Questions and Answers: Auctioning (November 2013)
The ETS Directive contains the general principle that all allowances not allocated free of charge are to be auctioned. The annual volumes to be auctioned and the timing and frequency of auctions are regulated in Chapter III of the Auctioning Regulation.
The total quantity of general allowances to be auctioned in 2013, as determined in the auction platforms' calendars, is 808,146,500. This is based on a conservative working estimate of the number of allowances to be auctioned under the cap for 2013. It also deducts, among other things, allowances allocated free of charge by eight Member States to certain electricity generators under Article 10c of the ETS Directive.
The total is composed as follows:
|479,238,500||EEX||24 participating Member States||Weekly auctions on Mondays, Tuesdays and Thursdays|
|182,560,500||EEX||Germany||Weekly auctions on Fridays|
|95,098,000||ICE||United Kingdom||Fortnightly auctions on Wednesdays|
|51,249,500||EEX||Poland||Weekly on Monday afternoons as of 16 September|
Neither the EEX auction calendar nor the ICE calendar take into account the Commission's draft amendment of the Auctioning Regulation for postponing the auctioning of 400 million general allowances from the 2013 budget under the 'back-loading' initiative.
In addition to deducting the 151,566,054 allowances allocated free of charge under the Article 10c exemption, 60 million allowances - half of the 120 million from "early auctions" in 2012 - have been deducted under Article 10(2) of the Auctioning Regulation. The volume to be auctioned in 2013 by EEX as the common auction platform is increased by 27,519,500 allowances carried over from 2012. These could not be auctioned as the arrangements between the EEX and the auctioneers were not yet in place. The auctions for the Czech Republic could only start in March 2013 and hence, of a total of 8,953,000 allowances withheld from the auctions until that moment, only 6,173,500 could be spread over the auctions in 2013, the remainder to be spread over the auctions in 2014.
Croatia had 4,900,000 million allowances to be auctioned in 2013, but did not complete the administrative steps to allow to auction these allowances in 2013. Hence this amount is included in the volume for 2014.
The EEA-EFTA States had 7,929,500 allowances to be auctioned in 2013 but the preparations have not been finalised yet. Hence, also this amount is included in the volume for 2014
In accordance with the Auctioning Regulation, the difference between the volumes determined in the 2013 auction calendars and the figures determined according to Article 10(1) of the ETS Directive, i.e. 66,321,081 million allowances will be added to the volume to be auctioned in 2014 - see point two below.
Given the significant weight of power generation in the EU ETS, and even with partial free allocation in the eight member states, more than 40% of all allowances will be auctioned in 2013 and this share will rise in the coming years. In the second trading period (2008-2012), no more than 4% of the allowances were auctioned.
15% of the EU aviation allowances for the third trading period will be auctioned. However, in November 2012, the auctions of aviation allowances have been put on hold in view of the proposed Decision of the European Parliament and of the Council to defer application of the EU ETS to international flights in 2012.
In response to the positive developments at the recent ICAO Assembly, the Commission proposed an amendment to the EU ETS Directive on 16 October 2013 regarding aviation emissions. One of the proposed derogations would allow aircraft operators to surrender allowances with respect to 2013 emissions by 30 April 2015 instead of 30 April 2014.
In view of this proposal, the Commission and the Member States have asked the respective auction platforms to wait to submit a draft auction calendar for aviation allowances until there is greater clarity on the final version of the amendment, the expected timing of its adoption and hence the appropriate volumes to be auctioned.
In Recital 26 of its Decision of 5 September on the national implementation measures with respect to free allocation, the Commission estimated, in accordance with Article 10(1) of Directive 2003/87/EC, the amount of allowances to be auctioned in the period from 2013 to 2020 at 8,176,193,157. This amount can be broken down as follows:
|Year||Estimated Amount||Amount after deducting volumes allocated free of charge pursuant to Article 10c of the ETS Directive||Amount actually auctioned/foreseen to be auctioned|
- Figures include the amounts for Croatia and the EEA-EFTA States and are based on the assumption that Croatia and EEA-EFTA States start auctioning their shares as from 2014. The volume for 2014 includes the shares of these States for 2013. The starting date for the auctions for these States remains, however, to be confirmed. It also remains to be decided whether the volumes for the EEA-EFTA States would be aggregated to the volumes of the 25 participating Member States or whether separate auctions will be conducted for the aggregate volumes of the three EEA-EFTA States.
