Officials in the EU's executive, pressured by industry calling for longer-term visibility on carbon permit prices, are deciding how to arrange auctions ahead of the third phase of bloc's Emissions Trading Scheme (EU ETS), which starts in 2013.
The scheme is the EU's main tool for reining in carbon dioxide emissions, blamed for warming the planet. Companies above their emissions cap must buy carbon permits from firms that have a surplus.
The scheme's first two phases have been dogged by teething troubles that included low prices, stemming from an overall permit surplus and the economic slowdown, as well as windfall profits for industry as a result of receiving free permits.
As a result, from 2013 the EU will force utilities to buy at auction most of their permits under a steadily tightening emissions cap.
"Two central auctioning platforms are to be developed and established ... a provisional central platform, the purpose of which would be to auction in 2011 and 2012 allowances required for 2013," read a letter seen by Reuters. "The other platform will be the definitive central platform," it added.
A centralised platform, either a regulated market or a multilateral trading facility, would be a setback for Britain and Germany, which had pushed for linked national platforms, and had successfully lobbied Spain and Poland to support them.
At present, trading is mainly done over regulated, private exchanges like London's European Climate Exchange.
There will be no active price management but if prices are too low, auctions might be cancelled, both documents show.
"In case the auction clearing price is abnormally low, the auction shall be cancelled forthwith and the auctioned volume shall be distributed evenly over the next four scheduled auctions," the leaked draft regulation said.
It said the Commission will determine what amounts to an abnormally low price using a confidential methodology that can be modified.
"If something goes wrong in an auction for whatever reason and the price goes below the secondary market price the auction would be cancelled," Yvon Slingenberg of the EU's Climate Action division said on the sidelines of a conference in Amsterdam.
Auctions will occur at least weekly using a "uniform, single round, sealed bid," and will be mainly limited to ETS participants and regulated financial institutions, the draft said.
To prevent market manipulation, a maximum bid of 25 percent of allowances could be implemented, and to ensure the auctions are protected against fraud or abuse, a monitor will be appointed to supervise.
Getting it right
A spokeswoman said the Commission was finalising its proposal before seeking the approval of the EU's 27 countries, and it regretted the details had been leaked.
Emissions traders and market observers praised the plan.
"Getting this right is absolutely vital for the integrity of the EU's climate policy," said Sanjeev Kumar of environment think-tank E3G. "The Commission's position is quite solid. There should be one central platform and no more loopholes."
Seb Walhain, head of environmental markets at Fortis Netherlands, said: "A centralised platform is good for the market as it is more transparent and guarantees the proper distribution of revenues."
By starting auctions from 2011, the Commission will keep industry happy, particularly utilities which, instead of receiving them for free, must pay for their permits from 2013.
Auctioning permits from 2011 will allow utilities to hedge their forward power sales.
(EurActiv with Reuters.)
