011. These rules stipulate that
the free allocation in 2013 can be
no more than 70 per cent of the
total power sector emissions over
the period 2005-2007. After 2013,
the percentage has to decrease
gradually to reach zero in 2020.
This decline could either be linear or
non-linear. A non-linear trajectory
cannot deviate more than 50 per
cent from the average decline
necessary in any given year to reach
zero per cent by 2020. Based on
such an “optimizing” approach,
we estimate the total maximum
Table 4: Proposed free allocation to power sector in eligible countries
Values in million tonnes.
Member state Proposed free
Proposed allocation as
% of total allowed
Bulgaria 58 104 56%
Cyprus 9 14 64%
Czech Republic 108 199 54%
Estonia 19 40 48%
Hungary 24 54 44%
Lithuania 2 8 31%
Poland 405 537 75%
Romania 75 140 54%
Overall 701 1096 64%
Eight countries to
give away EUAs to
their power sectors
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number of allowances that can be
allocated for free in each of the eight
member states in Table 4. Overall,
the maximum amount of allowances
they could receive is 1096 Mt.
Eligible installations are those
that have started to generate
electricity before 31 December 2008
or for which the investment was
“physically initiated” by that date.
The latter can be demonstrated by a
contract for the construction of the
plant, signed before 31 December
2008, an authorizing document
from a national authority approving
the construction, or any other
evidence proving the investment
decision was not influenced by the
option to receive free allowances.
There is a possibility that the
Commission will contest Poland’s
proposed allocation that includes
thirteen yet-to-be-built power plants
which did not have a building permit
by 31 December 2008. According
to Polish law, a building permit
is required before construction
commences. Polish authorities will
have to provide other evidence that
the plants were “physically initiated”
if challenged by the Commission,
but their plan is currently not clear.
Total Free Allocation
The amount of free allocation for
each year is comprised of the free
allocation to the power, industry and
new industry sectors. For the power
sector we have aggregated the
volumes proposed by member states
under the derogation rule.
However, Romania and Estonia have
only announced the total proposed
free allocation for the whole period
2013-2019. Thus, we have estimated
the potential amount of allowances
they could allocate for free for
each year according to their total
proposed volume. To do this, we
assumed that the percentages in
Table 4 are constant for all years
2013-2019. We have multiplied
this percentage by the estimated
maximum allowed allocation for
each year to calculate the potential
annual amounts.
The increased use of auctioning for
allocating allowances will be one
of the most important changes in
the EU ETS as we pass from phase
2 to phase 3. Overall, in the years
2013-2020, around 59 per cent of
the total allocation will be auctioned
(see Table 6). In the ongoing second
trading period, only 4 per cent of the
EUAs have been auctioned.
Member state Revenue forgone
(Million EUR)
Bulgaria 548
Cyprus 60
Czech Republic 1095
Estonia 250
Hungary 363
Lithuania 63
Poland 1584
Romania 777
Total 4740
Table 5: Income lost
Revenue foregone from the proposed
free allocation to the power sector.
Choosing to allocate allowances for
free, the eight member states would
forgo some potential revenues in
a time of strapped public budgets.
Given our forecasted average price
for phase 3 of EUR 12/tCO2, we
estimate the amount of revenues
that governments will forgo if they
were to allocate free allowances
based on their proposals (see Table
5). The values range from 1.6 billion
for Poland to €60 million in Cyprus,
for a total of €4.7 billion.
Commission assessment
of optional allocation
The European Commission has
until 30 March 2012 to assess the
applications. During this period,
it will make sure that the total
allocation in each country does
not exceed the average electricity
emissions over 2005-2007, and
apply a cross sectional correction
factor if they do. More importantly,
the Commission will determine
whether the installations included
in the application are eligible for
partial free allocation.
2013 881 1099 55%
2014 853 1091 56%
2015 824 1083 57%
2016 794 1076 58%
2017 752 1083 59%
2018 708 1090 61%
2019 663 1099 62%
2020 592 1134 66%
Total 6067 8754 59%
Table 6: Free allocation and auctioning
The 300 million allowances set to be allocated from the NER 300 in 2012 have
been subtracted from the phase 3 allocation. The early auction volumes of 120
million allowances are included in phase 3.
