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 periods
Canada - Nova Scotia

FREE ALLOCATION: Each year within the compliance period, free allowances are transferred to the program participants’ accounts. The amount of free allowances for the participating entities is calculated as follows:

Industrial Facilities (output-based allocation): Facilities receive allowances based on production intensity benchmarks. 75% of eligible emissions allowances are distributed to participating entities on 14 January of each year. The remaining eligible 25% are provided in the following year with production-level adjustments after the submission of a verified emissions report.

The benchmark is based on historical facility emissions intensity, an assistance factor that varies between 1 (100%) for cement and 0.9 (90%) for pulp and paper as well as natural gas processing (these are the only three GHG activities, or components of a GHG activity explicitly specified in the regulatory framework).

A cap adjustment factor is also applied, declining from 1 in 2019 to about 0.88 in 2022. This means that an entity would receive about 12% fewer allowances based on the output in 2022 compared to in 2019.

Fuel Suppliers and Electricity Importers (grandparenting): Facilities receive 80% of free allocation based on verified GHG reports for the previous year’s emissions on 14 April of each year.

Nova Scotia Power Inc. (free allocation based on a reduction of BAU projections): Allowances for the utility are allocated equivalent to the amount of approximately 90% of the business-as-usual projections for GHG emissions from the electricity sector for the
compliance period. The BAU projections are established by the regulator. ~5.5 million allowances were freely allocated in 2020, and in 2021, ~5.1 million allowances will be allocated, declining to just over five million in 2022.
Allowances are allocated on 14 January of each year.

AUCTIONING: The province holds two to four auctions per calendar year. Two auctions were held in 2020: the first in June and the second in December. Minimum price: CAD 20 (USD 14.91) for auctions held in 2020; the minimum price increases by 5% plus inflation in each subsequent year.

Purchasing Limits at Auctions (for the 2019-2022 compliance period): In order to minimize the risk of one participant manipulating the market by causing shortages and price spikes, purchasing limits restrict how many emission allowances each participant can buy at any one auction. The limits for the three types of participants are as follows:
• Industrial facilities: 3% of their previous year’s verified GHG emissions per auction and 5% for the calendar year.
• Fuel suppliers: 15% of the previous year’s verified GHG emissions per auction and 25% for the calendar year.
• Nova Scotia Power Inc.: 5% of the allowances available for sale at each auction.

Auctioning in Nova Scotia has two particularities:

(1) Option for regulated entities to consign allowances to auction: To minimize transaction costs for participants, regulated entities can consign their allowances to the government auctions. Allowances offered for sale through consignment are included in the government auctions and sold first, followed by allowances offered for sale by the province. 100% of the revenue from allowances sold on consignment is returned to the participants.

(2) Purchase limits to secure market functioning: To secure market functioning, bidders are subject to purchasing limits that restrict how many allowances each participant can buy at any one auction. Purchasing limits are intended to mitigate the risk that one participant can manipulate the market by causing shortages and price spikes.

Nova Scotia’s cap-and-trade program is structured around four-year compliance periods; trading periods are not defined separately. The first compliance period is 2019-2022.

Canada - Québec Cap-and-Trade System

Allowances–referred to as “emission units” in Québec’s cap-and-trade regulations–are distributed via auction and free allocation.

FREE ALLOCATION: Emission-intensive, trade-exposed (EITE) sectors receive a portion of free allowances because they are considered vulnerable to carbon leakage. Eligible sectors include aluminum, lime, cement, chemical and petrochemicals, metallurgy, mining and pelletizing, pulp and paper, petroleum refining, and others (manufacturers of glass containers, gypsum products, and some agro-food products). Electricity producers with a fixed-price sales contract signed before 2008 that does not allow price adjustments to take into account a carbon cost are also eligible to receive free allowances. The amount of free allocation issued is generally determined by: recent levels of production or consumption of raw materials (depending on the reference unit for the sector); a declining intensity target based on historic averages, depending on the type of emissions (e.g., fixed process, combustion, and other, mainly fugitive emissions); and an assistance factor.

Until 2020, the assistance factors for all EITE sectors were set at 100%. For the 2021-2023 period, assistance factors for industrial activities have been determined based on trade exposure and emissions intensity. These metrics were used to group the industrial sector’s carbon leakage risk into three categories (low, medium, and high), with assistance factors of 90%, 95%, and 100% respectively. An assistance factor of 60% applies for off-site electricity and steam production for producers with fixed-price sales contracts signed before 2008 that were referenced above.

The rules on free allocation for entities that voluntarily opt into the cap-and-trade system are the same as those for regulated entities.

AUCTIONING: Electricity and fuel distributors must buy 100% of their allowances, with some narrow exceptions (e.g., on contracts prior to 2008 that have not been renewed or extended). Allowances are auctioned quarterly. 

Allowances that remain unsold after an auction may be offered for sale again later when the price at two consecutive auctions settles above the minimum price.

In 2019, about 67% of allowances were allocated by auction or directed to reserves. About 33% of allowances were allocated for free.

The Québec cap-and-trade system is structured around three-year compliance periods, except for the first period (see “Compliance” section). A cap trajectory until 2030 has been set (see “Cap” section). Allowances are allocated and auctioned with calendar vintage years.

China - Beijing pilot ETS

FREE ALLOCATION: Free allocation through grandparenting based on historical emissions or emissions intensity in the baseline years, which are the previous three years.

Benchmarking is used for new entrants and entities with expanded capacity, as well for the power sector. Benchmarking will be expanded to sectors such as heat production and cement.

AUCTIONING: Beijing could set aside up to 5% of allowances for regular and irregular auctions (see “Market Stability Provisions” section). To date, no auctions have been held.

