|Buying allowances in the auctions versus on the secondary market - pros and cons - Page 4|
|Monday, 12 September 2011 05:46|
Page 4 of 4
When we already established that buying allowances in the auctions is burdened with significant shortcomings for acquirers seeking certainty when it comes to the terms of supply and potential indemnity for default in the supply it is worth considering now whether auctions have any advantage over OTC market from a demand side participants point of view.
In that context it should be written down that in the effect of the operation of the Article 7(2) subparagraph 2 of the Regulation, the bidder is able to buy emission allowances for the clearing price, which, in principle, could be lower than the price offered in the bid. The said provision stipulates that ‘The price of the bid at which the sum of the volumes bid matches or exceeds the volume of allowances auctioned shall be the auction clearing price’. This mechanism generally is for the benefit of the bidders, especially the small and inexperienced ones, which are able to buy carbon credits cheaper than they earlier evaluated their bid. In that aspect the auctions offer for the SME the opportunity which is rather hard to exploit on the OTC market.
The potential disproportional impact of this rule is, however, alleviated by mitigating mechanism contained in Article 7(6) which reads: ‘Where the auction clearing price is significantly under the price on the secondary market prevailing during and immediately before the bidding window when taking into account the short term volatility of the price of allowances over a defined period preceding the auction, the auction platform shall cancel the auction’.
The above legal circumstances lead to the conclusion that theoretically it is possible to buy emission allowances in the auction cheaper than the price on the secondary market, but not ‘significantly’ cheaper (when big volumes are at stake this deal might, however, seem interesting).
The question what does it mean price ‘significantly under’ the price on the secondary market remains to answer. Clearing this issue up will in effect delineate the scope for potential benefits for auction participants - being the price on the secondary market (prevailing during and immediately before the bidding window) at one end of the spectrum of possible situations and the price ‘significantly under’ the said price at the other end of the spectrum (situation in which the auction will be cancelled).
In between those extremes are the fruits to be picked in the auctions.
It’s no wonder that information on the methodology to define what constitutes an auction clearing price ‘significantly’ under the prevailing secondary market price before and during an auction is listed as confidential data not disclosed to bidders (Article 62(1)(i) of the Regulation).