Total free allocation
Total auctioning
Auctioning % of
total allocation
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Auction format
The auctioned product will be daily
futures (two day delivery delay). The
sales will take place as single-round,
sealed bid, uniform price auctions.
This is a simple format that has
been chosen deliberately to ease
the access for a maximum number
of bidders, including small and
medium sized enterprises. Directly
following the closure of the bidding
window (minimum two hours), the
auction platform will determine and
publish the clearing price at which
demand for allowances equals the
number of allowances offered for
sale in the auction concerned.
Successful bidders will be the ones
who have placed bids for allowances
at or above the clearing price.
They will all pay the same price,
regardless of the price they specified
in their bids.
The auction handling will entail
significant costs for the platform
operators, especially linked to due
diligence (of buyers and sellers)
and clearing. This will be covered
by a fee, consisting of a fixed and
a variable part, which the bidders
will have to pay to participate in the
In today’s market (phase 2), fees on
the major exchanges typically range
from 2-4 euro per 1000 tonnes. The
higher supervision standards in
phase 3, could justify the fees to rise,
but given the exchanges’ eagerness
to handle the EUA auctions, we
expect they will likely bid to host
them at substantially discounted
Only regulated markets
can auction in phase 3
A key difference in phase 3 will
be that only “regulated markets”
will be allowed to operate auction
platforms. This typically means fully
regulated commodity exchanges
(such as ICE ECX, GreenX, NASDAQ
and EEX), which already conduct
much of the EUA trading in phase 2.
Other currently operating platforms
which are not considered regulated
markets will either have to up-
grade their legal statuses, a long
and cumbersome process, or be
excluded from selling primary EUAs.
Two main groups of buyers will
be admitted to the auctions:
installation operators that are
compliant under the ETS (those who
need to surrender EUAs every year)
and investment firms and credit
institutions that are authorised and
regulated under EU law. In addition,
a special provision allows for fuel
traders to take part.
Financial market exchanges can
compete in the tenders, as can
newly set up entities, as long as they
get the status of regulated market.
Given the complexities involved, the
likelihood of a new operator winning
a tender seems very slim.
The platform selection will be based
on price (cost to participants), as
well as technical and financial
capacity to perform the contract.
The draft version of the tender
indicates a comprehensive list
of precise aspects that will be
assessed, including web interface,
training courses, etc.
A common auction monitor will
scrutinize all four platforms to
guarantee non-discriminatory
access for all admitted participants,
avoid market manipulation, etc.
Total Auctioning Volumes
In phase 3, auctioning volumes will
be equal to the cap minus the free
allocation. We estimate that the
amount of auctioned allowances
will be 1099 in 2013 and gradually
increase to 1134 in 2020 (Table 6).
The exact auctioning volumes will
be known once the Commission
decides how many free allowances
will be given out, which we expect to
happen towards the end of 2012.
Distribution among
member states
The total auctioning volumes
are divided among the member
states following a rather complex
calculation in the ETS directive.
Essentially, each country will
receive allowances more or less
proportionally to its share of
historical emissions, except that
12 per cent of the annual volumes
will be deducted before the initial
distributions, to be added to the
shares of certain eligible countries.
The various governments will then
offer their allowances to the market
on one of four auctioning platforms
that will be created for this purpose.
24 member states will set up a
common platform together with
the European Commission. The top
three CO2 emitters Germany, Poland
and UK have decided to launch their
own national platforms.
Volumes shall be spread throughout
the year, in regularly recurring
“bidding windows”, in order to
minimize the impact on secondary
trading. The technical details will be
decided by the platform operators,
but questions of substance, such
as possible revision of volumes, will
be deicided by the Commission.
The exact dates and times of the
auctions will be published in auction
calendars in February the preceding
Much remains to be
done regarding auc-
tion platforms
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Although the regulatory framework
is more or less ready on a EU level,
the implementation in the member
states is far from being finished.
The Auctioning Regulation (AR)
has direct legal effect, but the
fact that it refers to a series of
other legislative acts, not yet fully
transposed in all member states,
means that potential platform
operators risk being excluded on
the basis of their host country
not having up to date national
legislation. The Commission is
mapping the implementation status,
and the latest available update
(November 2011) shows that at least
ten member states still need to
implement provisions pursuant to
the directives for market in financial
instruments (MiFID) and for market
abuse (MAD).
