UK leads way with carbon auction

19 November 2008


The UK’s decision to auction emission allowances under the European Union’s Emission Trading Scheme (ETS) will give it valuable experience in years to come when auctioning becomes the norm, according to carbon market intelligence firm Point Carbon.

The UK on 19 November became the first European country to auction some of its CO2 emission allowances, which are usually allocated free to companies participating in the ETS. The power sector is likely to be largest bidder for allowances in the auction.

The government is selling 4 million allowances for the 2008-2012 trading period at a price equal to the current carbon spot price – around EUR17. The decision to be an early-mover in auctioning is in line with government policy on climate change and will give the UK considerable experience in setting up the required regulatory framework.

“From a regulatory perspective, it is … an advantage for the UK to be an early mover,” said Andreas Arvanitakis, senior analyst at Point Carbon. “The UK is one of the EU’s biggest champions of auctioning and the auction will give the government experience in how to set up and run auctions. This will be valuable both for the UK and other EU countries going forward as auctioning will the main method to allocate allowances in the years to come.”

The government is expected to generate around £58 million from the auction. The average carbon spot price over the year has been EUR24, according to Point Carbon.

“Obviously the government could raise more revenue by holding the auction at a time when the price is higher. But by sticking to its timeline, it is providing regulatory certainty that would be undermined were it to speculate on prices by changing the date,” said Arvanitakis.

The European Union is currently debating proposals to increase the level of allowance auctioning in order to improve the effectiveness of the ETS and eliminate the possibility of companies continuing to generate windfall profits – especially in the power sector. The start of auctioning of ETS allowances marks the start of changes to the carbon trading scheme that will make it more demanding, says law firm Eversheds.

“Since its inception in 2005, the scheme has been widely criticised for being too lenient with caps not being tight enough and the grandfathering arrangements that allowed EU ETS installations to receive allowances for free leading to windfall profits for some sectors,” said Eversheds partner Michael Wood.

The UK says it will introduce auctioning for all ETS allowances from 2013, and recently pledged to cut carbon emissions by 80 per cent. The government initially planned to auction 23 million allowances in 2008, but due to delays in setting up the regulatory framework only 4 million allowances will be sold this year.

The UK is planning to auction 25 million allowances in 2009, and a total volume of 86 million allowances over the 2008-2012 period. It is also considering putting into effect a ring-fencing obligation whereby profit generated under a carbon trading scheme would have to be spent on measures aimed at carbon dioxide emissions reduction.

“Whether this is a sensible approach that will show leadership and leave UK installations already primed for fuller auctioning or whether this amounts to gold-plating of EU requirements will be a matter of perspective but ultimately whatever view you take it is not going to change the fact that in future auctioning of carbon allowances will become more widespread,” notes Wood.

Other EU Member States had also planned to auction allowances in 2008, but none of them has yet been able to set up the required legislation and institutions to do so.




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