Preparing for the 3rd trading period

From the start of the third trading period in 2013, auctioning will progressively replace free allocation as the main method for allocating allowances to all EU ETS sectors except aviation. This best ensures the efficiency, transparency and simplicity of the system and creates the greatest incentive for investments in a low carbon economy. Auctioning will also eliminate windfall profits which arise when operators charge their customers the cost of the allowances, even where they received these allowances free of charge.

From 2013, all allowances not allocated free of charge must be auctioned. Since electricity generators will not receive any allowances free of charge (with the potential exception of those in 10 new Member States which may continue to allocate limited volumes of allowances for free on a transitional basis), it is expected that roughly half of the allowances will be auctioned, i.e. some one billion allowances per year. In the current second trading period (2008-2012), no more than 4% of the allowances are auctioned.

In addition, in the aviation sector 15% of the EU Aviation Allowances (EUAAs), i.e. some 30 million per year, will be auctioned from 2012, see the Commission's decision of 30 June 2011.

The Auctioning Regulation, as amended in November 2011, provides for the auctioning of 120 million phase 3 EU allowances (EUAs) in 2012.

The revised EU ETS Directive adopted in 2009 lays down that the European Commission shall adopt a Regulation on timing, administration and other aspects of auctioning to ensure that auctioning is conducted in an open, transparent, harmonised and non-discriminatory manner. This must support the overarching aims of the revision of the EU ETS, namely greater efficiency of the system, more harmonisation, avoidance of distortion of competition and greater predictability. All these objectives would be at risk without appropriate rules.

The importance of these rules is underpinned by their legal form: a Regulation is the strongest form of EU legislation and the rules are directly applicable in all Member States.

The Auctioning Regulation covers auctions of EU allowances (EUAs) valid for trading periods as from 2013, including 'early auctions' of 120 million EUAs in 2012, i.e. before the start of the third trading period in 2013.

The Regulation also covers EU Aviation Allowances (EUAAs) which can only be used for emissions by aircraft operators. Aircraft operators have come into the system as from 2012.

The Auctioning Regulation provides for allowances to be auctioned in the form of spot products, which means delivery within a maximum of five working days after the auction. The exact product specifications will be determined in the procurement of the auction platform(s). The auctioned product may or may not be a financial instrument in the meaning of the EU regulatory framework for markets in financial instruments.

Spot products have been chosen for their simplicity and because, unlike futures, they do not lock-in the trading of the auctioned allowances to the auction platform(s), which could have a potential negative impact on competition between trading places in the secondary market.

The auction format will be a single-round, sealed bid, uniform price auction. This is a simple auction format that facilitates participation, including by SMEs (see question 13).

During a single bidding window of the auction, bidders can place any number of bids, each specifying the number of allowances they would like to buy at a given price. The bidding window must be open for at least two hours. Directly following the closure of the bidding window, the auction platform will determine and publish the clearing price at which demand for allowances equals the number of allowances offered for sale in the auction concerned.

Successful bidders will be the ones who have placed bids for allowances at or above the clearing price. All successful bidders will pay the same price, regardless of the price they specified in their bids.

For the auctions in 2012, no firm start dates are fixed yet, as Member States first have to appoint the auction platforms that are to conduct these auctions. 24 Member States will do so by means of a procurement procedure jointly with the Commission (see below). The Contract Notice for the call for tenders for a transitional common auction platform was published on 24 March 2012 in OJ 2012/S 59-095297. The tender specifications require the contractor to have the capacity to start conducting the auctions within 60 calendar days following the date of entry into force of the contract. The publication of the Contract Notice allows the auctions to start after Summer 2012.

For information on the auction platforms to be appointed by the remaining three Member States (Germany, Poland and the UK), see questions 32 to 35 below.

An overwhelming majority of stakeholders, a large majority of Member States and the Commission's impact assessment supported a single EU-wide auction platform rather than a system whereby each Member State holds its own separate auctions. A single EU-wide platform would best meet all objectives laid down in the revised EU ETS: it would be most cost efficient, most transparent, would best ensure respect of the principle of non-discrimination, and would offer the greatest level of harmonisation and predictability as compared to auctioning through two or more parallel national auction platforms.

Some Member States, however, preferred the possibility of setting up auction platforms of their own. The Regulation therefore provides for common auction platform(s) whilst allowing Member States to opt out of the common auction platform(s) and set up their own auction platforms. Such platforms must be in conformity with the framework set out in the Regulation and subject to potential further rules to ensure adequate coordination between national auction platforms and the common auction platform(s). Germany, Poland and the UK decided to make use of this opt-out provision and appoint their own auction platforms. Germany has concluded its tender procedure, the deadline for submitting offers for the tender launched by the UK has expired and Poland is expected to launch its tender procedure soon.

