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 - Nova Scotia

FREE ALLOCATION, OUTPUT-BASED
BENCHMARKS:

Industrial Facilities: Facilities will receive allowances based on production intensity benchmarks based on production intensity benchmarks determined using data from the period 2014–2016. At the beginning of the year, 75% of the eligible emissions allowances are distributed to participating entities. The remaining 25% will be provided in the following year together with production-level adjustments after the submission of a verified emissions report.

The benchmark is based on historical facility emissions intensity, an assistant factor that varies between 1 (100%) for cement and 0.9 (90%) for pulp and paper and natural gas processing (the only defined industries).

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% less allowances based on the output in 2022 compared to in 2019.

Fuel Suppliers and Electricity Importers: Receive 80% of free allocation based on verified GHG reports for previous year’s emissions.

Nova Scotia Power Inc.: The utility will be allocated allowances based on a reduction from BAU projections; ~6.3 million allowances will be freely allocated to Nova Scotia Power Inc. in 2019. In 2020, ~5.5 million allowances will be allocated, declining to just over five million in 2022.

AUCTIONING: The province will hold auctions two to four times per calendar year, starting in 2020. Minimum price: CAD 20 (USD 15.07) for auctions held in 2020; each subsequent year: minimum price will increase by 5% plus inflation.

Auctioning in Nova Scotia has two particularities:

(1) The option for regulated entities to consign allowances to auction: 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 emission allowances offered for sale by the province. 100% of the revenue from allowances sold on consignment is returned to the participants.

(2) The purchase of limits to secure market functioning: secure market functioning, bidders will be 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.

Purchasing Limits (for the 2019-2022 compliance period):

·         Fuel suppliers: 15% of the previous year’s verified GHG emissions per auction and 25% for the calendar year;

·         Industrial facilities: 3% of their previous year’s verified GHG emissions per auction and 5% for the calendar year; and

·         Nova Scotia Power Inc.: 5% of the allowances available for sale at each auction.

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.

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). The amount of free allocation issued is generally determined based on historical emissions intensity and therefore depends on the amount of reference units produced or consumed, an assistance factor, and an annual decline rate depending on the type of emissions (e.g., fixed process, combustion, and other, mainly fugitive emissions).

Until 2020 the assistance factors (AFs) for all EITE sectors are set at 100%. For the 2021-2023 period, AFs for industrial activities will be determined based on trade exposure and emissions intensity. These metrics will be used to group the industrial sector’s carbon leakage risk into three categories (low, medium, and high) with AFs of 90%, 95%, and 100% respectively. An AF of 60% will apply for electricity and steam production.

 

The rules used to determine the amount of free allowances issued to entities that are eligible to voluntarily opt in since 2019 are in alignment with what has been established for regulated entities.

AUCTIONING:
Generally, electricity and fuel distributors have to buy 100% of their allowances. Allowances are auctioned quarterly.

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 settlement price is higher than the minimum price.

In 2019, almost 75% of allowances were allocated by auction or directed to reserves. About 25% of allowances were allocated for free. Some allowances from future vintages are offered at each auction and may be traded but not used for compliance until the compliance date for the vintage year.

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. 

Auctioning: Beijing could set aside up to 5% of allowances for regular and irregular auctions (see Market Stability Mechanisms). To date, the trigger price for additional auctions has never been met.

2013-2019*

*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 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*

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

China - Fujian pilot ETS

Free Allocation: Benchmarking is applied to 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 allowance allocation. At first, entities will receive 70% of the allowances, which are calculated based on their production levels in 2018. Allocation will be adjusted ex post to reflect the actual production in 2019.

Auctioning: Auctioning may take place where considered appropriate by the ETS authorities (see Market Stability Provisions below) 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. 50,000 allowances from the government reserve were auctioned, with the settlement prices ranging from CNY 26.50 (USD 4.01) to around CNY 30 (USD 4.53). To date, this is the only auction held in the province.

2016-2019*



*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 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.

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. In 2019, the government auction allowance was adjusted from two million allowances in previous years to five million allowances in 2019. Quarterly auctions were held until 2016, while in 2017 and 2018 auctions were ad hoc. No auction took place in 2018 or 2019.

2013-2019*

*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: Free allocation of 2018 vintage allowances through benchmarks for power and cement (except the entities using outsourced clinker).

Historical emissions intensity for heat, co-generation, glass and other building materials, and the pulp and papers sectors; grandparenting based on previous three years’ historic emissions for all other sectors.

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

The total cap also includes a new entrants reserve, as well as a government reserve for potential market stability measures.

Auctioning: In November 2019, through two separate auctions 5 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 3.50). Remaining allowances were made available to covered entities as well as other market participants. 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 3.48).

*In this case, entities first receive half of the total allowance based on the previous year’s actual emission data or historical emission baseline; the actual production data is then used to update allocation ex-post.

2014-2019*

*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 (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). 

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 purpose of auctions is to provide compliance entities with additional supply to meet their compliance demand. Shanghai auctioned two million tonnes from the government reserve in November 2019, with a floor price set at 1.2 times the weighted on-exchange allowance price from 1 August 2018 to 28 November 2019—CNY 48 (USD 6.83). The auction cleared at the floor price and a total of 73,421 allowances were sold (3.7% of total auction volume). An auction of two million allowances was held in July 2018. 15% of allowances were sold, at the floor price of CNY 41.54 (USD 6.28).

Two trading periods: first period 2013-2015, second period 2016; 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

Free Allocation: Allowances are largely distributed for free. Benchmarking is applied to the water, power, and gas sectors based on sectoral historical emissions intensity.

Grandparenting is applied to port and subway sectors, public buses, and other non-transport sectors based on the entity’s historical emissions intensity. Allowance allocation is adjusted ex post based on output data.