More important in terms of delay
risk is the fact that the entire
infrastructure still needs to be
set up. The joint procurement
agreement for the common
auction platform was published
late November 2011, and the call
for tenders seem to be in the last
phase of preparation (draft version
can be found on the Commission’s
website). We assume it will likely
be published by late January or
early February 2012. As it is set
to be a very thorough selection
process, the platform is not likely
to be operational before October
at the earliest. The auction monitor
will also be selected through a
tender process in 2012 (the joint
procurement agreement was
published in November 2011).
With only one year to go before the
start of phase 3 (January 2013), the
planned schedule seem to be a race
against the clock (se Figure 4 below)
UK started procurement
of opt-out platform
The UK, which has opted out of
the common platform, launched
a tender for its own permanent
platform on 22 December 2011, with
submission deadline 17 February
2012. ICE Future Europe, Bluenext
and EEX have all indicated that they
will submit tenders, whereas GreenX
is reported to be “reviewing the
Germany and Poland also opted-
out of the common facility, and will
set up their own national platforms
through separate tenders. So far,
little news has been revealed about
their procurement procedures,
it thus seems likely that their
permanent platforms will be
finalised only some time after the
common European and the UK
Once all the four platforms are
operational they will share the total
auctioning volume between them.
Assuming that Germany will auction
its EUAs on its own platform, as will
UK and Poland on theirs – whereas
the rest will enter the market
through the common platform – we
Figure 2: Share of early
auctions by platform
The general regulatory framework for the EU ETS is set by the Emission Trading
directive, which determines the total cap. The directive also calls for a regulation
to be adopted by the Commission, on the “timing, administration and other
aspects of the auctions”. This became the Auctioning Regulation, (AR) which
specifically governs the auctions of phase 3 allowances.
Originally passed in 2010, the newest version of the AR entered into force
25 Nov 2011, with amendments that set the national volumes for the phase
3 auctions that will take place already in 2012. Like the ETS directive, the AR
covers stationary installations (EUAs) as well as aviation (AEUAs). The AR
contains several measures to avoid cheating, fraud and favouritism.
Broadly speaking the AR provisions concern two different aspects of the
platforms: 1) the procurement procedure to be followed to select them, in order
to ensure a non-discriminatory competition among the interested candidates,
and 2) the functioning (once they will be operational). The latter point includes
the general design: how to spread volumes throughout the year, when to publish
the calendars, criteria for access to auctions (who can place bids? who can be
refused?), the role of the auctioneer and the auction monitor, etc.
The regulation clearly distinguishes between the common platform and the
national ones, although most provisions are applicable to both types. More
details on the platform design will appear in the tender that is likely to be
published in January 2012.
The regulatory framework for auctioning
Figure 3: Share of phase 3
auctions by platform
Carbon Market Analyst 17 January 2012
All rights reserved © 2012 Thomson Reuters Point Carbon
estimate the shares of each in Figure
2 (based on the 2012 early auction
volumes decided by the EU in 2011).
For the whole period 3, the EU share
will slowly increase its part (from 58
to 62 per cent) as the calculations
stipulated in the ETS directive
comes into play (Figure 3).
Set-up of platforms to go
on throughout 2012
If the tender for the permanent
common platform is published by
the end ofJanuary, candidates will
probably have until March to present
their offers. Then it will take a
minimum of two months to conclude
the selection of operators, and then
potentially several months more to
test the platforms before they are
ready for commercial operations.
The UK already published its
tender, and could thus enjoy a head
start for its platform. However,
the Commission will still need to
assess the chosen UK platform;
to be sure that all eligible bidders
are given equal access to the
auctions, and that no preference
is given to companies registered
in any particular member state. If
satisfied, the Commission will then
put forward a draft amendment of
the Auctioning Regulation in order
to list the opt-out platform in the
regulation annex.
This amendment follows the same
procedure as the adaptation of
the AR itself, including a vote by
the Climate Change Committee
followed by a three-month scrutiny
period in the European Parliament.
The opt-out platform can start
conducting auctions only when the
amendment to list it in the annex
to the AR has entered into force.
