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 can apply to receive free allowances in Phase I.

Not applicable; details for post-2020 period not determined yet.

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 November 2016, Québec had held a total of thirteen auctions, nine jointly with California.

All auction revenues go to the Québec Green Fund and are dedicated to the fight against climate change through Québec’s 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: 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): Free allocation based on historical levels, production level and intensity target of GHG emissions attributable to the activity, with 100% allocation for process emissions, 80% for combustion emissions and 100% for emissions from other sources.

Second compliance period (2015-17): Free allocation diminishes by approximately 1-2% on a yearly basis.

75% of free allowances issued on 14 January of each year (year x) (except in 2013 when they were issued on 1 May). The remaining 25% are to be issued in September of the following year (year x+1) after the Minister´s verification of emission reports (for year x). Free allocation is based on real output.

No free allocation for fuel distributors.

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 - Beijing pilot system

Mainly free allocation through grandfathering based on emissions or emissions intensity in the years 2009-2012 (stationary sources) or 2011-2014 (mobile sources). Benchmarking for new entrants and entities with expanded capacity.

Four years (2013-2016)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in the second half of 2017, the pilots will continue operating until then and probably also beyond.

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. Ex-post adjustments based on production data are also possible.

Four years (2013-2016)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in the second half of 2017, the pilots will continue operating until then and probably also beyond.

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 among market participants, Fujian DRC organized a  first allowance auction on December 15, 2016. 50,000 allowances from the government reserve were sold during the auction.

One year (2016)*

*Similar to the other seven Chinese pilots, the Fujian pilot will operate until the start of the national ETS in the second half of 2017 and probably also beyond. The pilot may then extend its coverage to smaller emitters, who will not be covered under the national scheme.

China - Guangdong pilot system

Mainly free allocation through grandfathering based on 2013-2015 emissions. Annual emissions reduction factor of 0.99 is applied to sectors using grandfathering for 2016 vintage.  Benchmarking is applied for coal or gas fired electricity generators (including heating, combined heat and power), certain cement and iron and steel industrial processes and relevant new entrants. For those using benchmarking, pre-issuance of allowance is based on 2015 production, and the final number will be updated based on 2016 production.

New entrants need to first buy enough allowances on the market and formally transfer into compliance entities; afterwards they receive new allowances.

In 2016, the proportion of free allocation (95% for Power sector and 97% for remaining sectors) remained the same as in 2015. The allowance auction plan was also the same as for the 2015 compliance year. A total of 2 million tonnes of allowances were auctioned in four quarters, i.e. September, December, March and June. During the first compliance year participation in auctions was mandatory for entities to be able to receive or trade their freely allocated allowances.

Four years (2013-2016)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in the second half of 2017, the pilots will continue operating until then and probably also beyond.

China - Hubei pilot system

Free allocation of 2016 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, and ceramics sectors; grandfathering based on 2013-2015 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 2015 production data and then using 2016 actual production data to update allocation). The total cap also includes a reserve for new entrants.

Four years (2013-2016)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in second half of 2017, the pilots will continue operating until then and probably also beyond.

China - Shanghai pilot system

Free allocation based on sector-specific benchmarks (power, heat, car glass manufacturers), historic emissions intensity (industry, aviation, ports, shipping, and water suppliers, generally based on 2013-2015 data) or historic emissions (buildings and commercial sector, generally based on 2013-2015 data).

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

A smaller share of the annual cap will be auctioned.

Three years (2013-2015 formal, 2016-2018 indicative)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in second half of 2017, the pilots will continue operating until then and probably also beyond. Shanghai has indicated a second 3-year phase to run until 2018 with the announcement of the transition plan for the Shanghai Emissions Allowances (2013–2015) to be banked to Phase II 2016–2018.

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 2016 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. As of November 2016, only one auction has taken place (June 2014).

Four years (2013-2016)*

*Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in the second half of 2017, the pilots will continue operating until then and probably also beyond.

China - Tianjin pilot system

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

Four years (2013-2016)*

* Initially, the seven Chinese pilot ETS were scheduled to end after three compliance years and be replaced by the national ETS in 2016. However, as the national ETS will start in the second half of 2017, the pilots will continue operating until then and probably also beyond.

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): In 2013, about 40% of total allowances were auctioned, with different allocation rules for the electricity, manufacturing and aviation sectors.

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 (2012-2020): 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.

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): On 15 July 2015, the European Commission proposed amendments to the EU ETS directive to enhance cost-effective emissions reductions and low-carbon investments. A central component of the proposed amendments refers to the continuation of transitory measures to address the risk of carbon leakage and a revision of the free allocation of allowances.  According to the European Commission, the limited and declining number of allowances requires that the current system of free allocation be revised in order to distribute allowances in the most effective and efficient way. To this end, changes are proposed to:

On 15 July 2015, the European Commission proposed amendments to the EU ETS directive to enhance cost-effective emissions reductions and low-carbon investments. A central component of the proposed amendments refers to the continuation of transitory measures to address the risk of carbon leakage and a revision of the free allocation of allowances.  According to the European Commission, the limited and declining number of allowances requires that the current system of free allocation be revised in order to distribute allowances in the most effective and efficient way. To this end, changes are proposed to:

· Benchmark values, which will be updated to reflect technological progress in the different sectors.

· Production data to better take into account production increases or decreases and to adjust the amount of free allocation accordingly. This should also make the EU ETS more flexible.

· Make carbon leakage rules more targeted. The number of sectors receiving 100% of the benchmark-based free allocation will be reduced.

In addition, the European Commission proposed to transfer 250 million unused allowances from 2013-2020 to establish a reserve for new and growing installations.  Amendments to the Commission's proposal are currently discussed within the European Parliament and in the Council.

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)

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)

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

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

In the year to June 2016, 4.6 million NZUs were allocated to industrial participants, and 8.5 million NZUs were granted for removal activities, compared to a total of 20.4 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. However, no decision to implement auctioning has been taken.

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: receive allowances on behalf of their ratepayers. Investor-owned electrical utilities must consign the allowances they receive to state-run auctions. Publicly owned electrical utilities may either deposit allowances into a compliance account or consign the allowances to auction. Natural gas suppliers must consign an increasing percentage of allowances to auction each year (25% of allowances in 2015, 30% in 2016, and so on); the remainder of allowances must be placed into the natural gas supplier’s compliance account. All natural gas and electrical utilities must use the allowance value for ratepayer benefit and for emissions reductions.

Industrial facilities: Receive free allowances for transition assistance and to prevent leakage. Starting in 2018, transition assistance declines. The amount of free allocation is determined by leakage risk (measured through emissions intensity and trade exposure) and sector-specific benchmarks. Each entity’s allocation reduces each year in proportion to the cap. 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. This was about 6% of current-vintage allowances in the first compliance period, and increases in subsequent compliance periods.

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 - 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
China

Phase I (2017-2019): Expected to be free allocation in the beginning based on either benchmarking or historical emissions intensity. NDRC expresses a willingness to introduce and gradually increase the share of auctioning, but there are no details as of yet on the starting date and share of auctioning.

Phase I: Three years (2017-2019)

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 (2016-2020): Free allocation based on grandfathering.]

Phase I (Pilot phase): 2013

Phase II: 2014-2015

[Phase III: 2016-2020]

Ukraine
Brazil
Chile

Further research on appropriate allocation method is part of the Chilean Market Readiness Proposal (MRP)

No information available yet.

Japan
Mexico
Russia
Taiwan
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.