Consultation on EU ETS auction regulations suggests low market liquidity for aviation emission allowances

Consultation on EU ETS auction regulations suggests low market liquidity for aviation emission allowances | EU ETS, auctioning, ICF
Fri 24 July 2009 – A European Commission consultation on future EU Emissions Trading Scheme (EU ETS) auctioning rules, which will have major implications for aircraft operators joining the scheme from 2012, has just one week to run. An EU Regulation must be adopted by 30 June 2010 on timing, administration and other aspects of auctioning within the EU ETS. The consultation, which is being carried out by ICF International, has a section devoted to the auctioning of EU Aviation Allowances (EUAAs). It calculates that some 210 million EUAAs per year will be issued, based on an estimated average 2004-2006 emissions cap, with around 30 million EUAAs to be auctioned. The consultation warns that because there will be a relative scarcity of EUAAs, the liquidity of this secondary market may be lower than for EUAs.
While aircraft operators will be able to use EUAs for compliance, non-Aviation ETS operators will not be able to surrender EUAAs to cover their emissions. Accordingly, says the consultation, EUAAs will require a separate auction process.
Of the 2,000-plus potential operators to be regulated under the scheme, the 15 largest operators are expected to represent around 50% of the regulated aviation emissions. Less than 200 should have emissions over 100,000 tCO2 in 2012, of which around 50 will emit more than 1 million tCO2. This implies that a small number of Member States with the largest hub airports will account for a relatively large number of EUAAs to be auctioned.
As aviation is anticipated to grow significantly, emissions in the sector are expected to exceed the cap on EUAAs so operators will be required to buy additional EUAs for compliance needs. Under this scenario, it is likely that EUAA prices will closely follow EUA prices. However, because of the relative scarcity of EUAAs and because of the generally smaller amounts involved, market liquidity for EUAAs may be lower than for EUAs.
As larger aircraft operators generally hedge part of their fuel needs, carbon hedging may become a widespread practice. However, auctioning EUAA futures may only carry limited benefits to fulfil hedging needs, advises the consultation document. It says there may not be a need for a high number of EUAA auctions per year, given the possibility of using EUAs and accessing such allowances through EUA auctions. By contrast, the smaller group of large aviation operators suggests a need for relatively large EUAA auctions in order to ensure effective competition. In order to avoid bidding dilemmas, EUAA auctions should not coincide with EUA auctions and it may be desirable that they follow shortly behind EUA auctions so as to benefit from the EUA auction price signal.
The smaller volume of EUAAs suggests a greater need for simplicity of the auction design and therefore a single-round auction is recommended to be the most appropriate method. A reserve price may be useful, which could be based on the prevailing market prices of both EUAAs and EUAs. As operators have the possibility to use EUAs instead of, and in addition to, EUAAs, attempts to drive up the EUAA price are likely to have limited effects. Accordingly, there appears to be no case for a maximum bid-size in EUAA auctions.
The consultation, which includes specific questions for operators and other stakeholders to answer through a web-based questionnaire, closes on August 3.
In early August, the European Commission’s DG Environment is due to publish the actual carbon cap for the sector as well as the revised list of aircraft operators to be included in the EU ETS, along with their administering EU State.



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