New primary market for emissions allowances – some remarks on auctioned products
Tuesday, 20 April 2010 21:07


In spite of mysteriously drafted provisions of Article (4(2) and 4(3) of the Auctioning Regulation, beneath I try to determine the concrete time span for auctions of futures and forwards in relation to EUAs of the third trading period, as well as the available volumes of such contracts.

 


The European Commission’s proposal of 6 April 2010 for the Regulation on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and the Council establishing a scheme for greenhouse gas emission allowances trading within the Community (hereinafter referred to as “Auctioning Regulation” or “Regulation”) provides for 4 different auctioned products as regards EUAs of the third trading period.


According to the Article 4(2) and 4(3) of the Auctioning Regulation:

 

“2.Until the legal measures and technical means necessary to deliver the allowances are put in place, allowances shall be auctioned by each Member State in the form of only one of the following auctioned products:

(a) futures;

(b) forwards;

with physical delivery deferred to a date no later than December 2013.

3. When the legal measures and technical means necessary to deliver the allowances are put in place, allowances shall be auctioned by each Member State in the form of only one of the following auctioned products:

(a) two-day spot;

(b) five-day futures.”

 

Auctions of forwards and futures are called by the Auctioning Regulation “an alternative means of auctioning” to be used on a provisional basis (see: recital 10). For the purposes of the Regulation the distinction was adopted that futures differ from forwards in that whilst the former are subject to cash margining, the latter are margined through non-cash collateral. The choice, which of them to apply, was left to the Member States depending on their budgetary situation. Both, futures and forwards alike are obviously financial instruments and are subject to the MIFID Directive legal regime.

 

It is easy to perceive that the Auctioning Regulation discriminates the legal situation between “until” and “when” “legal measures and technical means necessary to deliver the allowances are put in place”. But practically - what does it mean for traders and what concrete dates are concerned?

 

A little bit of explanation we can find in the Impact Assessment  (accompanying document to Auctioning Regulation) where, on the page 14 and 15, the Commission noticed that delivery of third trading period EUAs will, require adaptation of the Community Independent Transaction Log (CITL), “which will not practically be possible before 2012. Auctions before 2012 can therefore only concern futures with delivery in e.g. 2013.”

 

Taking into account the abovementioned remark, we can draw a conclusion that the point in time when “the legal measures and technical means necessary to deliver the allowances are put in place” will be not earlier than 2012.

 

Considering the maximum maturity date of December 2013 - mentioned in the Article 4(2) - there could  thus be time span of circa three years (2011, 2012, 2013) for primary market in futures and forwards as regards EUAs of the third trading period (excepting of course five-day futures provided for in Article 4(3) point b).

Such a conclusion is acknowledged in recital 14 of the Auctioning Regulation, which states that, “As a rule, the volume to be auctioned in each year should be equal to the volume of allowances attributed to that year. Any allowances covered by Chapter III of Directive 2003/87/EC to be auctioned in 2011 and 2012 would be an exception”.

 

So, when we have established – in spite of mysteriously drafted provisions of Article (4(2) and 4(3) of the Auctioning Regulation – the concrete time span for auctions of futures and forwards in relation to EUAs of the third trading period, the market may be further interested in addressing the available volumes of such contracts. But this issue is not so simple. It is envisioned that the precise data on volumes of allowances auctioned prior to 2013 (in 2011 and 2012) and the auctioned product through which they shall be auctioned will be inserted in Annex I to the Auctioning Regulation. But the content of Annex I will be addressed after the entry into force of the Regulation. Such a solution rises some doubts (for details see: “Some formal errors in the draft of the auctioning Regulation”).

 

It is renowned that all the aforementioned issues relating to the auctions of futures and forwards are of utmost account, in particular, for electricity generators, which contract electricity in many cases in advance. Auctions in these financial instruments can be regarded as a concession just towards the needs of electricity producers.

 

But in the context of actual needs of installations to plan the availability of units for compliance purposes in the third trading period, it is useful to recall that apart from the above-mentioned forwards and futures in the primary market, there should be also taken into account the volumes of:

1) allowances banked from the second into the third trading period,

2) CERs (to a certain extent),

 

The separate pool of allowances in the new entrants reserve will be sold pursuant to Article 10a(8) of Directive 2003/87/EC (as an effect of CCS projects financing).

 

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