Allocation is the process of distributing allowances to covered entities in an emissions trading system. There are two basic options for allocation; allowances can be either given away (freely allocated) or sold, often by auction. Because allowances have a value, the allocation process is governed by rules to ensure their fair distribution. A simple, transparent and credible process facilitates this politically contentious part of operating a trading scheme.

Source: ICAP ETS Brief #5 Emissions Trading Revenue


Two methods are common in the context of free allocation of allowances: grandfathering and benchmarking. With grandfathering, covered entities receive emission allowances according to their historical emissions in a base year or base period. Grandfathering tends to increase the political feasibility of emissions trading as it avoids high initial costs for covered sectors. As an allocation method however, grandfathering tends to reward historically high emitters and requires further provisions for new entrants (i.e. emitting facilities that join the system after its initial establishment). The other method is benchmarking, where allowances are allocated according to performance indicators. Benchmarking rewards efficient installations and can more easily assimilate new entrants. Allocation rules can be adjusted to give out only a portion of allowances for free, but in each case, a system should have reliable emissions data and clear allocation formulae for sectors and/or installations.

Selling allowances, usually by auction, has the advantage of reflecting the actual need of installations for allowances and gives covered entities equal opportunity to buy allowances. Moreover, it raises revenues for the regulator that can then be spent on other measures to address climate change. Auctions, sometimes referred to as forming the primary market, are generally conducted either
via static “blind” or “sealed bid” auctions, where all bidders bid once and pay the same price; or by dynamic “ascending clock” auctions where each bidder pays closer to what they are willing to pay as revealed through multiple rounds. These processes and variations thereof foster transparent discovery of allowance prices based on the demand of covered entities. Auction design and participation rules may further help in preventing manipulation through collusive behavior through groups of bidders and limit the market power of single large buyers.

Source: ICAP ETS Brief #5 Emissions Trading Revenue

 

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Allocation Trading period
Canada - Ontario Cap-and-Trade Program

Electricity sector (electricity generators, or those involved in electricity importation and transmission), petroleum producers and suppliers, and natural gas distributors: Electricity and fuel distributors have to buy 100% of their allowances at auctions or on the secondary market. Allowances are auctioned quarterly.

Other sectors (industry, institutions as defined above (Sectors)): Emitters outside the electricity, natural gas and fuel sectors are eligible to receive free allowances in Phase I.

After the first compliance period (2017–2020), compliance periods are three years long; 2021–2023 is the first 3-year compliance period.

Canada - Québec Cap-and-Trade System

Auctions: Generally, electricity and fuel distributors have to buy 100% of their allowances at auction (or on the market). Allowances are auctioned quarterly.

As of 1 January 2018, Québec had held a total of 17 auctions, 13 held jointly with California. All auction revenues go to the Québec Green Fund, which is dedicated to the fight against climate change through Québecʼs 2013–2020 Climate Action Plan.

Unsold allowances in past auctions are removed and will gradually be released for sale at auction after two consecutive auctions are held in which the sale price is higher than the minimum price.

Free allocation: Emission-intensive sectors subject to international competition receive a portion of free allowances. These include: Aluminum, lime, cement, chemical and petrochemicals, metallurgy, mining and pelletizing, pulp and paper, petroleum refining, and others (manufacturers of glass food containers, electrodes, gypsum products, and some
agro-food products).

First compliance period (2013-2014): 
Historical emission intensity adjusted for production level and by type of emission, with 100% allocation for process emissions, 80% for combustion emissions and 100% for emissions from other sources.

Second (2015–2017) and subsequent periods: Allocation of free allowances is based on increasingly strict intensity targets (declining emissions intensity per activity) and production levels. Since production volumes can vary, increasing intensity targets do not guarantee an absolute reduction in free allocation.

As of 2019, allocation of free allowances is made available to voluntary emitters (also known as opt-in covered entities) in alignment with what has been established for regulated entities.

In Québec's cap-and-trade system, a trading period is referred to as a "compliance period" (see below). Allowances are allocated and auctioned with calendar vintage years.

China

Detailed allocation rules are yet to be developed by NDRC in cooperation with energy sector authorities (Article 13, Work Plan). However, based on officially released documents during trial allocation, free allocation is expected based on sub-sector benchmarks with ex-post adjustments for changes in actual production.

 

Based on the national cap setting and allocation framework approved by the State Council in December 2016, draft allocation plan for three sectors (power, cement and electrolytic aluminum) were developed and trial allocation work carried out in two provinces in May 2017, which will feed into the finalization of the allocation rules.