The maximum appointment duration for any auction platform is five years. However, to ensure a timely appointment and to mitigate the risk of any unexpected issues with the joint procurement process, the 24 Member States and the Commission participating in the joint action will also procure a transitional auction platform, which is meant as a temporary fall-back. Whereas all other auction platforms have to respect the Auctioning Regulation in full, the transitional auction platform is exempt from some provisions, so fewer adaptations from its established market practice would be required. Germany and Poland intend to appoint a transitional opt-out auction platform, whereas the UK intends to appoint a 'definitive' opt-out auction platform from the start.

Since the coexistence of the common auction platform(s) and the opt-out auction platforms inevitably implies less than full harmonisation of the auction process, the arrangements put in place in the Auctioning Regulation will be reviewed within five years.

In order to limit the impact of auctions on the secondary market, the auctions will be relatively frequent. The Auctioning Regulation provides that the common auction platform will hold auctions at least weekly for EU allowances (EUAs) and at least once every two months for EU Aviation Allowances (EUAAs), given their smaller quantity. The default frequencies foreseen in the draft tender specifications are somewhat higher: two auctions of EUAs per week and one auction of EUAAs per month, though the appointed auction platform may propose different frequencies. See the Contract Notice published in OJ 2012/S 59-095297 of 24 March 2012.

The opt-out auction platform to be appointed by Germany would conduct auctions on a weekly basis. The frequency of auctions on the opt-out auction platforms to be appointed by Poland and the UK remain to be determined.

The volume auctioned on all auction platforms will be spread evenly throughout the calendar year, with reduced frequency over holiday periods in the summer and no auctions during the Christmas and New Year period.

The auction calendar will set out the dates, bidding windows, size and other details of each auction to be held in a calendar year. It will be fixed well in advance to provide certainty to the market. After it has been fixed, it can only be adjusted in a limited number of well-defined circumstances, and each adjustment should have a minimal impact on predictability.

As a rule, the common auction platform will determine and publish its auction calendar by 28 February of the preceding year, whereas any opt-out auction platform will determine and publish its auction calendar by 31 March of the preceding year. In view of the time needed for appointing the auction platforms and putting in place the infrastructure, for 2012 these publications will take place at a later date.

The auction platforms will determine the auction calendar, having consulted the Commission and taking utmost account of the Commission's opinion.

Any ETS operator or aviation operator is eligible to apply for admission to bid in the auctions, and so are their parent, subsidiary or affiliate undertakings. Operators can also form business groupings to bid as an agent on their behalf.

Effective competition is crucial for the efficiency of the EU ETS and the good functioning of the carbon market. Indeed, openness is one of the principles laid down in the ETS Directive. Therefore, in addition to operators, investment firms and credit institutions, authorised and regulated under EU law, may apply for admission to bid.

Furthermore, the Regulation provides for an additional category, namely intermediaries that benefit from an exemption from the authorisation requirements in EU law, but that have been authorised under rules laid down in the Auctioning Regulation. This is particularly relevant for intermediaries such as fuel traders, so these could easily add allowances to the products they offer to ETS operators.

Neither the auctioneer nor the auction platform or its staff may apply for admission to bid.

The auction platform must consider each application for admission in order to prevent auctions being used as a vehicle for money laundering, terrorist financing, criminal activity or market abuse. The auction platform must carry out a minimum of customer due diligence checks.

Bidders will be able to access the auctions through the internet. The auction platform shall also offer dedicated connections.

Each Member State must appoint an auctioneer, who will be responsible for offering the allowances to be auctioned to the auction platform on behalf of the appointing Member State. It will also receive the auction proceeds and disburse these proceeds to the appointing Member State.

The auctioneer may be a private or a public body. A list of auctioneers is available on the Documentation tab (see top of this page).

The auctions will be conducted by a regulated market authorised pursuant to EU financial markets legislation.

Regulated markets have been chosen because they are bound by EU law (the Markets in Financial Instruments Directive and the Market Abuse Directive^[1]) to provide a number of safeguards in the conduct of their operations. These safeguards include, among others, arrangements to identify and manage the potential adverse consequences of any conflicts of interest, to identify and manage risks that the market is exposed to, and to have transparent and non-discretionary rules and procedures for fair and orderly trading.

A further advantage of using regulated markets such as the auction platform(s) is the ability to use the market infrastructure that already exists on the secondary market for allowances and of which many potential participants in the auctions are already members or participants.

Fair and orderly auctioning is ensured, firstly, by provisions in the Auctioning Regulation on access to the auctions and the auction calendar. The auction platform is, e.g., under an obligation to ensure appropriate know-your-customer checks before granting admission to any potential bidder.

Secondly, the auction platform must be a regulated market, which ensures it meets strict standards and that it will be supervised by the competent national authority for financial markets of the Member State in which it is located.

