UK to auction 4m allowances in the European carbon market

London (18 November 2008)

Tomorrow (November 19) the UK government will be the first European country to auction some of its CO2 emission allowances for the 2008-2012 period of the EU emissions trading system.

The UK plans to auction 4 million allowances tomorrow, which are likely to be sold at a price equal to the spot price in the carbon market, currently standing at around €17, according to Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

Although the price of carbon has been falling along with the economic downturn, resulting in lower predicted revenues from the auction than would have been the case earlier this year, the auction is likely to generate some £58 million, says Andreas Arvanitakis, a senior analyst at 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”, Andreas Arvanitakis said.

The average price of carbon over the year has been €24.

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

From 2013 the EU will start moving towards full auctioning of allowances. This is in line with the polluter pays principle, and also in line with the long term goal of other emission trading systems currently being developed around the world. “Auctioning is seen as a way of killing windfall profits, particularly in the electricity sector,” says Andreas Arvanitakis.

As the EU increases the amount of auctioning, those countries with the most experience in auctioning will be best suited to influence the common EU-rules which will be developed over the next couple of years. “From a regulatory perspective, it is thus be an advantage for the UK to be an early mover”, according to Andreas Arvanitakis, who added “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”.

Only the industry sectors most exposed to international competition will continue to receive all allowances for free. To avoid industry moving outside Europe, industries like aluminum and steel will probably receive carbon allowances for free at least up to 2020, says Andreas Arvanitakis (see notes for editors).

The UK is planning to auction 25 Mt in 2009, and a total volume of 86 million allowances over the 2008-2012 period.

The auction will take place on November 19. The 4m allowances can be bought by anyone with an account in the EU registry, and will broadly be bought by companies covered by the EU ETS.

Note to editors

The Kyoto Protocol on Climate Change, which entered into force in February 2005, resulted in the launch of The EU’s Emissions Trading Scheme (ETS). The world’s first international emissions trading scheme, it works on a cap - and - trade basis, forcing companies to emit less carbon dioxide than their Kyoto target allows or buy carbon permits from elsewhere (CERs and ERUs). The second phase of the scheme runs from 2008-12 and coincides with the Kyoto Protocol commitment period. No timetable has currently been established for the post-2012 regime. 

To ensure compliance with the targets under the Kyoto Protocol member states have a number of measures at their disposal which include reductions in the EU ETS sectors, reductions in non-trading sectors such as transport and governments’ purchase programmes of Kyoto carbon credits (CERs, ERUs and AAUs). 

The EU ETS covers electricity and heat, metals, building materials, oil and gas, pulp and paper. 

Operators in these sectors must submit one allowance for every tonne of CO2 they emit. In the current trading phase (2008-2012 inclusive), the vast majority of allowances are allocated in the first place for free. Governments are allowed to auction up to 10% of the allowances they have to allocate. 

The EU is currently negotiating new rules for the EU ETS to take effect from 2013. Among them is a proposal to allocate no allowances for free to the electricity sector, rather to sell them in an open auction. Other sectors would have fewer allowances allocated for free with each year, until by 2020 100% of the allowances across Europe are auctioned. This rule may change in the ongoing negotiations.


For comments or further more information, please contact:

Candida Jones
PR Manager, Point Carbon
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E-mail: cjo@pointcarbon.com  

Andreas Arvanitakis
Senior Analyst
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E-mail: aa@pointcarbon.com  

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