2013 and ongoing*

* In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with 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 ETS

FREE ALLOCATION: Free allocation through grandparenting based on historical emissions (highest number in period 2008-2012). Regulated entities submit their allowance allocation demand on a yearly basis, forming the basis of their free allocation. This value is adjusted if it exceeds the highest historical annual emissions (2008-2012) of the respective entities, by using the average of the two numbers. In addition, if the sum of the allocation for all the entities exceeds the top-down cap (see “Cap” section), a reduction factor is applied to all the covered entities.

2013 and ongoing*

* In the short term, the existing Chinese regional carbon markets are expected to operate in parallel to the Chinese national 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 ETS

FREE ALLOCATION: Benchmarking is applied to the electricity, cement, aluminum, and plate glass sectors.

The other sectors are allocated allowances based on historical intensity. These entities can also apply for more allowances for early mitigation actions.

A pre-allocation method is adopted for the annual allowance allocation. At first, entities receive 70% of the allowances in a given year, which are calculated based on their production levels in the previous year (for example, 2019 pre-allocation is based on 2018 production data). Allocation is then adjusted ex-post to reflect the actual production in the respective compliance year.

AUCTIONING: Auctioning may take place where considered appropriate by the ETS authorities (see “Market Stability Provisions” section) and may be introduced as a method for allowance allocation over time; up to 10% of the total cap is reserved for market intervention.

In order to increase market liquidity and price discovery, the Fujian DRC organized a discriminatory (nonuniform price) auction of 50,000 allowances in 2016 from the government reserve, with the settlement prices ranging from CNY 26.50 (USD 3.84) to ~CNY 30 (USD 4.35). No further auctions have taken place to date.

2016-ongoing*



*In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with 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 ETS

FREE ALLOCATION: Mainly free allocation through grandparenting based on historical emissions or emissions intensity, or benchmarking.

Benchmarking is applied to coal- and gas-fired electricity generators (including heating, and combined heat and power), as well as to some industrial processes in the aviation, cement, paper, and steel sectors.

Grandparenting on the basis of historical emissions is applied to some processes in the cement and steel industries and the whole petrochemical industry. Grandparenting on the basis of historical emissions intensity is applied to the power industry using special fuel generating units and heating boilers, other powder products in cement industry, captive power plants in the steel industry, special paper and paper product manufacturers, enterprises with pulp manufacturing, and other aviation enterprises.

Ex-post adjustments based on real production data of the respective compliance year are also applied for those sectors that use benchmarks and emissions intensity methods.

Compared to previous years, the 2020 allocation plan has one major change, namely an increase of free allocation for the aviation sector from 97% to 100%.

AUCTIONING: Guangdong auctions a small share of allowances as a form of allowance allocation. During the first compliance year (2013), entities were required to purchase allowances in auctions in order to become eligible to receive their freely allocated allowances. This requirement was terminated in 2014. Since 2014, free allocation percentages remain the same, i.e., 95% for the power sector and 97% for the remaining sectors (for 2020, the aviation sector received 100% free allocation). Quarterly auctions were held until 2016; since 2017, they have been held on an ad hoc basis. Auctions are also subject to a reserve price (see “Market Stability Provisions” section). No auctions took place in 2018 or 2019.

The allowance volume available for auction was adjusted from two million allowances (as had been the case until year 2018) to five million allowances from 2019 onwards. One auction took place in April 2020 with a floor price of CNY 25.84 per tCO2e (USD 3.74), selling 400,000 allowances at the price of CNY 28.2 (USD 4.09).

2013 and ongoing*

*In the short term, the existing Chinese regional carbon markets are expected to operate in parallel with 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 ETS

FREE ALLOCATION, BENCHMARKING: Free allocation of 2019 vintage allowances through benchmarks for power and cement (except for entities using outsourced clinker).

FREE ALLOCATION, GRANDPARENTING: Historical emissions intensity for heat, co-generation, glass and other building materials, some of the equipment manufacturing, and the pulp and papers sectors; grandparenting based on previous three years’ historic emissions for all other sectors.

Ex-post allocation adjustments are applied, especially for those sectors that use benchmarks and emissions intensity.

Hubei also introduces the so-called market adjustment factor, a factor that is applied to all covered entities to reduce overall allocation. It is determined based on the previous year’s market stock of the Hubei carbon market, while taking the province’s overall economic development and the achievement of its climate mitigation targets and strategies into consideration. For the 2019 compliance year, it was set at 0.9723.

AUCTIONING: A small share of the annual cap can be auctioned. The main purpose of auctions is to promote price discovery and provide regulated entities with additional supply to meet their compliance demand. To date, auctions have been held on an ad hoc basis and happened only in 2014, 2019, and 2020. The first auction took place in 2014, with two million allowances sold at the floor price of CNY 20 (USD 2.90).

In November 2019, through two separate auctions, five million allowances were made available from the government reserve. The auctions operated with a reserve price set at the weighted spot market price from 30 October 2017 to 30 October 2019. The first auction was restricted to compliance entities. Two million allowances were offered with 1.49 million sold at an average price of CNY 24.65 (USD 3.57). Remaining allowances were made available to covered entities as well as other market participants for a second auction. The total auction volume was 3.51 million tonnes, including 0.51 million that was left from the first auction. The average price was CNY 24.49 (USD 3.55).

Following an identical structure of two separate rounds of auctions targeting different types of entities, in December 2020 three million allowances were made available from the government reserve, with two-thirds dedicated to compliance entities only. The auctions operated with a reserve price set at CNY 27.56 (USD 3.99). 1.1 million and 671,000 tonnes were successfully auctioned respectively, with the average price of CNY 27.57 (USD 4.00).

