Insights

11/12/2012

Emissions for sale

European Union companies with emissions should start to consider if they want to buy emissions from auctions to meet their quotas. The first primary auctions have already been executed by the common EU auction platform European Energy Exchange AG (EEX). The time is now to gather the information you need to start buying your emissions allowances.

Generally speaking, if you are a company in the European Union that emits green house gases into the air, you may fall under the scope of the European Union’s Emission Trading Scheme (EU ETS). What this means on a practical level is that you can start buying your emissions allowances from the auctions to meet the EU’s emission quotas. The companies impacted the most by EU ETS are electricity producers, heavy industries and aviation companies. 

Why buy now?

By buying your emission allowances from the auctions early on, you ensure the best price for the quota amounts you need. If you delay, it is possible you may have to buy allowances from more-expensive secondary markets later on. Odds are the so-called “back loading” and potential “set aside” for EU emission allowances in Phase III may result in increased carbon prices.

For now, we are in what is called Phase II of the EU ETS. Fundamental changes are coming, however, in Phase III, which will take place from the years 2013–2020. 

During these years, heavy industries and, in all likelihood, some of the European aviation companies will need to buy more than 50 per cent of their allowances from the auctions, with the exception of district heating and the carbon leakage sectors. Electricity companies will need to buy 100 per cent of their allowances in the Phase III. 

As a result, emission trading and auctions will undoubtedly become more visible parts of the business for these firms. 

First full auctions in 2013

Auctions will be conducted either in the common EU auction platform used by 24 Member States or in “opt-out” auction platforms located in Germany, Poland and the United Kingdom. Following a competitive tender procedure, Member States and the European Commission appointed the EEX in Leipzig as transitional common auction platform for Phase III. Also, Germany selected EEX as an opt-out auction platform for Phase III auctions. The United Kingdom has nominated ICE Futures Europe (ICE) as its auction platform for the next trading period.

The time for preparation for the first auctions in 2013 will be very short despite the fact that the auction platforms have been made public. The primary auctions have already been executed in 2012. The first full auctions will take place in the beginning of 2013. 

Three steps to take now

It is recommended that companies start their preparations for the auctions well in advance of the beginning of the Phase III. Several essential steps are outlined below. 

Firstly, companies should evaluate their total annual emissions and the amount of allowances they need to obtain from the auctions in the Phase III (the amount they still need to buy in order to be able to comply with the EU ETS regulation). Once obtained, the total amount of allowances will then be surrendered by the end of April each year beginning in 2014. It should be noted that the auctioned allowances of Phase III may only be used to comply with Phase III emissions, not for year 2012. Only if you are an aviation company, you may use the allowances to comply with your emissions in 2012. 

Secondly, companies should decide which auctions they will attend. Even if your headquarters is in Finland, you can take part in the common EU auction platform or in the German or United Kingdom platforms. In general, the auctions will be held at least once a week. The calendars for 2013 auctions will be maintained by EEX and ICE. You should follow the auction calendars closely and prepare an auction participation strategy in advance. 

Thirdly, companies joining the auctions in 2013 should have their preparations well on their way. These practical preparations include completing an application and gaining access to the auctioning platform, negotiating and signing an agreement with a broker company, preparing financial documents and company compliance programmes, getting an overview of the auctioning products (future, forward or spot), as well as getting acquainted with the auctioning processes and practices. 

Finally, participants must comply with the European Union provisions that deal with insider dealing and market manipulation. At worst, legal consequences for neglecting auction or insider regulation may lead to criminal sanctions. Many companies have compliance programmes for insider issues, but considering the sectors participating in emissions auctions, this is not always the case.

By taking these steps, companies can get a jump start on the new auction process.

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