Allocation
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 |
Allocation | Trading period |
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Canada - Nova Scotia | |
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FREE ALLOCATION, OUTPUT-BASED | Nova Scotia’s cap-and-trade program is structured around compliance periods; trading periods are not defined separately. The first compliance period is 2019–2022. |
Canada - Québec Cap-and-Trade System | |
Allowances are distributed via auction and free allocation. | The Québec cap-and-trade system is structured around three-year compliance periods, except for the first period (see “Compliance” below). A cap trajectory until 2030 has been set (see “Cap”). Allowances are allocated and auctioned with calendar vintage years. |
China - Beijing pilot ETS | |
Free Allocation: Mainly free allocation through grandparenting based on emissions or emissions intensity in the baseline years (for 2018 allowances, the baseline years are 2009-2012 for stationary sources and 2013-2016 for mobile sources). Benchmarking is used for new entrants and entities with expanded capacity, as well for the power sector. The Beijing pilot ETS continues to increase the stringency of its benchmark values for power generation enterprises and is shifting from historical intensity or total emissions-based allocation to benchmarks for heat production and supply as well as for the cement sector. | 2013-2019* |
China - Chongqing pilot ETS | |
Free Allocation: Free allocation through grandparenting 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. Regulated companies submit their allocation quotas on a yearly basis, forming the basis of their free allocation. Ex-post adjustments based on output data are possible. | 2013-2019* |
China - Fujian pilot ETS | |
Free Allocation: Benchmarking is applied to electricity, cement, aluminum, and plate glass sectors. | 2016-2019* |
China - Guangdong pilot ETS | |
Free Allocation: Mainly free allocation based on grandparenting, historical intensity, or benchmarking. Benchmarking is applied to coal- and gas-fired electricity generators (including heating, as well as combined heat and power), as well as to some industrial processes in the aviation, cement, paper, and steel sectors. Ex post adjustments based on real production data of the respective compliance year are also applied. | 2013-2019* |
China - Hubei pilot ETS | |
Free Allocation: Free allocation of 2018 vintage allowances through benchmarks for power and cement (except the entities using outsourced clinker). | 2014-2019* |
China - Shanghai pilot ETS | |
Free Allocation: 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 airports, generally based on 2015-2017 data). | Two trading periods: first period 2013-2015, second period 2016; no specific ending year.* |
China - Shenzhen pilot ETS | |
Free Allocation: Allowances are largely distributed for free. Benchmarking is applied to the water, power, and gas sectors based on sectoral historical emissions intensity. | 2013-2019* |
China - Tianjin pilot ETS | |
Free Allocation: Mainly free allocation through grandparenting based on 2009-2012 emissions or on emissions intensity. Benchmarking for new entrants and expanded capacity. | 2013-2019* |
China National ETS | |
The ETS competent authority will develop detailed allocation rules in cooperation with energy sector authorities. | First Phase (~a year as of 2018): Development of market infrastructures |
EU Emissions Trading System (EU ETS) | |
PHASE 1 (2005-2007): Allocation established through the member state national allocation plans. Allocation through grandfathering. Some member states used auctioning and some used benchmark-based allocation. | Phase 1: 3 years (2005-2007) |
German National Emissions Trading System | |
PHASE ONE (2021-2026): Allowances will not be allocated for free. The government will start selling and auctioning allowances with a fixed price on CO2 emissions between 2021 and 2024. [1] | No information available yet. |
Japan - Saitama Target Setting Emissions Trading System | |
The baselines for facilities are set according to the following formula: Base-year emissions x (1 - compliance factor) x compliance period (5 years). | FIRST PERIOD: 1 April 2012 to 30 September 2016 |
Japan - Tokyo Cap-and-Trade Program | |
The baselines for facilities are set according to the following formula: base-year emissions x (1 - compliance factor) x compliance period (5 years). | FIRST PERIOD: 1 April 2011 to 30 September 2016 |
Kazakhstan Emissions Trading Scheme | |
PHASE ONE (2013): Free allocation: grandparenting. Based on emissions data from 2010. | PHASE ONE: 1 year (2013) |
Korea Emissions Trading Scheme | |
PHASE ONE (2015-2017): | PHASE ONE: 3 years (2015-2017) |
Mexico | |
The pilot will use free allocation with the following specifications. | · Pilot phase (2020-2021); and |
New Zealand Emissions Trading Scheme | |
FREE ALLOCATION, BENCHMARKING: | There are no fixed trading periods or phases under the NZ ETS. |
Swiss ETS | |
VOLUNTARY PHASE (2008-2012): | VOLUNTARY PHASE: 2008 - 2012 |
United Kingdom | |
USA - California Cap-and-Trade Program | |
Allowances are distributed via auction and/or free allocation. | The California Cap-and-Trade Program is structured around compliance periods (see “Compliance” below). A cap trajectory has been set through 2030, with a formula for the declining cap through 2050 (see “Cap” above). |
USA - Massachusetts Limits on Emissions from Electricity Generators | |
AUCTIONING: From 2019 onwards, allowances are partially auctioned, with 25% auctioned in 2019, 50% in 2020, and 100% from 2021 onwards. One to four auctions will be held each year. The first auction took place in December 2018. The second auction took place in December 2019.18. | The system has an annual compliance deadline of 1 March for the prior year’s emissions. |
USA - Regional Greenhouse Gas Initiative (RGGI) | |
CO2 allowances issued by each RGGI state are distributed through quarterly regional CO2 allowance auctions. Auctions are open to all parties with financial security, with a maximum bid of 25% of auctioned allowances per quarterly auction. | RGGI is structured around “control” (or compliance) periods. A cap trajectory until 2030 has been set (see “Cap” above). |
Colombia | |
Montenegro | |
Ukraine | |
USA - Pennsylvania | |
USA - Transportation and Climate Initiative (TCI) | |
Brazil | |
Chile | |
Indonesia | |
Japan | |
Pakistan | |
Philippines | |
Taiwan, China | |
Thailand | |
Turkey | |
USA - New Mexico | |
USA - New York City | |
USA - North Carolina | |
USA - Oregon | |
USA - Washington | |
Vietnam |
Studies
Kopp, R. (2008) Allowance allocation. Assessing U.S. Climate Policy Options. Resources for the Future.
Lopomo, 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.
Official Websites and Presentations
EU ETS
European Commission Website - Allocation
European Commission Website - Auctioning 1
European Commission Website - Leakage
California
Air Resources Board Website - Allocation
Air Resources Board Website - Auction
New Zealand
NZ ETS Website - Allocations
Québec
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (Division II and III)
RGGI
RGGI Website - Allocation
Switzerland
BAFU Website - Auctions