Phase one (roughly a year): Development of market infrastructure

Phase two (roughly another year): Simulation trading

Phase three (roughly from 2020 on): Deepening and expanding


The following trading periods are to be further defined.

China - Beijing pilot system

Mainly free allocation through grandfathering based on emissions or emissions intensity in the years 2009-2012 (stationary sources) or 2013-2016 (mobile sources). For 2017 vintage, benchmarking has been introduced for electricity (including co-generation) sector. For new entrants and entities with expanded capacity an advanced sector based emissions intensity benchmark is applied. 

Five years (2013-2017)*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Chongqing pilot system

Free allocation through grandfathering based on historic emissions (highest number in period 2008-2012). If the sum of allocation for all enterprises exceeds the cap, a reduction factor is applied.Different from other pilots, the covered companies are asked to submit their allocation quotas on a yearly basis of which free allocation is based on. Ex-post adjustments based on production data are also possible.

Five years (2013-2017)*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational

China - Fujian pilot system

Allocation: Mainly free allocation on annual basis, with a view to introducing auctioning over time as appropriate. 10% of the total cap will be reserved for capacity extension and market intervention (when necessary). Free allowances to be allocated to new entrants.

In order to increase market liquidity and facilitate price discovery, on 15 December 2016, Fujian DRC organized a discriminatory (non-uniform price) allowance auction. The 50,000 allowances from the government reserve were auctioned, with the Settlement Prices ranging from CNY 26.5 (USD 3.9) to around CNY 30 (USD 4.4). No further auctions are currently planned.

One year (2016).*

Fujian may also extend ist coverage to smaller Emitters who would continue trading after the national ETS to be fully operational.

* In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Guangdong pilot system

Mainly free allocation through grandfathering or historical intensity reduction method based on 2014-2016 emissions for 2017 vintage allocation. Annual emissions reduction factor of one is applied to sectors using grandfathering (the reduction factor was 0.99 in 2016). Benchmarking is applied for coal or gas fired electricity generators (including heating, combined heat and power), aviation, cement, paper and steel industrial processes. For those using benchmarking, the pre-issuance of allowance is based on 2016 production, and the final number will be updated based on 2017 production. 

In 2016 and 2017, the proportion of free allocation (95% for the power sector and 97% for remaining sectors) remained the same as in 2015. The allowance auction plan was also the same as for the vintage 2015, with a total of two million allowances available for auction. Different from 2015 and 2016 where auctions were held on quarterly basis, for vintage 2017 auctions will be ad hoc. During the first compliance year (2013) participation in auctions i.e. purchasing allowances was mandatory for entities to be eligible to receive or trade their freely allocated allowances. This requirement has been terminated since 2014.

Five years (2013-2017) before the national carbon market is launched in 2017*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Hubei pilot system

Free allocation of 2017 vintage allowances through benchmarks for power, heat, co-generation and cement (except the entities using outsourced clinker); historical carbon intensity method for glass and other building material, pulp and paper, and ceramics sectors; grandfathering based on previous three years’ historic emissions for all other sectors. Ex-post allocation adjustments are possible, especially for those sectors that use benchmarks and historical intensity (first receive half of the total allowance based on previous year’s actual emission data or historical emission baseline and then using the actual production data to update allocation). The total cap also includes a new entrants reserve as well as government reserve for potential market adjustment.

Five years (2013-2017)*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Shanghai pilot system

Free allocation based on sector-specific benchmarks (power, heat, manufacturers), historic emissions intensity (industry, aviation, car glass, ports, shipping, and water suppliers, generally based on 2014-2016 data) or historic emissions (buildings, commercial sector, industry with complex products or considerable change in emission boundary, and airport, generally based on 2014-2016 data).  

Ex-post allocation adjustments, e.g., on the basis of production data, are possible.

A smaller share of the annual cap (from the government reserve) could be auctioned. Shanghai held its allowance auction of 2m tons on 30 June 2017, with floor price of CNY 38.77 (USD 5.74), to increase the market supply. A total of 41,855 tons (2.1% of total auction volume) of allowances were sold at the floor price. Similarly, another acution was held in 2014. Both auctions were for coverred entities that were in need of allowances for their compliance.

