The public consultation on adjusting the GHG emission allowance auction process for 2021-2030 is open for comment until August 6.
In order to deepen cooperation in the energy sector and to build up a stronger Energy Union, the European Parliament and the Council revised Directive 2003/87/EC (ETS Directive) in March 2018 to implement the ambitious targets of the 2030 EU Climate and Energy Framework. The European Commission (EC) therefore plans to adjust the rules on auctioning greenhouse gas (GHG) emission allowances to maintain pace with these recent EU Emissions Trading System (EU ETS) developments. Prior to adopting a Delegated Regulation to amend Regulation (EU) No 1031/2010 (Auctioning Regulation), the EC is inviting comments on the draft until August 6, 2019.
The draft is the first general revision of the Auctioning Regulation and the amendments pursue three main objectives:
- Conveying the new rules of phase IV of the EU ETS for the period of 2021 to 2030, which were adopted in the last revision of the ETS Directive
- Implementing the classification of emission allowances as financial instruments under Directive 2014/65/EU on markets in financial instruments
- Incorporating the conclusions drawn from the evaluation of the auctioning in phase III of the EU ETS (2013-2020)
However, the EC does not intend to change the overall architecture of the auctioning process, as the consultations involving the Member States themselves indicate that the system currently works efficiently.
EU ETS and GHG Emission Allowance Trading
The EU ETS was set up in 2005 to establish a scheme for GHG emission allowance trading. The EU ETS is the world’s first international emissions trading system, and operates in the EU Member States, Iceland, Liechtenstein, and Norway. The ETS Directive caps overall emissions of certain GHG from covered installations. The cap is reduced each year in order to consistently decrease emissions. Within this limit, companies can buy and sell allowances as needed, in respect of their own emissions. According to the EC, the EU ETS limits emissions from more than 11,000 heavy energy-using installations and airlines and covers around 45% of the EU’s GHG emissions.
Changes to the Auctioning Regulation
The draft Auctioning Regulation incorporates the changes in the determination of the annual volume of allowances to be auctioned. In particular, the number of allowances available for auctioning have become more flexible under the revised ETS Directive. For instance, in order to increase the amount available for free allocation, the ETS Directive reduces auction volume by up to 3% of the total quantity of allowances. Furthermore, Member States are allowed to cancel allowances in the event of closure of electricity generation capacity. Another aim of the Auctioning Regulation is to strengthen the European Investment Bank’s role and responsibility as auctioneer for the Innovation Fund and Modernisation Fund. Both funds were established by the revised ETS Directive. The Modernisation Fund is designed to improve energy efficiency and to modernize the energy systems of less developed Member States, while the Innovation Fund is designed to support investment in innovative technologies.
The draft Auctioning Regulation also takes into account that emission allowances are classified as financial instruments, as of 2018. Through this classification, emission allowances have obtained the same protection and benefits of trading as derivatives of emission allowances even had before. The draft Auctioning Regulation modifies the process of monitoring of auctions and introduces reporting obligations that meet the requirements of the amended market abuse regime.
Last but not least, the EC wants to further improve and simplify the auction process. For instance, the procedure in Member States for appointing opt-out auction platforms will be simplified, and the rules on cancellation of auctions will be set out in more detail.
We will continue to track the developments of the Auctioning Regulation when it comes into effect and of EU ETS more generally.