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Legal basis of the auction system 

The ETS Directive contains the general principle that all allowances not allocated free of charge are to be auctioned. The European Commission estimates that about 50% of the total amount of allowances will be auctioned during 2013-2020. The rest of EUA allowances are allocated free of charge between: energy-intensive industry sectors (exposed to the risk of carbon leakage), other manufacturing industry sectors (received 80% of its allowances free of charge in 2013, but this will decrease annually to 30% in 2020), and the power sector in some Member States, including Poland, eligible for for derogation (Article 10c of the ETS Directive). The total number of allowances to be auctioned in 2013-2020 is available in the table on the EU website. 

The total amount of allowances were distributed pursuant to Article 10(1) of the ETS Directive (88%/10%/2% key):

  • 88% of the allowances to be auctioned in 2013 to 2020 are distributed to the EU Member States on the basis of their share of verified emissions from EU ETS installations in 2005 or the average of the 2005-2007 period, whichever one is the highest;
  • 10% are allocated to the least wealthy EU Member States to take account of the lower GDP per capita according to values specified in the Annex IIa of ETS Directive;
  • 2% is given to nine EU Member States which had reduced their greenhouse gas emissions according to values specified in the Annex IIb of ETS Directive. 

The key legal act regulating the auctioning of allowances is the Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community (Auctioning Regulation).

The above legal act provides: 

  • full, fair and equitable access to bid in the auctions for SMEs covered by the Union scheme;
  • access to the same information all participants at the same time to prevent the participants from disrupting the funcioning of the auction;
  • ensuring cost-efficiency and avoiding undue administrative burden;
  • access to bid in the auctions for small emitters. 

Due to the positive experience of Member States (especially Germany) related to the organization of auctions via secondary market platforms during the second period of the EU ETS, it was decided that the current secondary market infrastructure will be used to auction allowances in the third trading period. 

The requirement that the auction platform is a regulated market is founded on the desire to use the organisational infrastructure available on the secondary market for the administration of the auctions. In particular, regulated markets are bound under Directive 2004/39/EC and under Directive 2003/6/EC on insider dealing and market manipulation (market abuse), to provide a number of safeguards in the conduct of their operations. Those safeguards include arrangements to identify and manage the potential adverse consequences of any conflicts of interest for the operation of the regulated market or its participants: 

  • to identify and manage the risks to which they are exposed and to put in place effective measures to mitigate them;
  • to provide for the sound management of the technical operations of their systems establishing effective contingency arrangements to cope with risks of systems disruptions;
  • to have transparent and non-discretionary rules and procedures for fair and orderly trading and establish objective criteria for the efficient execution of orders;
  • to facilitate the efficient and timely finalisation of the transactions executed under their systems;
  • to have available sufficient financial resources to facilitate their orderly functioning, having regard to the nature and extent of the transactions concluded on the market and the range and degree of risks to which they are exposed. 

In addition, it allows relying on the organisational infrastructure, experience, capabilities and transparent mandatory operational rules of the market. This is relevant, inter alia, with regard to the clearing or settlement of transactions, as well as monitoring compliance with the market’s own rules and with other legal obligations such as the prohibition of market abuse and the provision of extra-judicial dispute settlement mechanisms. This is cost-effective and helps safeguard the operational integrity of the auctions. Many potential participants in the auctions will already be either members of, or participants, in the various regulated markets active on the secondary market. 

According to the article 3d ETS Directive, 15% of the EUAA aviation allowances will be sold at auction from 1 January 2013 to 31 December 2020.

 

Types of allowances 

The subject of the sale of each auction are valid rights in the third period of the EU ETS, which due to the inclusion of the aviation industry in the EU ETS can be divided into two groups: 

  • Emission allowances issued to ETS operators – EUA (European Union Allowances)
  • Emission allowances issued to aircraft operators – EUAA (European Union Aviation Allowances) 

Both EUA and EUAA can be acquired by all participants of the auction. However, EUAA is used only to account for aviation emissions. In contrast, EUAs can be used by all entities covered by the EU ETS to account for their own emissions (including aircraft operators). 

Sales of EUA and EUAA allowances are carried out at separate auction sessions, but within the same auction. Due to the small number of EUAAs, a smaller number of auctions is planned for the year, compared to those auctions that will be subject to EUAs.

 

Auction Platforms

The Auctioning Regulation provides for a common auction platform but gives Member States the possibility to opt-out and appoint their own auction platform. Germany, Poland and the UK have made use of this option. At present, only two platforms are auctioning allowances under the Auctioning Regulation - European Energy Exchange (EEX) in Leipzig is the common auction platform used by 25 Member States and separetly is the opt-out auction platform used by Germany, and ICE Futures Europe (ICE) in London is the United Kingdom’s opt-out auction platform. Poland also intends to appoint an opt-out auction platform but is using the common auction platform (EEX) in the meantime. The EEA-EFTA States will auction on the common auction platform as well.

Figure 1. Scheme of currently operating auction platforms in the EU ETS

Source: National Centre for Emissions Management (KOBiZE)