Three years (2013-2015; 2016-2018)*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Shenzhen pilot system

Allowances are largely distributed for free. Benchmarking is applied to the water, power and gas sectors based on sectoral historical carbon intensity; while grandfathering based on the entity’s historical carbon intensity is applied to port and subway sectors, public buses and other non-transport sectors. For those using benchmarking and historical carbon intensity, the final number of allowances will be updated based on actual Output.

The Interim Measure for the Administration of Carbon Emission Trading of Shenzhen indicated that at least 3% of allowances are ought to be auctioned. This provision on auction hasn't been implemented in practice yet. So far, only one auction has taken place (in June 2014).

Five years (2013-2017)*

*In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

China - Tianjin pilot system

Mainly free allocation through grandfathering based on 2009-2012 emissions or emissions intensity. Benchmarking for new entrants and expanded capacity.

Five years (2013-2017)*

* In the short-term, the existing Chinese regional carbon markets are expected to operate in parallel to the national Chinese carbon market. Over the medium to long-term, they are expected to be integrated into the national market, once it is fully operational.

EU Emissions Trading System (EU ETS)

Phase one (2005-2007): Nearly 100% free allocation through grandfathering. Some Member States used auctioning and some used benchmarking.

Phase two (2008-2012): Similar to Phase one with some benchmarking for free allocation and some auctioning in eight EU Member States (about 3% of total allowances).

Phase three (2013-2020): Over the entire trading period (2013-2020), 57% of allowances will be auctioned, while the remaining allowances are available for free allocation.

Electricity sector: 100% auctioning with optional derogation for the modernization of the electricity sector in certain Member States. In line with the 2030 framework for climate and energy, Member States with a GDP per capita in 2013 below 60% of the EU average may continue to make use of this optional free allocation in Phase four.

Manufacturing sector: Free allocation is based on benchmarks. Sub-sectors deemed at risk of carbon leakage will receive free allocations at 100% of the pre-determined benchmarks. Sub-sectors deemed not at risk of carbon leakage will have free allocation phased out gradually from 80% of the benchmarks in 2013 to 30% by 2020.

Aviation sector: In 2012, 85% of allowances were allocated for free based on benchmarks. For Phase three: 15% of allowances are auctioned and 82% allocated for free based on benchmarks. The remaining 3% constitutes a special reserve for new entrants and fast growing airlines. As a consequence of the temporary derogation applying to flights with third countries, the allocation is adjusted to the intra-EEA scope.

Back-loading: Taken as a short term measure to address a growing surplus in the EU ETS, it was agreed to postpone the auctioning of 900 million allowances until 2019-2020. Auction volumes were reduced by 400 million allowances in 2014, 300 million in 2015, and by 200 million in 2016. In line with the decision to create an MSR, the back-loaded allowances will not be auctioned but be placed directly in the MSR.

New Entrants Reserve: 5% of the total allowances are set aside to assist new installations coming into the EU ETS or covered installations whose capacity has significantly increased since their free allocation was determined.

Phase four (2021-2030): One of the central components of the Phase four revision package is to ensure the declining number of free allowances is distributed in the most effective and efficient way. To this end, in Phase four:

·        Benchmark values will be updated twice during the phase to reflect technological progress in the different sectors.

·        Free allocation may be updated annually to mirror sustained changes in production (if the change is more than 15% compared to the initial level, on the basis of a two-year rolling average).

·        Carbon leakage rules will be more robust, as the number of sectors classified at risk of carbon leakage will be reduced, and the free allocation for other sectors will be discontinued by 2030 (except district heating).  

·        As an additional safeguard for industry, the agreement foresees a “free allocation buffer” of over 450 million allowances initially earmarked for auctioning, to be made available if the initial free allocation is fully absorbed (thereby avoiding or reducing a correction factor).

In addition, two new multi-billion Euro funds will be established to help the industry and the power sectors meet the innovation and investment challenges of the transition to a low-carbon economy.

The Innovation Fund: For the demonstration of innovative technologies to breakthrough innovation in industry, as well as carbon capture and storage/use and renewable energy.

The Modernization Fund: Facilitating investments in modernizing the energy systems and supporting energy efficiency in ten lower-income Member States, including investments to support a socially just transition to a low-carbon economy (such as retraining for affected workers).

Phase one: Three years (2005-2007)

Phase two: Five years (2008-2012)

Phase three: Eight years (2013-2020)

Phase four: Ten years (2021-2030)

Japan - Saitama Target Setting Emissions Trading System

Grandfathering based on historical emissions is calculated according to the following formula: Base year emissions x (1-compliance factor) x compliance period.

