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23 April 2009

Government announces changes to rules governing UK carbon auctions

In line with the government’s commitment to support a robust and stable carbon market, HM Treasury today published the Community Emission Trading Scheme (Auctioning of Allowances) Scheme 2009. This replaces the Community Emission Trading Scheme (Allocation of Allowances for Payment) Scheme 2008. The Scheme sets out how the UK will conduct auctions of carbon allowances and the terms governing participation in auctions during Phase II of the EU Emissions Trading Scheme.

The 2009 Scheme improves upon the UK auctioning model on two significant grounds.

The first key amendment implements a previous government commitment to establish a non-competitive bidding facility especially designed for smaller emitters. The facility will allow businesses that participate in the EU ETS to bid for up to 10,000 EU allowances (EUAs) at the clearing price determined at auction. In due course the Government will announce which auctions will include the non-competitive bidding facility.

The second amendment provides for the government to compensate primary participants (auction intermediaries) for the services they provide at auctions. Today, the government announces that from the next auction on 4 June 2009, primary participants will receive €0.05 for each carbon allowance purchased on behalf of an indirect bidder. This performance related payment will help boost auction competitiveness and ensure better value for money for UK taxpayers. Indirect bidders will not bear any of these costs.

Approvals given and obligations entered into under the 2008 Scheme are not affected by its revocation and by the creation of the 2009 Scheme.
The 2009 Scheme also makes other minor amendments to the 2008 Scheme.

Notes for Editors

1. European Union Emissions Trading System Phase II (2008-2012) currently covers more than 10,000 installations in the energy and heavy industrial sectors including large energy generators, cement manufacturers and chemical plants. These sectors are collectively responsible for close to half of the EU's emissions of carbon dioxide. The EU ETS aims to reduce emissions of carbon dioxide at least cost to industry.

2. The System works on a "cap and trade" basis. EU governments are required to set an emissions cap for all installations covered by the System. Each installation is then allocated allowances for the particular commitment period in question. The number of allowances allocated to each installation for any given period is specified in a document called the National Allocation Plan (NAP).

3. If an installation fails to surrender sufficient allowances to cover its annual emissions, it will face financial penalties (currently set at €100 per tonne); the requirement to surrender sufficient allowances to cover emissions still applies.

4. The UK NAP for the second trading period (2008-2012) sets aside 7% of the allowance cap for auctioning, amounting to approximately 86 million allowances over the phase. The Treasury has appointed the Department of Energy and Climate Change (DECC) to conduct the auction. DECC has appointed the UK Debt Management Office (DMO) to act as the  administrator .

5. The UK auction model has been designed in two parts to offer i) competitive bidding, and ii) non-competitive bidding.  UK auctions to date have used only the competitive bidding facility.  Competitive bidding works using intermediaries known as Primary Participants, who collect and submit bids from end-users, referred to as ‘Indirect Bidders’.  Subsequent auctions may include a non-competitive element to facilitate direct access to the auctions for smaller compliance buyers.  During 2009 the Government plans to auction 25 million allowances.

6. The Government has appointed six Primary Participants (intemediaries) to facilitate the competitive stage of auctions.  Organisations can apply to DECC to become Primary Participants and will be assessed against the eligibility criteria set out in the Scheme. These include having an office in an EEA state, having the ability to meet financial commitments, the ability to effectively participate in an auction on behalf of others, and systems to prevent the disclosure of confidential information (including having 'Chinese walls' within their organisation).

7. Once appointed, Primary Participants must abide by the "Terms" set out in the Scheme. These include accepting instructions to act on behalf of any organisation with an EU Registry account (known in this process as 'indirect bidders'), subject to anti-money laundering checks and their own objective checks on the indirect bidders' ability to pay for allowances. This ensures that UK auctions are open to all and that Primary Participants cannot refuse to place bids on behalf of an indirect bidder without good reason.

8. The UK has held two auctions to date in Phase II of EU ETS – on 19 November 2008 and 24 March 2009 – and published a schedule of further auctions to April 2010.  The schedule is available on the UK Debt Management Office’s website (opens in new window)


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