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Commission will finalise free carbon allocation in September

30 Jul 2013 18:39:28 | edcm

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The European Commission said on Tuesday the free allocation of carbon allowances to industrials for phase III will be finalised in September, and estimated companies will receive their 2013 quota originally due by February "one to three months" after.

Now the possible update of the volumes due to be auctioned in 2013 - originally due by July - might instead apply directly to volumes on auction in 2014.

The Commission's comment confirms the time frame the UK's Department of Energy and Climate Change (DECC) gave to ICIS last week (see EDCM 26 July 2013).

"The European Commission plans to adopt a decision on member states' national implementation measures (NIMs) for phase III of the EU Emissions Trading System (ETS) during the course of September 2013," the EU executive said in a statement. "The Commission is currently scrutinising the NIMs."

The Commission must calculate a final figure of free allowances to be handed out to installations, based on the numbers each EU country submitted in their NIMs plans. If the sum of the proposed free allocations exceed the number of free EU allowances (EUAs) available, then the Commission will cut NIMs equally in each country and sector. Analysts expect the final free allocations to be lower by 5-15% compared with the amount submitted by countries (see EDCM 12 July 2013).

The Commission estimated it will take "one to three months" for EU countries' registry authorities to distribute the free allowances to installations, depending also on whether a correction factor is necessary.

This means some operators might get their EUAs in December, almost one year late, and with only a few months to go before the 2013 compliance deadline.

According to the International Emissions Trading Association (IETA), the lack of transparency in the calculation process has fuelled concern and confusion among operators.

The uncertainty has led industrials - potential sellers because of their significant length - to hold onto their EUA surplus until the EU confirms the NIMs figures, analysts said.

Auction calendar update in 2014

The Commission said it will also fix the final EU ETS cap for phase III at the same time. The current 2013 cap is not final yet, as the phase II cap must be finalised.

"While [the cap] is generally known in ballpark [figures], some member states have not fully used up their new entrant reserve. The unused volumes are cancelled and thus reduce the cap of the second trading period. As a consequence, the Commission requires from all member states final data on unused NER volumes to determine the final phase II cap," said Jan Frommeyer, director of market analysis at consultancy Tschach Solutions - now part of ICIS.

Portugal, for instance, is one of the countries that sold none of the 13.5m EUAs left in its new entrant reserve (see EDCM 21 March 2013).

The delay in the free allocation calculation will affect the possible update of the auction calendar, as the volume on auction every year is the difference between the cap and the free allocation. The preliminary calendar published in December last year was based on a "conservative estimate", and any possible update was due to come "no later than July 2013" (see EDCM 12 December 2012).

The Commission said that if the volumes on auction have to be changed, it might decide the adjustment is taken into account in the 2014 auction calendars.

"In light of the delays that have occurred so far, we believe that any adjustment to auction volumes would likely be made to the 2014 auction calendar," Italian bank UniCredit carbon analyst Kathrin Goretzki told ICIS on Tuesday.

Tschach Solutions expects up to 70m EUAs to be added to the 818.86m EUAs provisionally scheduled to be auctioned in 2013.

"The potential delay of an auction adjustment to 2014 is however new and could ease expected pressure on carbon prices in Q4 2013," the consultancy said in a note on Tuesday. Silvia Molteni

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