- See point 1 above for the calculation of the 2013 volumes determined in the 2013 auction calendars.
- The amount foreseen to be auctioned in 2014 takes into account:
- the difference between what was foreseen in the 2013 auction calendars and the Commission's estimate of allowances to be auctioned in Recital 26 of the Commission's decision of 5 September;
- amounts that could not be auctioned in 2013 due to rounding
- an amount of 2,779,500 withheld from the auctions as the Czech Republic started auctioning only in March 2013;
- rounding at multiples of 500 allowances for each State. 8,623 allowances have been deducted from the 2014 volume and added to the amount to be auctioned in 2015. The figure for 2015 and later years have not yet been corrected for rounding.
- The Commission proposed a draft amendment of the Auctioning Regulation for postponing the auctioning of part of the allowances under the 'back-loading' initiative. It's adoption will affect the figures for individual years, including 2014.
- The Commission's estimated amount takes into account all allowances handed out for free, including those for planned modernisation investments in the electricity sector in 8 Member States, and is based on the existing carbon leakage list. Lack of the modernisation investments or changes to the composition of the carbon leakage list resulting from the on-going review may further increase the share of auctioned allowances.
With the start of the third trading period in 2013, auctioning is progressively replacing 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 investment in a low-carbon economy. Auctioning will also eliminate windfall profits, which arise when operators charge their customers the cost of allowances they have received for free.
All allowances which are not allocated free of charge are auctioned. 88% of the allowances for auctioning are distributed to Member States on the basis of EU ETS emissions in the 2005-2007 period. 10% of the allowances are distributed to poorer Member States to take account of the lower GDP per head and higher prospects for growth and emissions. Another 2% of the allowances are distributed to nine Member States which in 2005 had achieved a reduction of at least 20% in greenhouse gas emissions compared with the reference year set by the Kyoto Protocol.
Member States are responsible for ensuring that the allowances assigned to them are brought into the EU carbon market via auctions.
Auction revenues accrue to Member States. The ETS Directive recommends that at least half the revenues, and all of the revenues from auctioning aviation allowances, should be used to fight and adapt to climate change within the EU and/or in developing countries. The European Council has noted the willingness of Member States to use at least half of the revenues for this purpose.
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, 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, following a procurement procedure jointly with the Commission; EEX also serves as Germany’s 'opt-out auction platform';
- 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 will use the common auction platform in the meantime.
The EEA-EFTA States will also auction on the common auction platform as well.
An overwhelming majority of stakeholders, a large majority of Member States and the Commission's impact assessment supported a single EU-wide auction platform as it 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.
Opt-out auction platforms must conform with the framework set out in the Regulation, which provides for further rules to ensure adequate coordination between the opt-out auction platforms and the common auction platform.
The maximum appointment duration for any auction platform is five years. EEX has been appointed as the common auction platform for three years, renewable for one additional year, but the contract may expire earlier once its successor is appointed. EEX has been contracted as Germany’s platform. Its first appointment runs until 31 December 2013 at the latest; its second appointment runs for an additional three years, renewable for a further two years. ICE was contracted in November 2012 as the UK’s platform for a maximum duration of three years, renewable for a further two years.
Since the coexistence of the common auction platform 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 in the light of the annual consolidated report drawn up by the auction monitor. This is to be delivered by the end of 2014. The review will be carried out in consultation with Member States and stakeholders.
The revised EU ETS Directive adopted in 2009 requires the European Commission to adopt a Regulation on the 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 its rules are directly applicable in all Member States.
The Auctioning Regulation was adopted by the Commission on 12 November 2010.
