|Australian carbon auctions design – improvement of the EUETS auctioning model or regression?|
|Monday, 20 February 2012 07:25|
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It follows from the Australian Government document that Australian emission allowances auction design can have quite original features. As a consequence bidding strategies elaborated under assumption of the EUETS rules may occur not entirely effective on the Australian carbon primary market.
On 3 February 2012 The Australian Government published the Position paper “Auctions Position paper on the legislative instrument for auctioning carbon units in Australia’s carbon pricing mechanism” (available on the Commonwealth Department of Climate Change and Energy Efficiency website at: www.climatechange.gov.au – hereinafter referred to as ‘Position paper’) and invited submissions from all interested stakeholders (submissions on Position paper close 24 February 2012).
Comparing the design proposed in the Australian scheme with the EU ETS single-round, sealed-bid auctioning arrangements addressed in the EU ETS Directive (2003/87/EC) and the Auctioning Regulation (1031/2010) it should in the first place be noted that the Australian cap-and-trade prefers ascending clock auction format. In this model the Regulator announces the current price, bidders nominate the number of carbon units they are prepared to purchase at that price, if, however, demand exceeds supply, the Regulator raises the price in the next round and bidders resubmit their bids. Bidders may decrease, but not increase, their bid quantities in each successive bidding round. This process continues until the number offered is equal to or greater than demand. Bidders then pay the price from the previous round.
The price paid per carbon unit will be uniform for all successful bidders under an ascending clock auction system and this feature resembles the analogous solution adopted in the EUETS (uniform clearing price).
In the Position paper an example for ascending clock auction format is displayed in which the Australian Clean Energy Regulator auctions 100 carbon units and starts bidding at $21 per unit. Participant A will buy 50 units at this price, Participant B will buy 50 units at this price and Participant C will buy 50 units at this price. As demand for units exceeds supply, the price is put to $22 per unit. Participant A will still buy 50 at this price, Participant B will also buy 50 units $22 per unit, but Participant C will lower their demand to 20 units. As demand still exceeds supply the price goes to $23. Participant A only wants 40 units at this price, Participant B also wants 40 units and Participant C wants 15 units.
This means that under ascending clock auction format 5 units will remain unsold but this issue is not decided yet – Position paper explains that for that residual supply the Regulator will only determine whether to hold intra-round bidding, and the subsequent method for the submission of intra-round bids.
The noteworthy remark - general, but burdened with multiple implications - is also that the Position paper contains a mention that auction in the Australian cap-and-trade will be conducted using an electronic platform and an electronic settlement system ‘operated by the Regulator’. This passage may suggest that an option adopted under EUETS consisting in using auction platforms being regulated markets (when it comes to EUETS in the meaning of the MiFID Directive) has not been preferred by the Australian legislators (this issue, however, is somewhat unclear).
Pursuant to the Recital 29 of the Auctioning Regulation, ‘The requirement that the auction platform is a regulated market is founded on the desire to use the organisational infrastructure available on the secondary market for the administration of the auctions.’
If the Australian carbon auction didn’t use the said organisational infrastructure available on the secondary market, it would have to build the self-standing system, which is theoretically possible but exposed to additional operational risks.
The other most interesting detailed features of the proposed Australian auction design pursuant to the Position paper are as follows:
Under the Australian cap-and-trade it is proposed that there will be no deferred payment arrangements for auctions. It is proposed that the settlement day will be three business days after the end of the auction, except where settlement is cancelled (it is also proposed that payments in Australian currency only will be allowed).
The EU ETS rules provide for the payment for the auctioned products to be made either before or at the latest upon delivery of the allowances into the bidder’s nominated holding account or the nominated holding account of its successor in title.
As regards the currency used in EU ETS payments to the auctioneers are to be made in euros or in the currency of the appointing Member State where that Member State is not member of the euro-zone, at the option of the Member State concerned, regardless of what currency payments are made by the bidders, provided that the clearing system or settlement system concerned is capable of handling the national currency in question.
2. AUCTION CALENDAR
Under the Australian cap-and-trade it is proposed that four auctions will be held during the compliance year, one in each quarter (approximately 3 months apart).
There would be eight auctions for each vintage; three advance auctions, four within the relevant compliance year and one following the compliance year before the final surrender date.
Four years of vintages will be auctioned (current vintage plus advance auctions of three future vintages).
Advance auctions of flexible price carbon units will commence in the fixed price period.
The first auction will take place in 2013-14 financial year, most likely in early 2014. Auctions potentially held in the first and second year of the carbon pricing mechanism would be limited to 15 million carbon units per vintage.