The Auctioning Regulation includes detailed provisions to mitigate the risk of anti-competitive behaviour. Depending on the auctioned product, the auctions will be covered either by the Market Abuse Directive^[1] or by detailed provisions that provide equivalent protection.

Finally, in order to ensure fair treatment of clients, the Auctioning Regulation lays down an authorisation requirement and conduct rules for intermediaries in case they are not covered by such conduct rules provided for in the EU Financial legislation. It is, however, optional for Member States to put in place the legal framework for the authorisation of such intermediaries.

More information on carbon market oversight is available on the page 'Ensuring the integrity of the European carbon market'.

Yes. There will be a single independent auction monitor for all auctions on all auction platforms. The single auction monitor will be chosen through a competitive procurement procedure conducted jointly by the Commission and all Member States.

The single auction monitor will play an integral role in the oversight of the auctions. Each month, it will submit a report on all auctions of that month to Member States and the Commission. It will prepare an annual consolidated report on the functioning of the auctions, including any evidence of anti-competitive behaviour or market abuse and the impact of auctioning on the secondary market for allowances. Non-confidential versions of these reports will be published on the Commission's website.

The single auction monitor may also be asked to prepare ad hoc reports on a specific issue relating to auctioning. Furthermore, in light of a suspected breach of the regulation by an auction platform, the single auction monitor must draw up a report stating the nature of the breach, making recommendations to remedy the situation and, if appropriate, recommend the suspension of an auction platform.

Two separate bodies will supervise the auctions. The auction monitor will be responsible for reporting to Member States and the Commission on the functioning of all auctions on all platforms.

In addition, the competent national authority for financial markets of the Member State in which an auction platform is located will be responsible for supervising that auction platform. The conduct of investment firms, credit institutions or other persons authorised to bid on behalf of others will also be supervised by the relevant national authorities. This supervision will include any necessary investigation and prosecution of market abuse.

The public authorities involved shall be required to cooperate with each other in fulfilling their obligations.

The costs of the auction process, including the costs of setting up the auction platform(s) and carrying out due diligence checks on customers, will in general be paid for by the bidders through the fees they pay to an auction platform to participate in the auctions.

The costs of the single auction monitor will be deducted from the auction proceeds and will be borne by the Member States.

Yes. The revenue from auctions will go to the Member States according to their auctioning rights.

Yes. The Auctioning Regulation foresees a review of the arrangements provided for in the current Regulation. This review will begin by 31 December 2014 at the latest. The Commission will put forward any measures deemed necessary to deal with any distortion or malfunctioning of the internal market or the carbon market arising from the arrangements under this Regulation with a view to their entry into force by 31 December 2016.

This does not preclude the findings of a wider, ongoing work stream pursuant to Article 12(1a) of the ETS Directive, which is examining whether the EU ETS allowances market is sufficiently protected from market abuse, organising the oversight of the European carbon market and securing the market integrity of auctioning and trading in that market.

Yes. All information on the consultation and the Commission's impact assessment can be found on the consultation page.

The rationale for early auctions of Phase 3 allowances stems from the common practice of selling products in advance. In particular the power sector sells electricity up to three years in advance. At the time of such forward sales, the company normally also buys the required fuels and emission allowances so as to avoid the risk of price fluctuations (so-called "hedging").

The foremost objective in defining the volume for early auctions is to ensure a smooth transition from the second to the third trading period of the EU ETS that underpins the proper functioning of the secondary market.

The volume of early auctions in 2012 will be deducted, in equal parts, from the volumes to be auctioned in 2013 and 2014.

The amendment to the Auctioning Regulation provides for the auctioning of 120 million phase 3 allowances in 2012. This comes in addition to the regular auctioning of aviation allowances, which concerns some 30 million allowances annually as from 2012 (see answer to question 2).

Phase 3 allowances cannot be used for compliance in respect of emissions in phase 2 of the EU ETS. The Single Union Registry will provide a clear distinction.

The shares of individual Member States in the early auctions are those already determined in Article 10(2) of the revised EU ETS Directive. The distribution of the allowances is mainly based on historical emissions (88%), GDP per capita (10%) and the Member State's progress in achieving the target laid down in the Kyoto Protocol (2%).

See answer to question 7.

Yes. A stakeholder meeting took place in December 2010 and a written consultation was open until 7 February 2011 (see consultation page for all relevant documents and responses). The meeting and written consultation showed a very broad consensus on the relevant factors and the range for the volume of 'early auctions'.

On Saturday 24 March 2012, the Contract Notice for the call for tenders for the transitional common auction platform was published in OJ 2012/S 59-095297 and this Notice alone is authentic. The tender documents are available on the call page.

As set out in the Contract Notice and the Invitation to Tender, the closing date is 3 May 2012.

Tenders will be assessed in accordance with the procurement rules that apply to the Commission. The Commission will prepare a draft award decision to be approved by the participating Member States. Once approved, all tenderers will be informed accordingly. The Commission will announce the winning bidder on the day of the contract signature.