Base year emissions for the first compliance period are based on the average emissions of three consecutive fiscal years between 2002 and 2007.

Allocation to new entrants is based on past emissions or on emissions intensity standards: Emissions activity (floor area) x emission intensity standard.

First Period: 1 April 2012 to 30 September 2016 (compliance period and adjustment year).

Second Period: 1 April 2015 - 30 September 2021 (compliance period and adjustment year).

Japan - Tokyo Cap-and-Trade Program

Grandfathering based on historical emissions calculated according to the following formula: base year emissions x (1-compliance factor) x compliance period (5 years).

Base-year emissions for the first compliance period are based on the average emissions of three consecutive years between FY2002-FY2007.

Allocation to new entrants is based on past emissions or on emissions intensity standards: emissions activity (floor area) x emission intensity standard.

First Period: 1 April 2011 to 30 September 2016 (compliance period and adjustment year)

Second Period: 1 April 2015 to 30 September 2021 (compliance period and adjustment year)

Kazakhstan Emissions Trading Scheme (KAZ ETS)

Phase I (2013): 100% free allocation based on emissions data from 2010.

Phase II (2014-2015): Free allocation (0% and 1.5% below 2011/2012 average emissions).

Phase III (2018-2020): Free allocation based on grandfathering and benchmarking. A new entrants reserve of 35.27 million allowances over the three-year period was created.

Phase I (Pilot phase): 2013

Phase II: 2014-2015

Phase III: 2018-2020

In 2016 and 2017, the system was temporarily suspended.

Korea Emissions Trading Scheme

Phase one (2015-2017): 100% free allocation, no auctioning.

Most sectors will receive free allowances based on the average GHG emissions of the base year (2011-2013). Three sectors (grey clinker, oil refinery, aviation) will be allocated free allowances following benchmarks based on previous activity data from the base year (2011-2013).

During Phase one about 5% of total allowances are retained in a reserve for market stabilization measures (14 MtCO2e), early action (41 MtCO2e), and other purposes including new entrants (33 MtCO2e). In addition, any unallocated allowances and withdrawn allowances will be transferred to the reserve.

Phase two (2018-2020): 97% free allowances, 3% auctioned.

Phase three (2021-2025): Less than 90% free allowances, more than 10% auctioned.

Energy-intensive and trade-exposed (EITE) sectors will receive 100% of their allowances for free in all phases. EITE sectors are defined along the following criteria:
1. additional production cost of >5% and trade intensity of >10%; or
2. additional production cost of >30%; or
3. trade intensity of >30%

Phase one: Three years (2015-2017)

Phase two: Three years (2018-2020)

Phase three: Five years (2021-2025)

New Zealand Emissions Trading Scheme (NZ ETS)

Emissions Intensive and Trade Exposed (EITE) activities: Intensity-based allocation for 26 eligible activities (industrial): 90% free allocation for highly EITE activities (1,600 tCO2e/NZD 1 million of revenue [EUR 652,740]); 60% free allocation for moderately  EITE activities (800 tCO2e/NZD 1 million of revenue [EUR 652,740]).

Under the one-for-two transitional measure, free allocation volumes to EITE activities were halved to reflect the 50% compliance obligation. In line with the phase out of the transitional measure, allocations for EITE activities have increased from 1 January 2017, with full allocations applying from 1 January 2019 (see Price Management Provisions).

Post-1989 forestry sector and other removal activities: See ‘offsets and credits’.

In the year to June 2017, 5.5 million NZUs were allocated to industrial participants, and 9.5 million NZUs were granted for removal activities, compared to a total of 22.4 million certificates surrendered in this period.

Forestry and fisheries sectors: Owners of pre-1990 forest land received a one-off free allocation of NZUs to partially compensate for the impact of the introduction of the NZ ETS on land use flexibility. Fishing quota owners were also compensated for rising fuel costs with a one-off free allocation.

In 2012, the NZ ETS legislation was amended to allow the introduction of auctioning of NZUs within an overall cap on non-forestry sectors. In July 2017, an in-principle decision was taken to develop and introduce an auctioning mechanism. The mechanism is planned to be developed by 2012.

For most sectors the NZ ETS has year-on-year allocations and surrender obligations.

For post-1989 forestry participants, annual reporting of emissions and removals is optional, with five-year mandatory reporting periods. As a result, unit entitlement transfers and surrender obligations for these participants correspond to when they choose to report their emissions.