This legislative process will take 4-6
In a fast track scenario, we believe
both the UK and the common
platforms can be ready to host
their first phase 3 EUA auctions
in October 2012. Germany and
Poland have not yet started
the procurement of permanent
platforms, and unless they publish
calls for tenders by the end of
the first quarter of 2012, we see
a very limited probability for
their permanent platforms to be
operational by the end of 2012.
Figure 4 shows a step-by-step
illustration of what we consider a
likely timeline.
Figure 4: Tentative timeline for set-up of phase 3 auction platforms
Carbon Market Analyst 17 January 2012
All rights reserved © 2012 Thomson Reuters Point Carbon
with submission deadline 19
December. Given the less onerous
tender procedure, and assuming
the choice of a platform that a) has
experience in EUA auctions, and
b) qualifies as a regulated market,
Germany could possibly have it up
and running by summer 2012.
The German tender specifies that
the platform shall auction the 24 Mt
of German third phase EUAs (early
auction) and the estimated 7 Mt of
German aviation EUAs. It also states
explicitly that a candidate must be
prepared to continue operations at
least till the end of March 2013, or
later, if the permanent platform is
not operational by then.
The tender asks the candidate
operators to submit a detailed list
of information, of which the most
important are fees to be charged
on the auction participants, trade
volumes on operator’s existing
market and number of traders on
the operator’s existing market. The
candidates must also specify their
planned start of auctioning EUAs
(both aviation and third phase),
and a description of their platform’s
Internet interface and customer
support system.
The award of the German contract
will be based on three aspects:
price, quality of service and quality
of monitoring (detection of market
If anyone else (including the
Commission) will go ahead with
tenders for transitional platforms,
they are most likely to trail behind
the German process, and not be
ready before the end of 2012, by
which time the permanent platform
should anyway be operational.
Delayed early auctions
The result of all this is that no
auction for phase 3 allowances is
likely to take place before autumn
2012, at least not on a permanent
platform. Although the next trading
period does not start until 2013,
the AR clearly stipulates that 120
million phase 3 EUAs shall enter
the market already in 2012, in the
form of so-called early auctions. The
allowances are meant to enter the
market in small portions throughout
the year, in order to “limit the impact
on the secondary market”.
As the necessary infrastructure for
auctioning is not likely to be in place
before October, this concern will be
hard to accommodate unless the
early auction volumes are reduced. If
only three months will be available
for auctions – instead of six as
originally planned – member states
will face a choice of pumping out
huge volumes, or keeping significant
amount of phase 3 allowances till
the phase 3 actually starts.
There is also a question of EU policy
makers’ willingness to push forth
the early auctions. In a market where
prices are low and the dominant
ongoing debate is about possible
set-asides (withholding allowances),
there might to be little enthusiasm
to rush the early auctions.
German transitional
The AR does in fact foresee a need
for a temporary solution in the form
of “transitional platforms”. These
can be established more quickly as
they are not subject to all the strict
rules applying to the permanent
ones, but can be “aligned to services
already existing in the market”. They
do need to be “regulated markets”,
in order to prevent market abuse.
So far, only Germany has launched
a tender for a transitional platform,
Delays likely to reduce
early auctions to 70 Mt
The delays are likely to have a
significant impact on the volumes
of early auctions brought onto the
market in 2012. According to the EU
decision in July 2011, 120 Mt should
reach the market ”in the second half
of 2012”, but given the reduced time
window we do not see this as likely.
In order to quantify the effect of the
delays, we have made an estimate
based on the assumptions that
once the auctions start, volumes
will be limited pro rata in order to
avoid price impact on the secondary
market. 120 Mt spread out from July
through December, gives a monthly
volume of 20 Mt, and we assume
that this will be a good indication
of how much that will be sold on a
monthly basis in 2012.
With regard to the timing, we
assume that the German transitional
platform will be ready to host early
auctions from August-December
(five months). With the country’s
20 per cent share of the 120 Mt this
gives 24 Mt / 6 x 5 = 20 Mt (see
figure 2 on page 9 for the shares of
the different platforms).
We assume that the European and
UK (transitional) platforms will
start in October, and that they will
host the remaining 80 per cent, but
adjusted down from 6 to 3 months.
This gives 96 Mt / 6 x 3 = 48 Mt (in
the absence of a Polish exchange we
expect the country will auction on
the common platform).
