|Banking of CO2 allowances operates onwards not backwards|
|Friday, 19 August 2011 11:26|
The draft Commission Regulation amending Regulation (EU) No 1031/2010 determines the volumes of greenhouse gas emission allowances to be auctioned prior to 2013. But it should be remembered that EUAs sold in early auctions starting in 2012 will be barred from compliance use in the second trading period.
The draft Commission Regulation amending Regulation (EU) No 1031/2010 to determine the volume of greenhouse gas emission allowances to be auctioned prior to 2013 has been released recently. In my opinion the proposed therein amendments (strictly 11) are mainly of technical nature following the actual specification in the Annex I to the Regulation of the – lacking so far - exact volumes of allowances auctioned prior to 2013 and the auctioned product through which they shall be auctioned (forwards or futures).
The two of the said proposals for amendments of the Auctioning Regulation seem to be of particular relevance for 2012 CO2 emission market:
1) the addition to the Article 8(4) - regarding timing and frequency of the future auctions,
2) the amendment to the Article 32(1) – regarding volumes of allowances attributed to each specific auction in 2012.
Beneath a short description of the said two changes.
Article 8(4) of the Auctioning Regulation currently provides that as from the sixth auction or earlier, the joint auction platform shall conduct auctions of allowances covered by Chapter III of Directive 2003/87/EC (excludes aviation allowances) on a weekly basis at least and auctions of allowances covered by Chapter II of Directive 2003/87/EC (covers aviation allowances) shall be conducted on a two-monthly basis at least.
Draft Regulation at issue envisions an addition (reservation) to the said provision according to which during the year 2012, those auction platforms may conduct auctions of allowances covered by Chapter III of Directive 2003/87/EC in 2012 on a monthly basis at least.
It follows that we can expect that early auctions of allowances (aviation allowances excluding) will be carried out in 2012 at least monthly. And this is an important premise for any further potential analysis for the market parameters in 2012 – assuming obviously that the draft amendment becomes a binding law.
The second important change to the auction calendar (currently established by Article 32(1) of the Auctioning Regulation) is the specification of the volumes attributed to the each individual auction in 2012. The change relates to the auction platforms appointed by Member States opting to have their own auction platform (any Member State not participating in the joint auction platform may appoint its own auction platform for the auctioning of its share of the volume of allowances - UK, Germany and Poland opted for this variant).
The actual Article 32 of the Auctioning Regulation provides that the volume of allowances covered by Chapter III of Directive 2003/87/EC (i.e. aviation allowances excluding) auctioned in individual auctions conducted by a Member State’s auction platform shall be no greater than 20 million allowances and no less than 10 million allowances; save where the total volume of allowances, covered by Chapter III of Directive 2003/87/EC, to be auctioned by the appointing Member State is less than 10 million in a given calendar year, in which case the allowances shall be auctioned in a single auction per calendar year.
In that regard the draft Regulation at issue envisions an addition that during the year 2012, the volume of these allowances auctioned in an individual auction conducted by those auction platforms shall be no greater than 4 million allowances and no less than 1 million allowances.
From the draft of the Annex I to the said Regulation follows that United Kingdom has the volume of 12 258 000 allowances to be auctioned in 2012, Germany and Poland respectively 23 530 000 and 14 704 000 (the three biggest emitters in the EU overall). Hence, If the plans to launch the three - independent of the common auction platform – Member States’ auction platforms succeeds, there will be quite big volumes of allowances to distribute over individual auctions in these three Member States in 2012.
The one thing is, however, particularly important as regards so-called “early auctions” (i.e. auctions conducted in 2012). The said issue is the problem of the general validity of allowances – see box.
As was envisioned in the title of this post, the provisions of the Directive 2003/87/EC and the Registry Regulation give ground to the assertion that banking of CO2 allowances operates onwards not backwards. It means in particular that it is possible to use CO2 allowances from the second trading period in the third one, as from 2013 (with the reservation of the particular procedure for exchangeability) – but not conversely.
As a consequence, EUAs sold in early auctions starting in 2012 will be barred from compliance use in the second trading period.
Besides, according to the Auctioning Regulation (Article 4(2)) ‘when auctioning futures or forwards, the delivery of the allowances may be deferred to a date no later than 31 December 2013’. This provision uses the phrase “no later” hence the maturity of the futures and forwards products still remains to be specified. Given the variety of auction platforms (joint platform, and the platforms of the above-mentioned Member States), it seems that the maturity of these products may, in theory, be also diversified (but capped maximally at 31 December 2013).