The auction format is 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 is open for at least two hours. Directly following the closure of the bidding window, the auction platform determines and publishes the clearing price at which demand for allowances equals the number of allowances offered for sale in the auction concerned.
Successful bidders are the ones who have placed bids for allowances at or above the clearing price. All successful bidders pay the same price, regardless of the price they specified in their bids.
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 auctioned product may or may not be a financial instrument in the meaning of the EU regulatory framework for markets in financial instruments. The products auctioned by EEX and ICE are not such financial instruments; exact product specifications are available on the auctioning webpages of EEX and ICE.
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 potentially negative impact on competition between trading places in the secondary market.
The following are eligible to apply for admission to bid in the auctions:
- ETS operators and aviation operators, and their parent, subsidiary or affiliate undertakings.
- Business groupings of operators or aircraft operators acting as an agent on behalf of their members. The concept of "business grouping" requires the existence of a multi-lateral legal relationship between several ETS operators and/or aircraft operators such as a partnership, joint venture or association of such operators and/or aircraft operators. The business grouping must have its own (incorporated or unincorporated) legal identity and statute which clearly indicates that the business grouping is controlled by ETS operators and/or aircraft operators. For bidding in the auctions directly on its own account and acting as an agent on behalf of its members, the business grouping could employ the services of in-house or outside traders who must be natural persons acting as the bidder's representative.
- Public bodies or state-owned entities that control ETS operators or aviation operators.
- Investment firms and credit institutions authorised and regulated under EU law. Once admitted, they can bid on their own account. They may also bid on behalf of clients provided that they are authorised to do so by the national competent authority. Such authorisation must be valid with respect to the auctioned products which, as currently auctioned by EEX and ICE, do not constitute a financial instrument under EU legislation for financial markets. Information on the implementation by Member States of the provisions in the Auctioning Regulation concerning the requisite authorisation can be found in this notice.
- Persons exempt from the authorisation requirements in EU financial law because their trading and investment services activities are only ancillary to their main business (Article 2(1)(i) of Directive 2004/39/EC), but who are authorised under national legislation implementing the rules laid down in the Auctioning Regulation. As is the case for investment firms and credit institutions, they may also bid on behalf of clients provided they are authorised by the national competent authority to do so. Information on the implementation by Member States of these provisions can be found in this notice.
Where investment firms, credit institutions or exempt persons bid on behalf of their clients, they shall ensure that those clients are themselves eligible to apply for admission to bid, i.e. are included in one of the categories above.
See Article 18 of the Auctioning Regulation for the precise wording on the above.
Unauthorised brokers are not eligible to apply for admission to bid, but could play a role in facilitating the formation of business groupings. An interesting and relatively easy business opportunity for a broker might be to form a European Economic Interest Grouping (EEIG) made up solely of operators and/or aircraft operators. This is a relatively cost-effective means of establishing a business grouping under EU law allowing for cross-border membership. Such an EEIG could then apply to be admitted to bid directly in the auctions and could appoint traders employed by the broker to act as their bidder's representative within the meaning of Article 6(3) of the Auctioning Regulation.
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 customer due diligence checks. Complete information on the admission process and criteria can be found on the websites of EEX and ICE.
The Auctioning Regulation thus strikes a balance between the objectives of openness, effective competition and mitigating the risk of money laundering, terrorist financing, criminal activity or market abuse.
Once admitted, bidders are able to access the auctions through the internet. The auction platforms also offer dedicated connections. EEX, furthermore, offers a possibility to submit bids by fax. Complete information on the means of access can be found on the websites of EEX and ICE.
SMEs covered by the EU ETS as well as small emitters can access the auctions directly after going through the due diligence checks. They may also access the auctions through an intermediary or form a business grouping to act as an agent on their behalf. This may offer them the advantage of minimal transaction costs as well as certainty on the price and quantity of allowances they wish to receive.
The design of the auctions has been made as simple as possible to facilitate participation by SMEs. For example, all successful bidders pay the same clearing price so that SMEs and small emitters will not be disadvantaged by having less knowledge than larger participants.