Swiss ETS

Voluntary phase (2008-2012): Each participant was granted free allocation of allowances covering emissions up to their own entity-specific emissions target.

Mandatory phase (2013-2020): Free allocation is based on industry benchmarks using a similar methodology to the EU ETS. Free allocation for sectors not exposed to the risk of carbon leakage will be phased out gradually: in 2013, 80% free allocation and in 2020 this will be reduced to 30% free allocation.

An overarching correction factor is applied given the benchmarked allocation exceeds the overall emissions cap.

Allowances that are not allocated for free are auctioned. Auctions take place two or three times a year, depending on available auction volumes.

5% of the allowances are set aside in the New Entrants Reserve (NER).

Voluntary phase: 2008 - 2012

Mandatory phase: 2013 - 2020

USA - California Cap-and-Trade Program

Allowances are distributed either via auction or free allocation. 

Electrical distribution utilities and natural gas suppliers:  Receiveallowances on behalf of their ratepayers (consignment allowances). All natural gas and electrical utilities must use the allowance value for ratepayer benefit and for emissions reductions.

Industrial facilities: Receive allowances for transition assistance and to prevent leakage. The amount of free allocation is determined by leakage risk (measured through emissions intensity and trade exposure, used to define assistance factors), sector-specific benchmarks and production volumes as well as a general cap-adjustment factor. In the third compliance period, the assistance factor is differentiated across sectors based on leakage risk. For the post-2020 period, assistance factors for allocation will be part of a new rulemaking to reflect the direction provided in (AB) 398, which specifies an assistance factor of 100% in the post-2020 period.

The majority of industrial allocation is based on production benchmarks and is updated annually based on verified production data. There is no cap on the total amount of industrial allocation.

Other allocation: Other categories of transition assistance are provided for public wholesale water entities, legacy contract generators, universities, and public service facilities. The remainder of allowances is auctioned. In 2017, almost 70% of allowances were available through auction, including allowances from Air Resources Board (ARB) as well as consigned allowances to utilities.

California's trading period is referred to as a "compliance period" (see “compliance period”).

Allowances are allocated and auctioned with calendar year vintages. Some allowances from future vintages are offered for sale at each auction and may be traded but not used for compliance until the compliance date for the vintage year.

USA - Massachusetts Limits on Emissions from Electricity Generators

In 2018, allowances are allocated freely based on prior production volumes (electricity generation). A reserve for new entrants also exists to allocate allowances to facilities beginning operation in 2018.

From 2019 onwards, allowances will be auctioned. Auction proceeds willbe paid to a segregated account and shall be used to further reduce GHG emissions. There will be at least one auction per year; with a default of quarterly auctions (that can be adjusted by the Executive Office of Energy and Environmental Affairs and its Massachusetts Department of Environmental Protection (MassDEP)).

Allowances can be traded year-round except for the month of March.

There is no distinction between trading and compliance period.

USA - Regional Greenhouse Gas Initiative (RGGI)

The vast majority of CO2 allowances issued by each RGGI state are distributed through quarterly, regional CO2 allowance auctions using a “single-round, sealed-bid uniform-price” format. Auctions are open to all parties with financial security, with a maximum bid of 25% of auctioned allowances per quarterly auction.

RGGI’s trading period is referred to as a control period.

First control period: 2009-2011

Second control period: 2012-2014

Third control period: 2015-2017*

Fourth control period: 2018-2020*

*RGGI introduced an interim control period with the 2014 revisions. An affected source must cover 50% of its emissions with allowances in each of the first two years of a control period. The affected source must cover 100% of the remaining emissions at the end of the three-year control period.

Canada - Nova Scotia
Mexico
Taiwan, China
Ukraine
USA - Virginia
Brazil
Chile
Colombia
Japan
Thailand
Turkey
USA - Oregon
USA - Washington
Vietnam

Studies

Kopp, R. (2008) Allowance allocation. Assessing U.S. Climate Policy Options. Resources for the Future.

Lop
omo, G., Marx, L.M., McAdams, D., Murray, B. (2011) Carbon Allowance Auction Design: An Assessment of Options for the U.S. Duke University (published in Review of Environmental Economics and Policy, 2011, 5(1), 25-43).

Neuhoff, K., Matthes, F., et al. (2008) The Role of Auctions for Emissions Trading. Climate Strategies.

Tänzler, D. & Steuwer, S. (2009)
Cap and Invest. Why Auctioning gains Prominence in the EU’s Emissions Trading Scheme. Heinrich Böll Foundation North America.