2014 and ongoing*

*In the short term, the existing Chinese regional carbon markets are expected to operate 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 ETS

FREE ALLOCATION: Free allocation based on sector-specific benchmarks (for the electricity and heat producers, and electricity grid sector).

Grandfathering based on historic emissions intensity for part of the industrial sectors, aviation, ports, shipping, and water suppliers, generally based on the previous three years’ data.

Grandfathering based on historic emissions for airports, buildings, commercial sector, and part of the industrial sectors with complex products or considerable change in emission boundary, generally based on the previous three years’ data.

Ex-post allocation adjustments, e.g., on the basis of production data, are applied for those with historic intensity or benchmarking allocations.

AUCTIONING: A small share of the annual cap could be auctioned. The main purpose of auctions is to provide compliance entities with additional supply to meet their compliance demand. To date, auctions have been held on an ad hoc basis. One auction was held in each of the following years: 2014, 2016, 2018, and 2019.

In 2020, Shanghai held two auctions: one in August and the other in October. The floor prices were set differently: for the first auction, which was open to institutional investors and compliance entities, the floor price was set at the market weighted average price of all trading days in the second quarter of 2020. For the second auction, which was open to the compliance entities only, the floor price was set at 1.1 times the market weighted average price of all trading days from December 1, 2019 to September 30, 2020. The auctions offered 2 million tonnes of allowances each, with 100% and 5.9% of them cleared at the floor price of CNY 39.61 (USD 5.74) and CNY 44.27 (USD 6.42) respectively.

Two trading periods:
• the first period ran between 2013 and 2015;
• the second period started in 2016, with no specific ending year.*

*In the short term, the existing Chinese regional carbon markets are expected to operate 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 ETS

Allowances are largely distributed for free and allowance allocation is adjusted ex-post, based on output data.

FREE ALLOCATION, BENCHMARKING: Benchmarking is applied to the water, power, and gas sectors based on sectoral historical emissions intensity.

FREE ALLOCATION, GRANDPARENTING: Grandparenting is applied to port and subway sectors, public buses, and other non-transport sectors based on the entity’s historical emissions intensity.

AUCTIONING: Although the ‘Interim Measure for the Administration of Carbon Emission Trading of Shenzhen’ document states that at least 3% of allowances should be auctioned, this has not yet been implemented. So far, only one auction has been held (in June 2014); its purpose was to increase market supply and price stability.

2013 and ongoing*

*In the short term, the existing Chinese regional carbon markets are expected to operate 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 ETS

FREE ALLOCATION: Mainly free allocation through grandparenting based on either base year (for example, 2018 for the allocation of 2019 allowances) total emissions (for iron and steel, petrochemicals, chemicals, exploration for oil and gas, and aviation) or on emissions intensity (for heat and electricity production, papermaking, and building materials). Benchmarking for new entrants and expanded capacity.

Ex-post allocation adjustments are applied, especially for those sectors that use benchmarks and emissions intensity.

AUCTIONING: A small share of the annual cap could be auctioned. Participation is voluntary and the purpose of auctions is mainly to provide compliance entities with additional supply to meet their compliance demand. To date, auctions have been held on an ad hoc basis. The Tianjin EEB held its first allowance auction in June 2019. Two million tonnes were on offer with the auction clearing at CNY 14.63/tonne (USD 2.12). Following the first auction in 2019, the Tianjin pilot held two auctions in 2020. The first auction for the 2019 compliance year was held in June, with two million allowances sold at prices between CNY 17.31 (USD 2.51) and 21.55 (USD 3.12). The second, held in August, sold 812,573 allowances at CNY 26.24 (USD 3.80).

2013 and ongoing*

*In the short term, the existing Chinese regional carbon markets are expected to operate 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 National ETS

FREE ALLOCATION: Benchmarking is used as the main allocation method, with four distinct benchmarks: conventional coal plants below 300 MW; conventional coal plants above 300 MW; unconventional coal; and natural gas.

At first, entities will receive allowances at 70% of their 2018 output multiplied by the corresponding benchmark factor. Allocation will be adjusted later to reflect actual generation in 2019 and 2020. A unit load (output) adjustment factor distributes more allowances for entities operating at load rates lower than 85%. This may provide more allowances to less efficient power units. A regional adjustment factor that would give regional governments the opportunity to tighten allocation in line with regional climate targets had been proposed during the drafting phase of the Allocation Plan, but was not included in the final version.

AUCTION: Currently, allocation is to take place mainly through free allocation, but the National Measures clarify that auctioning may be introduced at a later point in time.

The current regulation does not yet define specific trading periods for the Chinese national ETS.

EU Emissions Trading System (EU ETS)

PHASE ONE (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 TWO (2008-2012): Similar to Phase 1, with ~90% of allowances allocated for free. Some benchmark-based free allocation; and some auctioning in eight Member States (Germany, United Kingdom, The Netherlands, Austria, Ireland, Hungary, Czech Republic, and Lithuania), amounting to ~3% of total allowance allocation.

PHASE THREE (2013-2020): 57% of allowances auctioned over the entire trading period with the remaining allowances allocated through benchmarking.

88% of the auctioned allowances were distributed to EU Member States based on verified 2005 or average 2005-2007 emissions.

10% was allocated to lower-income EU Member States and the remaining 2% distributed among nine Member States that reduced 2005 emissions by 20% compared to the base year.

Power Sector: 100% auctioning with an optional derogation for the modernization of the electricity sector in certain Member States whose GDP per capita was below 60% of the EU average in 2013.