Both EEX and ICE have measures in place to facilitate access for SMEs covered by the EU ETS, as well as for small emitters.
All Member States have appointed an auctioneer, who is responsible for offering the allowances to be auctioned to the auction platform on behalf of the appointing Member State. It also receives the auction proceeds and disburses these proceeds to the appointing Member State.
The auctioneer may be a private or public body. A list of auctioneers can be found under the Documentation tab at the top of this page.
The auction platform must be a regulated market authorised under 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) 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.
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 obliged to ensure appropriate ‘know-your-customer’ checks are carried out before it grants admission to any potential bidder.
Secondly, the auction platform must be a regulated market, which ensures that it meets strict standards and 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 product auctioned, the auctions will be covered either by the Market Abuse Directive 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 rules of conduct for intermediaries in case they are not covered by the rules of conduct provided for in the EU Financial legislation. It is, however, optional for Member States to put in place a 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'.
The Auctioning Regulation provides for a single independent auction monitor for all auctions on all auction platforms, to be chosen through a competitive procurement procedure conducted jointly by the Commission and all Member States.
The Auctioning Regulation foresees an integral role for the auction monitor in the oversight of the auctions. Each month, it is to submit a report to Member States and the Commission on all auctions conducted that month. It is to produce a consolidated annual report on the functioning of the auctions, including any evidence of anti-competitive behaviour, market abuse, money laundering, terrorist financing or criminal activity, 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 the auction platform.
Auctions and auction platforms are supervised at various levels:
- supervision of the organisation and conduct of auction platforms;
- supervision of the organisation and conduct of professional intermediaries bidding on behalf of clients;
- supervisions of transactions to prevent market abuse;
- supervision of transactions to prevent money laundering and terrorist financing.
These different layers of supervision are interlinked and complementary.
Authorisation and supervision of an auction platform rests with the competent national authorities of the Member State in which an auction platform is located. The rules that apply to an auction platform's organisation and conduct are those of the Markets in Financial Instruments Directive (2004/39/EC) and of the Auctioning Regulation.
Professional intermediaries like investment firms, credit institutions or other persons authorised to bid in EU ETS auctions on behalf of others are also licensed and supervised by the relevant national (typically financial) authorities of the Member State where they are located. When bidding on behalf of clients in the auctions, such intermediaries have to abide by the rules set out in the Auctioning Regulation and/or in Directive 2004/39/EC.
Rules against market abuse, set out in the Auctioning Regulation and in the Market Abuse Directive (2003/6/EC), apply to behaviour and transactions of any bidder in the EU ETS auctions. On-going supervision in this area is primarily left to competent authorities of the Member State where an auction platform is located, but competent authorities of other Member States are also empowered to act and their involvement may be indispensable in cross-border investigations and enforcement.
The Financial Intelligence Unit (FIU) in the Member State where the auction platform is located is the competent national authority for combating money laundering and terrorist financing. It is responsible for supervising the auction platform and must ensure compliance of the auction platform with its obligations under the Auctioning Regulation in relation to customer due diligence, the monitoring and record keeping of the relationship with the bidders, surveillance of the auctions, and related notification requirements. The FIU in the Member State where the auction platform is located cooperates with other FIUs through the FIUs Platform and with the national law enforcement authorities in order to effectively prevent and sanction money laundering and terrorist financing, in accordance with Directive 2005/60/EC.
In addition, once appointed, the auction monitor will monitor and report to Member States and the Commission on the functioning of all auctions on all platforms, on the compliance of the auction processes with the objectives of the ETS Directive and the provisions of the Auctioning Regulation and on any evidence of anti-competitive behaviour or market abuse.
The supervision by the competent authorities and the auction monitor is without prejudice to the obligation on the auction platform to survey the auctions itself.
The costs of the auction process, including the costs of setting up the technical infrastructure, the actual conduct of the auctions and carrying out due diligence checks on bidders, will in general be paid for by the bidders through the fixed and variable 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 Auctioning Regulation will be reviewed following delivery of the first annual consolidated report by the auction monitor, which is due by end-2014.