A note [84 KB] sets out the rules for contacts with economic operators on matters pertaining to the joint procurement procedures.

The single auction monitor will be chosen through a joint procurement by the Commission and all the Member States.

The common auction platform(s) will be chosen through a joint procurement by the Commission and the 24 Member States that have chosen to auction their allowances through the common platform(s).

Germany, Poland and the United Kingdom have decided to opt out of the joint procurement.

On 9 November 2011, two joint procurement agreements between the (participating) Member States and the Commission entered into force: one for the procurement of an auction monitor, and the other for the procurement of the common auction platforms. For the majority of the Member States, these joint procurement agreements have entered into force, but for some the signature or completion of national approval procedures is still pending.

These agreements lay down the modalities for the conduct of these procurement procedures jointly by the Member States and the Commission.  They provide for, among other things, the following:

• the Commission is to arrange for the overall orientation, preparation and organisation of the joint procurement procedures;
• the Commission is to be the sole representative towards third parties and to provide administrative support in the course of the joint procurements and the resulting contracts;
• the Member States, represented in a Joint Procurement Steering Committee (JPSC), are to provide steering input. Main decisions, notably adoption of tender documents and award decisions, require prior approval by the (participating) Member States by means of qualified majority vote in the JPSC.
• opt-out Member States will be given observer status as regards the procurement of the common auction platforms;
• a Contract Management Committee consisting of representatives from the Commission and the Member States will manage the contracts with the common auction platforms and the single auction monitor.

The procurement procedures themselves will be conducted pursuant to the procurement rules in the Financial Regulation, which is the legal basis for procurement procedures carried out by the Commission.

The Contract Notice for the common auction platform has been published in OJ 2012/S 59-095297 of 24 March 2012, see question 28. The call for tenders for the single auction monitor will also be published on Tender Electronic Daily (TED), the electronic version of the supplement S to the Official Journal of the European Union.

The Commission published a notice on the Member States' implementation of the Auctioning Regulation and on transparency. As set out in this notice, in order to ensure maximum transparency and equal treatment, the Commission may publish draft tender documents. Such drafts can be found on the 'documentation tab' (see top above). The publication of such drafts does not constitute publication or advertising within the meaning of Article 90(1) of the Financial Regulation nor Articles 118, 119 and 120 of the Implementing Rules. Any part of such drafts may be changed; the drafts are not binding on the Commission or the Member States taking part in the joint procurement. Only the notices and associated documents relating in the call for tenders published in the OJ shall be authentic.

The Commission will be the sole contact point for candidates and tenderers. A note [84 KB] sets out the rules for contacts with economic operators on matters pertaining to the joint procurement procedures.

Germany, Poland and the United Kingdom informed the Commission of their decision to opt out of the common auction platform(s) and appoint their own auction platforms.

Germany has concluded the procurement procedure to appoint a transitional opt-out auction platform and notified the Commission of this pursuant to Article 30(6) of the Auctioning Relation. For further information, see 'Emissionshandel: UBA erteilt Zuschlag für deutsche Versteigerungsplattform 2012/2013'.

The deadline for submitting offers for the 'definitive' opt-out auction platform to be appointed by the UK has expired.

Poland is expected to launch its tender procedure for the appointment of a transitional common auction platform soon.

After determining the details of their intended opt-out platforms, Germany, Poland and the United Kingdom must notify their plans, including all relevant details, to the Commission so that it can verify that the auction platform satisfies the rules of the Auctioning Regulation and the objectives of the ETS Directive and determine whether obligations or conditions could be required for ensuring adequate coordination between the different auction platforms.

If the Commission is satisfied that the opt-out platform respects the rules and can be expected to achieve the objectives, it will put forward a draft amendment of the Auctioning Regulation in order to list it in an Annex to the regulation. The adoption of this amendment follows the same procedure as the adoption of the Auctioning Regulation itself, including an opinion by the Member States represented in the Climate Change Committee and a three-month scrutiny period for the Council and the European Parliament thereafter. The opt-out platform can start conducting auctions only when the amendment to list it has entered into force.

In the absence of the listing of an opt-out auction platform, the Member State concerned will have to auction its share of allowances on the common auction platform, so as to ensure that the envisaged volume of allowances comes to the market as foreseen in the Auctioning Regulation.

No, Member States will not be able to give preferential treatment to their own industry. All auction platforms must  give all eligible bidders equal access to the auctions and no preference can be given to companies registered in any particular Member State. The provision that any auction platform must be a regulated market helps to ensure that all participants are treated in a fair and non-discriminatory way.

In addition, there will be a single auction monitor, for both the common platform(s) and any opt out platforms, who will supervise the auctions and is required to report on compliance with the provisions of the Regulation