Manufacturing/Industry: Free allocation follows product-based benchmarks. Benchmarks were based on activity levels in 2007-2008 and were set at the average of the 10% most efficient installations in the (sub)sector.

Subsectors deemed at risk of carbon leakage received free allocation at 100% of the predetermined benchmarks. Subsectors deemed not at risk of carbon leakage had free allocation phased out gradually from 80% of the respective benchmarks in 2013 to 30% by 2020. Where free allocation exceeded the amount reserved for free allocation, a cross-sectoral correction factor applied.

Carbon leakage risk was assessed against the following criteria of emissions intensity and trade exposure:
• direct and indirect cost increase >30%; or
• non-EU trade intensity >30%; or
• direct and indirect cost increase >5% and trade intensity >10%.

Cost intensity was determined by the formula
[Carbon price × (direct emissions × auctioning factor + electricity consumption × electricity emission factor)]/GVA

Trade intensity was determined by the formula
(imports + exports)/(imports + production)

Aviation Sector: In 2012, 85% of allowances were allocated for free, based on benchmarks. In Phase 3 (2013-2020), 15% of allowances were auctioned and 82% allocated for free, based on benchmarks. The remaining 3% constituted a special reserve for new entrants and fast-growing airlines. Due to the temporary derogation that applied to flights with third countries, the allocation was adjusted to the intra-EEA scope.

Back-loading: As a short-term measure to address a growing surplus in the EU ETS, the auctioning of 900 million allowances from 2014-2016 was postponed to 2019-2020. In line with the decision to create the market stability reserve, the back-loaded allowances were placed in the MSR, which became operational in 2019.

New Entrants Reserve: 5% of the total allowances are set aside to assist new installations coming into the EU ETS or to cover installations whose capacity has significantly increased since their free allocation was determined. Until June 2020, a total of 171.1 million allowances were reserved for 1,089 installations during Phase 3. At the end of Phase 3, any unallocated allowances (excluding 200 million reserved for the NER300* in Phase 4) were placed into the MSR.

PHASE FOUR (2021-2030):
Manufacturing/Industry: Benchmark values are updated twice to reflect technological progress in different sectors. The first set of benchmark values applies to the period 2021-2025; the second set of values will cover the period from 2026 to 2030. Member States submitted lists of incumbent installations and updated emissions data by 30 September 2019 and are required to do so again by 30 September 2024. Based on this data, the European Commission will update Phase 3 benchmarks.
• Benchmark values in Phase 4 will be adjusted for technological progress year-on-year. An annual reduction rate (0.2% to 1.6%) will be determined for each benchmark. For the steel sector, which faces high abatement costs and leakage risks, the lower end of 0.2% annual benchmark reduction will apply. Further updates on the above may be released as part of the broader ETS review.
• Free allocation may be updated annually to mirror sustained changes in production (if the change is more than 15% compared to the initial level, based on a 2-year rolling average).

Carbon leakage rules:
• The third carbon leakage list adopted in February 2019 applies for the period 2021-2030. The revised list includes a reduced number of sectors classified at risk of carbon leakage. Free allocation for other sectors will be discontinued by 2030 (except district heating).
• Carbon leakage is assessed against a composite indicator of trade intensity and emissions intensity.
• As an additional safeguard for industry, the Phase 4 cap breakdown includes a free allocation buffer of more than 450 million allowances, initially earmarked for auctioning, which can be made available for free allocation if the initial free allocation volume is fully absorbed (thereby avoiding the need to apply the cross-sector correction factor).

Carbon leakage risk is assessed according to the following criteria:

• Trade Intensity x Emissions Intensity > 0.2
• Trade intensity x Emissions Intensity > 0.15 < 0.2; qualitative assessment will follow based on abatement potential, market characteristics, and profit margins.

Emissions intensity is determined by:
[direct emissions + (electricity consumption x electricity emission factor)]/GVA

Trade exposure is determined by:
(imports + exports)/(imports + production)

Power Sector: 100% auctioning with an optional derogation for the modernization of the electricity sector in certain Member States. Those Member States whose GDP per capita was below 60% of the EU average in 2013 may continue to make use of this optional free allocation through benchmarking. Three out of ten eligible Member States make use of the derogation in Phase 4 (2021-2030). Some Member States chose to monetize the corresponding share of allowances or use them to boost their share of the Modernization Fund.

Aviation: Free allocation for the aviation sector will be reduced compared to the 82% in Phase 3. A proposal is expected in June 2021.

Auctioning: 57% of allowances in Phase 4 will be auctioned. Out of these, 90% will be distributed to Member States based on their share of verified emissions, with 10% distributed among the lower-income EU Member States. Authorities have the right to cancel auctions when the highest bidding price is significantly below the prevailing secondary market price to avoid market distortion. In such a situation, allowances are transferred to subsequent auctions scheduled at the same trading platform.

NER: The New Entrants Reserve in Phase 4 (2021-30) has been supplied with 200 million from the unallocated NER allowances from Phase 3 (2013-2020).

*The NER 300 is an EU low-carbon technology funding program of approximately EUR 2 billion (USD 2.3 billion) monetized through the sale of 300 million allowances that awarded proposals in 2012 and 2014, the latest of which will enter into operation by June 2021.

Phase 1: 3 years (2005-2007)

Phase 2: 5 years (2008-2012)

Phase 3: 8 years (2013-2020)

Phase 4: 10 years (2021-2030)

German National Emissions Trading System

PHASE ONE (2021-2030)
Fixed price phase (2021-2025): Allowances will be sold for an annually increasing fixed price:

• 2021: EUR 25 (USD 28.55)
• 2022: EUR 30 (USD 34.27)
• 2023: EUR 35 (USD 39.98)
• 2024: EUR 45 (USD 51.40)
• 2025: EUR 55 (USD 62.82)

Generally, the yearly fixed price only applies to allowances acquired in the respective calendar year. However, up to 10% of allowances needed for compliance obligations for a certain year X can be acquired until 30 September of year X+1 at the fixed price of year X.