The review will be carried out in consultation with Member States and stakeholders. 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 the 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. This work is also concerned with organising the oversight of the European carbon market and securing the market integrity of auctioning and trading.
Were the opinions of stakeholders considered in the drawing up of the Auctioning Regulation? Has the Commission prepared an impact assessment?
Yes, all information on consultations held and on the Commission's impact assessment can be found on the consultation page.
Yes, several other countries and regions auction allowances or are considering doing so. They include Australia - with which the Commission has agreed a pathway towards linking the EU ETS with the Australian system - California, certain North-Eastern States of the US participating in the Regional Greenhouse Gas Initiative (RGGI) and Quebec. The annual volumes to be auctioned under the EU ETS are by far the largest, however.
Joint procurement of the single auction monitor and the common auction platform (November 2013)
Where can information on the procurement procedures for the common auction platform or the auction monitor be found?
Contract Notices are always published on Tender Electronic Daily (TED), the electronic version of the supplement S to the Official Journal of the European Union. Full tender documents are made available on DG CLIMA's call page.
The Commission has published a notice on the Member States' implementation of the Auctioning Regulation and on transparency. As set out in this notice, the Commission may publish draft tender documents in order to ensure maximum transparency and equal treatment. These drafts can be found under the Documentation tab at the top of this page.
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 to the call for tenders published in the OJ shall be authentic.
The Commission is the sole contact point for candidates and tenderers. An information note sets out the rules for contacts with economic operators on matters pertaining to the joint procurement procedures.
The procurement procedure for the auction monitor was launched on 6 August 2013 and the deadline for submitting tenders was 25 September 2013. More information can be found on the contracts and grants webpage.
This is not known yet.
An information note sets out the rules for contacts with economic operators on matters pertaining to the joint procurement procedures.
Two joint procurement agreements between the participating Member States and the Commission are in force, one for the procurement of the common auction platform and the other for the auction monitor. The agreements lay down the modalities for the conduct of these procurement procedures jointly by the Member States and the Commission.
Among other things, they provide that:
- The Commission arranges the overall orientation, preparation and organisation of the joint procurement procedures;
- The Commission is the sole representative towards third parties and provides administrative support in the course of the joint procurements and the resulting contracts;
- The Member States, represented in a Joint Procurement Steering Committee (JPSC), provide steering input. Main decisions, notably the adoption of tender documents and award decisions, require prior approval by the (participating) Member States through qualified majority vote in the JPSC.
- Member States opting out are given observer status as regards the procurement of the common auction platform(s);
- A Contract Management Committee consisting of representatives from the Commission and the Member States manages the contracts with the common auction platform(s) and the single auction monitor.
The procurement procedures themselves are conducted pursuant to the procurement rules in the Financial Regulation, which is the legal basis for procurement procedures carried out by the Commission.
Opt-out auction platforms (November 2013)
After determining the details of its intended auction platform, a Member State opting out of the common auction platform(s) notifies its plans, including all relevant details, to the Commission. The Commission verifies that the auction platform satisfies the rules of the Auctioning Regulation and the objectives of the ETS Directive, and to 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 of the ETS Directive, it puts forward a draft amendment of the Auctioning Regulation to list the opt-out platform 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, followed by a three-month scrutiny period for the Council and the European Parliament. The opt-out platform can start conducting auctions only when the amendment to list it has entered into force.
Under this procedure, EEX has been listed twice as Germany’s opt-out auction platform and ICE as the UK’s. Poland has yet to procure and notify its platform.
What happens to the allowances in question, in the absence of the listing of an opt-out auction platform?
In the absence of an opt-out auction platform being listed, the Member State concerned has 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. Pursuant to this rule, Poland has entered into a contract with EEX and EEX started auctioning for Poland as of 16 September 2013.
Can a Member State give preferential treatment to its own industry? How is respect of the principle of non-discrimination ensured?
No, Member States cannot give preferential treatment to their own industry. All auction platforms must give all eligible bidders equal access to 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.