In total this would mean about 70
Mt out of the 120 Mt early auctions
will come onto the market during
2012. There are obviously several
uncertainties attached to all the
above assumptions, but given the
currently available information,
we consider this our best possible
Are policy makers
willing to push early
Carbon Market Analyst 17 January 2012
All rights reserved © 2012 Thomson Reuters Point Carbon
New Union Registry will
replace national registries
In addition to the platforms, there is
also the question of the new Union
Registry which is set to replace the
national carbon registries. It was
meant to start receiving EUAs in
January 2012, but this has been
postponed till June. The transfer
from the national to the Union
Registry will happen gradually, and
is likely to be fully operational by the
end of 2012.
Phase 3 EUAs can only be deposited
in the Union Registry, meaning that
until it is operational, there can be
no spot sale of phase 3 allowances
(spot contracts are deposited
immediately upon acquisition).
This means that forward contracts
will still be relevant for the early
auctions that will take place on
the German transitional platform
(buyers can purchase in 2012 and
deposit whenever the Union Registry
is ready).
Auctioning aviation
2012 has seen the introduction of
aviation into the EU ETS. The ruling
of the European Court of Justice on
21 December 2011 has in principle
cleared the last legal hurdle for
this scheme, which will include
all airlines operating to, from and
within Europe.
Several international airlines
have stated their intention to file
a complaint at the International
Civil Aviation Organisation, so the
final word might not yet have been
said. Some of the same airlines (in
particular the American ones) have
nevertheless started to charge extra
ETS fees on the passengers, in a
clear sign that they are adapting to
the new regulatory framework.
They will receive special aviation
allowances (AEUAs), but they
can also buy regular EUAs. The
stationary compliance buyers on the
other hand cannot surrender AEUAs.
The special registry for aviation is
set to be operational by February
2012, but whether this deadline
will be met remains to be seen.
Furthermore, as we have already
seen, there will be no platform
for the sale of AEUAs before the
summer of 2012 at the earliest (if
the German transitional platform is
open by then).
The aviation sector has separate
caps for 2012 and for the 2013-20
period. For 2012, the cap is set at
97% of the sector’s emissions in the
2004-06 period, while in phase 3
this percentage is reduced to 95%.
For both 2012 and 2013-20, 15% of
the aviation cap will be auctioned.
During 2012, the aviation allowances
will be auctioned on the transitional
platform(s) that will be set up to
auction the pre-2013 volume of
EUAs. As it is unlikely that these
platforms will be in place before the
second part of 2012, operators will
likely turn to the secondary EUA
Another factor that will encourage
operators to buy EUAs is their
tendency to hedge future fuel costs,
making them likely to cover a need
for carbon allowances in advance.
Aviation operators usually hedge
fuel costs roughly 6-18 months
A delay in 2012 aviation auctioning
is estimated to increase EUA
demand from aviation by 32 Mt.
The phase 3 allocation process is
still far from completion as many
key stages remain to be carried out
in 2012. The Commission will begin
reviewing the NIMs only after all
of them have been submitted, an
event we expect around the end of
February 2012 at the earliest.
We expect that the free allocation
volumes will be determined
towards the end of 2012, with the
first issuance to take place on 28
February 2013. The result of this
delay is increased uncertainty for
the industry sector especially, which
might prompt installations to hold
on to their phase 2 surpluses and
limit their selling going forward.
For sectors that will not receive free
allocation, the question is how soon
they will be able to buy allowances
on auctions. Given the current pace
of progress, we expect the necessary
auctioning platforms to be up by
autumn 2012, delaying the early
auctioning and calling into question
how many phase 3 allowances will
actually be auctioned in 2012.
It seems unlikely that the full early
auction volume of 120 Mt will be put
to market in 2012. The final volume
could even be zero, but based on our
assumptions for the timeline and
for moderate distributed volumes,
we expect the volume of early
auctioning to be in the order of 70
A lower than expected supply
of early auction allowances and
planned aviation allowances could
lend support to carbon prices in
2012. Any support for carbon prices
however will come against the
backdrop of the oversupplied carbon
market and the ongoing sovereign
debt crisis in Europe.
Airline operators
could seek second-
ary market EUAs in 2012
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