Auctioning phase (from 2026): Auctioning of allowances starts in 2026, and a price corridor with a minimum price of EUR 55 (USD 62.82) and a maximum price of EUR 65 (USD 74.24) per tCO2 will apply.

Based on a review of the system, it will be decided in 2025 whether a price corridor should also be applied from 2027 onwards.

CARBON LEAKAGE RULES: A compensation mechanism to avoid carbon leakage for emissions-intensive trade exposed sectors will come into effect as early as 1 January 2021. Respective regulations will be released by mid-2021 and will have retroactive effect. The carbon leakage rules will apply to companies from emission-intensive sectors that are in international competition. Industries eligible for compensation are those on the carbon leakage list of the EU ETS Phase 4. Furthermore, it is foreseen that additional sectors/subsectors may qualify upon request.

PHASE ONE: 10 years (2021-2030)

Japan - Saitama Target Setting Emissions Trading System

Under the Saitama ETS, each facility has its own cap, which serves as the “baseline” from which it must achieve its reduction target. Baselines for facilities are set according to the following formula: Base-year emissions x (1 - compliance factor) x compliance period (5 years). The compliance factor for each period is determined based on regulations established by the Governor of Saitama Prefecture.

Base-year emissions are the average emissions of any three consecutive years between FY2002 and FY2007, as chosen by each entity. Credits are issued to facilities whose emissions fall below the baseline.

Baselines for new entrants are based on past emissions (the average of any three consecutive years of emissions from four years prior to the start of the compliance period up until the year before the start of the compliance period) or on emissions intensity standards.

COMPLIANCE FACTOR:
First period (FY2011-FY2014): 8% or 6% reduction below base-year emissions
Second period (FY2015-FY2019): 15% or 13% reduction below base-year emissions
Third period (FY2020-FY2024): 22% or 20% reduction below base-year emissions

The higher compliance factor applies to commercial buildings, as well as to district heating and cooling (DHC) plant facilities. The lower compliance factor applies to other facilities, such as commercial buildings that use DHC for more than 20% of the entire energy consumption, and factories.

In the third compliance period, for large facilities owned by small and medium-sized enterprises, the compliance factor is reduced to three quarters of the 22% or 20%, depending on category. Similarly, in medical facilities where electricity is vital to preserve life and health, the compliance factor is two percentage points lower than the 22% or 20% category.

EMISSIONS REDUCTION METHODS:
• Renewable energy: When covered facilities generate electricity from renewable sources for their own use, they can deduct this amount of electricity from the total energy usage of the facility to be reported.
• Low carbon electricity: In order to evaluate energy efficiency efforts of the covered facilities, CO2 emissions factors of electricity suppliers are fixed during each compliance period. When covered facilities procure electricity from suppliers with lower emissions factors, they can reduce the difference between these emission factors from their emissions to be reported to Saitama Prefecture from the third compliance period.

Facilities demonstrating outstanding performance in emissions reduction, as well as in the introduction, use, and management of energy equipment, are certified as top-level facilities that receive lower compliance factors according to their rate of progress, for a period of five years. The certification standards represent the highest-level energy-efficiency measures currently feasible, stipulating more than 200 different energy-saving measures.

FIRST TRADING PERIOD: 1 April 2012 to 30 September 2016
SECOND TRADING PERIOD: 1 April 2015 to 30 September 2021
THIRD TRADING PERIOD: 1 April 2020 to 30 September 2026

The Saitama ETS has both trading periods and compliance periods (see “Compliance” section). The trading period is defined as the compliance period plus an additional 18-month adjustment period, during which time entities may continue to trade credits in order to reach their targets for the corresponding compliance period.

Japan - Tokyo Cap-and-Trade Program

Under the Tokyo ETS, each facility has its own cap, which serves as the “baseline” from which it must achieve its reduction target. Baselines for facilities are set according to the following formula: Base-year emissions x (1 - compliance factor) x compliance period (5 years). The compliance factor for each period is determined based on regulations established by the Governor of Tokyo. Prior to the start of each new compliance period, TMG holds consultation meetings to garner experts’ opinions for determining the compliance factors.

Base-year emissions are based on the average emissions of any three consecutive years between FY2002 and FY2007, as chosen by each entity. Credits are issued to facilities whose emissions fall below their baselines. Additional emissions reductions may be issued through use of renewable electricity (see also “Offsets and Credits” section).

Baselines for new entrants are based on past emissions or on emissions intensity standards.

COMPLIANCE FACTOR:
First period (FY2010-FY2014): 8% or 6% reduction below base-year emissions

Second period (FY2015-FY2019): 17% or 15% reduction below base-year emissions

Third period (FY2020-FY2024): 27% or 25% reduction below base-year emissions

The higher compliance factor applies to office buildings, as well as to district heating and cooling (DHC) plants (excluding facilities that use a large amount of DHC). The lower compliance factor applies to factories and office buildings that use DHC for more than 20% of their entire energy consumption.

For new entrant facilities from the third compliance period onward, the 17% and 15% compliance factors from the second period are applied (transitional measures are introduced).

In the third compliance period, in medical facilities where electricity is vital to preserve life and health, the compliance factor is two percentage points lower than the 27% or 25% category to which they would otherwise belong.

