EU Countries Agree to 2012 Auction Of 120 Million Carbon Emissions Allowances

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BRUSSELS—EU member states July 13 gave provisional approval to auction 120 million carbon allowances in 2012 to participants in the EU Emissions Trading System (ETS) as part of the preparations for the system's third trading phase, which runs from 2013 through 2020.

The sales will be the first EU-wide auctions of ETS carbon allowances, and will mark a change in the method of allocating carbon permits to ETS participants, who have so far received most allowances for free. Once the third trading period begins in 2013, auctioning of emissions allowances will begin to replace free allocation as the main method for distributing allowances under the ETS, according to the European Commission's Directorate-General for Climate Action.

Starting in 2013, electricity generating companies must buy nearly all of their emissions allowances at auction, while heavy industry must buy upfront an increasing portion of their allowances. Airlines, which enter the ETS in 2012, must also buy some of their allowances at auction.

Companies required to participate in the ETS must have enough allowances to cover their carbon dioxide emissions or pay a penalty. The ETS is designed to cut emissions overall by gradually reducing the volume of allowances issued to participants, thus forcing them to make emissions-reducing investments or to buy additional allowances on the carbon market.

The total amount of emissions allocations, or emissions cap, for 2013 will be just under 2.04 billion allowances, with each allowance representing the right to emit one metric ton of carbon dioxide. Roughly half, or about 1 billion of the total allowances for 2013, are expected to be auctioned, according to the Directorate-General for Climate Action's auction information website.

Provisional Agreement

The agreement to auction 120 million allowances in an “early auction” in 2012 was adopted by an EU member state regulatory committee. The European Parliament and EU Council, which represents member state governments, have three months in which to raise objections to the plan, or it will be finalized after the summer.

The European Commission, which will coordinate the sales, said auctions would begin in the second half of 2012. The 120 million allowances are worth about €1.5 billion ($2.1 billion) at current prices.

The Commission said that the figure of 120 million allowances had been arrived at by considering supply and demand side factors, such as the likely needs of the power sector and surpluses held by other sectors, which could be sold on the carbon market.

Although centrally managed, the auction system will allocate shares of the allowances to EU countries, which will conduct the sales and collect the revenues for their national treasuries. The EU law regulating emissions trading (Directive 2009/29/EC) requires countries to use at least half of the proceeds for measures to combat climate change.

EU Climate Action Commissioner Connie Hedegaard said carbon auctions, when combined with other reforms to the ETS after 2012, amounted to “tightening the belt” and would result in further cuts to Europe's greenhouse gas emissions, which she said had already been reduced by the ETS.

By Stephen Gardner

Information about the auctioning of carbon allowances during the third phase (2013-2020) of the EU ETS is available at http://ec.europa.eu/clima/policies/ets/auctioning_third_en.htm .