Facilities demonstrating outstanding performance in emissions reductions, as well as in the introduction, use, and management of energy equipment, are certified as top-level facilities that receive 50% or 75% lower compliance factors according to their rate of progress. The certification standards represent the highest-level energy efficiency measures currently feasible, stipulating more than 200 different energy-saving measures.

FIRST TRADING PERIOD: 1 April 2011 to 30 September 2016
SECOND TRADING PERIOD: 1 April 2015 to 30 September 2021
THIRD TRADING PERIOD: 1 April 2020 to 30 September 2026

The Tokyo ETS has trading periods as well as compliance periods (see “Compliance” section). The trading period is defined as the compliance period plus an additional 18-month adjustment period, during which time entities may continue to trade credits in order to reach their targets for the corresponding compliance period.

Kazakhstan Emissions Trading Scheme

PHASE ONE (2013): Free allocation (grandparenting). Based on emissions data from 2010.

PHASE TWO (2014-2015): Grandparenting (0% and 1.5% below 2011-2012 average emissions), with a reserve of 18 MtCO2 in 2014 and 20.5 MtCO2 in 2015.

(2016-2017: System suspended)

PHASE THREE (2018-2020): Allocation based on grandparenting or product-based benchmarking, chosen by each company (149 installations chose benchmarking and 76 installations chose grandparenting). A reserve contained 35.3 million allowances to accommodate for new entrants, new stationary emission sources, and changes in output in case of the choice of benchmarking.

PHASE FOUR (2021): Benchmarking. A reserve contains 11.5 million allowances.

PHASE ONE: 1 year (2013)
PHASE TWO: 2 years (2014-2015)
PHASE THREE: 3 years (2018-2020)
PHASE FOUR: 1 year (2021)
(2016-2017: system suspended)

According to the new Environmental Code, which will come into force in July 2021, the next National Allocation Plan will be developed for five years.

Korea Emissions Trading Scheme

PHASE ONE (2015-2017)
Free Allocation: 100% of total allowance supply. Most sectors received free allowances based on the average GHG emissions of the base years (2011-2013). Three sectors (grey clinker, oil refinery, and aviation) were allocated free allowances following benchmarks based on previous activity data from the base years (2011-2013).

PHASE TWO (2018-2020)
Free Allocation: 97% of allocation to entities in sub-sectors subject to auctioning; 100% for EITE sectors. Toward the end of Phase 2, the share of sector-specific benchmarking reached 50% of total primary allocation and was expanded to a total of seven sectors: grey clinker, oil refinery, domestic aviation, with the addition of waste, industrial parks, electricity generation, and district heating/cooling.

EITE sectors received 100% of their allowances for free if they met one of the following three criteria:* 
• Additional Production Cost of >5% and Trade Intensity of >10%; or
• Additional Production Cost of >30%; or
• Trade Intensity of >30%.** 

Auctioning: 3% of allocation to entities in sub-sectors subject to auctioning. 26 subsectors were eligible to participate in auctions, including entities from the electricity, domestic aviation, wooden products, and metal foundry sectors. Regular auctions began in 2019. In 2019, authorities auctioned a total of 7.95 million allowances. 9.3 million allowances were auctioned in 2020.

Participation in auctions is subject to some limitations. Only companies that do not receive all their allowances for free are eligible to bid, with a list of eligible bidders published by the Ministry of Environment. No one bidder can purchase more than 30% of the allowances of one auction. The auctions are subject to a minimum price set by the following formula:
(average price over the previous three months + average price of last month + average price over the previous three days)/3

PHASE THREE (2021-2025)
Free Allocation: Less than 90% of allocation to entities in sub-sectors subject to auctioning; 100% for EITE sectors. The share of sector-specific benchmarking is to reach 60% and has been expanded to a total of 12 sectors: grey clinker, oil refinery, domestic aviation, waste, industrial parks, electricity generation, and district heating/cooling, with the addition of steel, petrochemical, buildings, paper, and wood processing.

Fuel-specific benchmarks apply to electricity generators and will be updated again by the end of 2023. Industry benchmarks are currently undergoing revisions.

EITE sectors receive 100% free allocation when meeting the following criteria:
Cost Incidence * Trade Intensity ≥ 0.002

Auctioning: At least 10% of allocation to entities in sub-sectors subject to auctioning. Entities from 41 subsectors, which excludes EITE sectors, can participate in auctions. The same auction provisions as for Phase 2 apply.

Financial intermediaries and other third parties can participate in exchange trading since 2021. A futures market will be introduced as a part of Phase 3 reforms at a yet-to-be-determined date.

* Additional Production Cost: annual average GHG emissions during base year x average market price of allowances during base year / annual average value-added production during base year

** Trade Intensity is calculated relative to the base year: (annual average exports + annual average imports) / (annual average sales + annual average imports)

PHASE ONE:  3 years (2015-2017)
PHASE TWO: 3 years (2018-2020)
PHASE THREE: 5 years (2021-2025)

Mexico

The Pilot will use free allocation with the following specifications.

INITIAL ALLOCATION: Entities will receive free allowances based on the most recent verified emissions. New entrants will receive free allowances based on their verified emissions in the year in which they first crossed the 100,000 tCO2 threshold.

EX-POST ADJUSTMENT: An adjustment allocation will be carried out from the general reserve for those participants whose verified emissions in that year are higher than the free allocation received. Also, as per the ‘Notice on the rules and criteria for allowance allocation,’ participants may request additional allowances when an expansion in their production results in additional direct CO2 emissions from stationary sources. As per the same Notice, in the event that demand for additional allowances exceeds reserves, SEMARNAT will make a distribution of additional allowances proportional to the requested amounts.

PLANT CLOSURES: When an installation closes permanently, the installation may have to surrender the allowances that it has for the compliance period of the year before its closure. As well, it may need to return the free allowances received for the compliance period in which it closes. Whether the installation has to only surrender allowances, only return allowances, or both, depends on the date of the year in which it closes. These allowances are then cancelled by SEMARNAT.

AUCTIONS: Starting from the second year of the Pilot and depending on market behavior, SEMARNAT may auction allowances from the auction reserve.

Pilot phase (2020-2021); and
transition phase (2022) to the operational period of the ETS, which is scheduled to start in 2023.

The schedule of implementation as contained in Annex I to the ETS Pilot regulation (Acuerdo por el que se establecen las bases preliminares del Programa de Prueba del Sistema de Comercio de Emisiones) contains compliance and allocation dates for the compliance cycle of 2020 and 2021. Emissions for 2022 will be covered by the operational period of the ETS.

SEMARNAT is expected to publish the regulation of the operational period of the ETS in 2022.

New Zealand Emissions Trading Scheme

FREE ALLOCATION:
Leakage protection/Industrial free allocation: Free allocation is provided, based on output and intensity-based benchmarks for 26 eligible industrial activities. Activities are deemed eligible if both emissions-intensive and trade-exposed (EITE) criteria are met. Highly emissions-intensive activities (over 1,600 tCO2e per NZD 1 million of revenue [1,600 tCO2e per USD 648 thousand of revenue]) receive 90% free allocation. Moderately emissions-intensive activities (over 800 tCO2e per NZD 1 million of revenue [USD 648 thousand]) receive 60% free allocation. Trade exposure is deemed if there is transoceanic trade in the good produced.
8.4 million NZUs were allocated for industrial EITE activities in the 2019/2020 financial year (1 July 2019 to 30 June 2020).

As a part of the ‘Climate Change Response (Emissions Trading Reform) Amendment Act,’ the government plans to phase down industrial free allocation from 2021. A minimum annual phase-down rate of 1% across all industrial activities will apply from 2021-2030. That rate will increase to 2% for the years 2031-2040, and to 3% for 2041-2050. The minimum phase-down rate will be complemented by further phase-down rates for activities that are considered at lower risk of carbon leakage.

Forestry and Fisheries Sectors (one-off): Owners of pre-1990 forest land, as well as owners of fishing quotas, received a one-off free allocation of NZUs when the NZ ETS was implemented to partially compensate for the impact of the ETS.

AUCTIONING:
Auctioning was introduced in 2021, with the first auction taking place on 17 March.

ALLOWANCES GRANTED FOR REMOVALS
Post-1989 Forestry Sector and Other Removal Activities: NZUs are granted to participants that voluntarily register in the scheme for removal activities, as outlined under “Forestry Removal Activities” below.

Forestry Removal Activities: Participants are entitled to receive one NZU per tCO2 removed for registered post-1989 forest land. If the forest is harvested or deforested, units must be surrendered to account for the emissions, and if the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned. 9.1 million NZUs were issued for forest removal activities for the 2019/2020 financial year.

Other Removal Activities: Participants are entitled to receive one NZU per tonne of removal from the destruction or export of products that embed carbon as well as for the export of HFCs and PFCs. 3.1 million NZUs were issued for other removal activities for the 2019/2020 financial year.

The NZ ETS has no fixed trading periods or phases.

Swiss ETS

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

SECOND TRADING PERIOD (2013-2020):
Free Allocation: Free allocation was based on industry benchmarks using a similar methodology to the EU ETS. Free allocation for sectors not exposed to the risk of carbon leakage was phased out gradually. In 2013, such entities received 80% free allocation, reduced to 30% in 2020.

An overarching correction factor was applied, given that the benchmarked allocation exceeded the overall emissions cap.

Free allocation for aircraft operators was based on tonne-kilometer data for 2018 reported by individual aircraft operators, multiplied by the benchmark of 0.642 emissions allowances per 1,000 tonne-kilometers (same benchmark as in the EU ETS).

Auctioning: Allowances that were not allocated for free were auctioned. Auctions took place two or three times a year, depending on available auction volumes. As of January 2020, auctions were opened to entities covered by the Swiss ETS and the EU ETS, as well as to non-compliance entities allowed to place bids in the EU ETS. In line with EU ETS legislation, the Federal Office of the Environment has the authority to cancel the auction results if the clearing price is significantly below the prevailing secondary market price of the EU ETS. In such a situation, allowances are transferred to subsequent auctions.

5% of the allowances were set aside in a reserve for new entrants and fast-growing operators.

Aviation Sector: In line with EU ETS regulations, starting in 2020, 15% of aviation sector allowances were auctioned. 3% were placed in the reserve dedicated to new and fast-growing operators. The remaining 82% was allocated according to sector-specific benchmarks in line with the EU ETS.

THIRD TRADING PERIOD (2021-2030):
Free Allocation: Updated EU ETS benchmarks will apply starting in 2022 at the latest. Free allocation levels may be updated annually if production levels deviate at least 15 percentage points from the 2014-2018 base years.

Auctioning: The same provisions apply as in the second trading period.

VOLUNTARY PHASE: 2008-2012
SECOND TRADING PERIOD: 2013-2020
THIRD TRADING PERIOD: 2021-2030

United Kingdom

AUCTIONING:
Auctioning is the primary means of allowance allocation under the UK ETS. Auctions have a GBP 22 (USD 28.21) transitional Auction Reserve Price, which will be in place until a SAM (if implemented – see “Market Stability Provisions” section) becomes operational. Auctions clear even when not all allowances are sold. Unsold allowances are carried over to the next four auctions, up to 125% of those originally intended for sale at that auction. If all four subsequent auctions have reached the 125% limit, the remaining unsold allowances are transferred into a reserve in the Market Stability Mechanism Account.


FREE ALLOCATION:
A limited number of allowances are allocated for free to industrial participants at risk of carbon leakage. The number of free allowances that an installation is entitled to is determined using the historical activity level, an industry benchmark, and a carbon leakage exposure factor (CLEF). The benchmarks and CLEFs to be used initially are those of the EU ETS during Phase 4. Historical activity levels are also based on data collected under the EU ETS. These parallels will likely result in comparable levels of free allocations for an installation in the UK ETS as it would have received had the UK participated in Phase 4 of the EU ETS.

The maximum number of allowances allocated for free (industry cap) is initially set at the UK’s notional share of the EU ETS industry cap for Phase 4, which is ~58 million allowances for 2021 (~37% of the UK ETS cap) and will decline by 1.6 million allowances per year. A review of the free allocation rules is planned to be carried out in 2021.

NER: A reserve of free allowances is set aside for installations that become eligible for participation within the first trading period and for covered installations that significantly increase their activity level. In line with the EU ETS Phase 4 approach, free allowance amounts are adjusted when activity levels of an installation increase or decrease by more than 15%. The number of free allowances for new entrants is determined based on their activity in the first year of operation, industry benchmark, and CLEF.

First trading period: 2021-2030

USA - California Cap-and-Trade Program

Allowances are distributed via free allocation, free allocation with consignment, and auction.

FREE ALLOCATION:
Industrial facilities: Facilities receive free allowances to minimize carbon leakage. For nearly all industrial facilities, the amount is determined by product-specific benchmarks, recent production volumes, a cap adjustment factor, and an assistance factor based on assessment of leakage risk.

Leakage risk is divided into tiers of “low”, “medium”, and “high” based on levels of emissions intensity and trade exposure. The Cap-and-Trade Regulation as adopted in 2011 set assistance factors of 100% for the first compliance period regardless of leakage risk. For facilities with medium leakage risk, the original regulation included an assistance factor decline to 75% for the second compliance period and to 50% for the third compliance period. For facilities with low leakage risk, it included an assistance factor decline to 50% for the second compliance period and to 30% for the third compliance period. Amendments to the Cap-and-Trade Regulation in 2013 delayed these assistance factor declines by one compliance period, and AB 398 (adopted in 2017) set all assistance factors to 100% for 2021-2030, citing continued vulnerability to carbon leakage. In adjusting these factors pursuant to AB 398, CARB also set all assistance factors in the same manner for the 2018-2020 period.

There is no cap on the total amount of industrial allocation, but the formula for allocation includes a declining cap adjustment factor to gradually reduce allocation in line with the overall cap trajectory.

Free allocation is also provided for transition assistance to public wholesale water entities, legacy contract generators, universities, public service facilities, and, beginning in 2018, waste-to-energy facilities.

CONSIGNMENT:
Electrical distribution utilities and natural gas suppliers: Receive free allocation on behalf of their ratepayers. All natural gas and electrical utilities must use the allowance value for ratepayer benefit and for emissions reductions. All allowances allocated to investor-owned electric utilities and an annually increasing percentage of allowances allocated to natural gas suppliers must be consigned for sale at the state’s regular quarterly auctions. Publicly owned electrical utilities can choose to consign freely allocated allowances to auction or use them for their own compliance needs.

AUCTIONING: In 2020, about 58% of total California-issued vintage 2020 allowances were made available through auction, which included allowances owned by CARB (about 32%) and allowances consigned to auction by utilities (about 26%).

Unsold allowances in past auctions are removed from circulation 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. However, if any of these allowances remain unsold after 24 months, they will be placed into CARB’s price ceiling reserve or into the two lower reserve tiers (see “Market Stability Provisions” section). To date, 37 million allowances originally designated for auction have been placed in reserves through those provisions.

The California Cap-and-Trade Program is structured around compliance periods (see “Compliance” section). A cap trajectory has been set through 2030, with a formula for the declining annual caps through 2050 (see “Cap” section).

Allowances are both allocated and auctioned, with each allowance associated with a specific calendar year vintage. Some allowances with a vintage three years in the future are offered at each auction and may be traded, but these future vintage allowances may not be used for compliance until the compliance date for the vintage year.

USA - Massachusetts Limits on Emissions from Electricity Generators

AUCTIONING: From 2019 onwards, allowances were partially auctioned, with 25% auctioned in 2019, 50% in 2020, and 100% from 2021 onwards. At least one auction is held each year. The first auction took place in December 2018, the second one in December 2019, the third one in September 2020, and the fourth auction in December 2020. Auction results are included in market monitoring reports posted on the program web page.

FREE ALLOCATION: Before 2021, non-auctioned allowances were freely allocated through grandparenting based on historical (2013-2015) generation.

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” section).

FIRST CONTROL PERIOD: 2009-2011
SECOND CONTROL PERIOD: 2012-2014
THIRD CONTROL PERIOD: 2015-2017
FOURTH CONTROL PERIOD: 2018-2020
FIFTH CONTROL PERIOD: 2021-2023

Since the third control period, RGGI operates with interim control periods (see “Compliance Period” section).

Colombia
Indonesia
Montenegro
Russian Federation - Sakhalin
Ukraine
USA - Pennsylvania
USA - Transportation and Climate Initiative Program (TCI-P)
Vietnam
Brazil
Chile
Japan
Pakistan
Philippines
Taiwan, China
Thailand
Turkey
USA - New Mexico
USA - New York City
USA - North Carolina
USA - Oregon
USA - Washington

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.