Although the ‘Interim Measure for the Administration of Carbon Emission Trading of Shenzhen’ states that at least 3% of allowances should be auctioned, this has not been implemented. So far, only one auction took place (in June 2014) in order to increase market supply.

2013-2019*

*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 2009-2012 emissions or on emissions intensity. Benchmarking for new entrants and expanded capacity.
 
Auctioning: 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 (USD2.08).

2013-2019*

*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.

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 2 (2008-2012):
Similar to Phase One, 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 3 (2013-2020):
 57% of allowances auctioned over the entire trading period with the remaining allowances allocated through the benchmark approach.

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

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

Auctioning
: 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.

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) in Phase Four. Some Member States chose to monetize these allowances or to use these allowances to boost their share of the Modernization Fund.

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

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

Carbon leakage risk is 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 is determined by the formula
[Carbon price × (direct emissions × auctioning factor + electricity consumption × electricity emission factor)]/ GVA)

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

Aviation Sector:
In 2012, 85% of allowances were allocated for free, based on benchmarks. In Phase Three, 15% of allowances are auctioned and 82% allocated for free, based on benchmarks. The remaining 3% constitute a special reserve for new entrants and fast-growing airlines. Due to the temporary derogation applying to flights with third countries, the allocation is 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 are 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.

PHASE FOUR (2021-2030):

Benchmark values will be updated twice to reflect technological progress in different sectors. The first set of benchmark values will apply to the period 2021-2025; the second set of values will cover the period from 2026 to 2030. Member states are required to submit lists of incumbent installations and updated emissions data by 30 September 2019 and 30 September 2024. Based on this data, the European Commission will update Phase Three benchmarks.
- Benchmark values in Phase Four 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.
- 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 will apply 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 assessed against a composite indicator of trade intensity and emissions intensity.
- As an additional safeguard for industry, the Phase Four cap breakdown includes a free allocation buffer of over 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 applying the cross-sector correction factor).
- Carbon leakage risk will be assessed according to the following criteria:
- Trade Intensity * Emissions Intensity > 0.2
- Trade intensity * Emissions Intensity > 0.15 < 0.2; qualitative assessment will follow based on abatement potential, market characteristics, and profit margins.

Emissions intensity will be determined by:
[direct emissions + (electricity consumption × electricity emission factor)]/GVA

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

Out of the allowances to be auctioned in Phase Four, 90% will be distributed to member states based on their share of verified emissions, with 10% distributed among the lower-income EU Member States.

Phase 1: 3 years (2005-2007)

Phase 2: 5 years (2008-2012)

Phase 3: 8 years (2013-2020)

Phase 4: 10 years (2021-2030)

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).

Base-year emissions are based on the average emissions of three consecutive years between FY 2002 and 2007, 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 or on emissions intensity standards.

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

Each of the above trading periods includes an 18-month adjustment period.

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).
 
Base-year emissions are based on the average emissions of three consecutive years between FY2002 and 2007, as chosen by each entity. Credits are issued to facilities whose emissions fall below their baselines.   
 
Baselines for new entrants are based on past emissions or on emissions intensity standards.

FIRST PERIOD: 1 April 2011 to 30 September 2016

SECOND PERIOD: 1 April 2015 to 30 September 2021

THIRD PERIOD: 1 April 2020 to 30 September 2026

Each of the above trading periods includes an 18-month adjustment period.

Kazakhstan Emissions Trading Scheme

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

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

(2016-2017: system suspended)

PHASE THREE (2018-2020): Free allocation: grandparenting and benchmarking.Allocation based on grandparenting or product-based benchmarking by each company’s own choice. A reserve contains 35.27 million allowances to accommodate for new entrants, new stationary emission sources, and changes in output in case of the choice of benchmarking.

PHASE ONE: 1 year (2013)
PHASE TWO: 2 years (2014-2015)
PHASE THREE: 3 years (2018-2020)

(2016-2017: system suspended)

Korea Emissions Trading Scheme

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

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

PHASE TWO (2018-2020):
Free Allocation: 97% of total allowance supply. Toward the end of Phase Two, the share of sector-specific benchmarking is set to reach 50%.

Auctioning: 3% auctioned. Auctioning is determined on the subsector level. These include, among others, entities from the electricity, domestic aviation, wooden product, and metal foundry sectors. Although auctioning was scheduled to start in 2018, it was delayed to the beginning of 2019. In 2019 authorities auctioned a total of 7.95 million allowances.   

 

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 that will be set by the following formula:  

“the average price over the previous three months + the average price of last month + the average price over the previous three days/3.”

In 2020, 8.25 million allowances are set to be auctioned.*



* Ecoeye International. 2019. December 2019: Korean Market Update.


PHASE THREE (2021-2025):
Free Allocation: Less than 90% free allowances. The share of sector-specific benchmarking is to reach 70%. 

Auctioning: more than 10%.

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:  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 historical emissions. New entrants will receive free allowances based on their reported 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. The regulation does not specify how adjustments will be made in the event that demand for additional allowances exceeds reserves.

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. Additionally, 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.

With regards to 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 to the operational period of the ETS (2022).

The schedule of implementation as contained in Annex I to the ETS pilot regulation 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, BENCHMARKING:
Free allocation is provided based on output and intensity-based benchmarks for 26 eligible activities. Eligibility is based on emissions-intensive, trade-exposed (EITE) criteria.

Highly EITE activities (over 1,600 tCO2e/ NZD 1 million of revenue [USD 0.66 million]) receive 90% free allocation. Moderately EITE activities (over 800 tCO2e/NZD 1 million of revenue [USD 0.66 million]) receive 60% free allocation. Trade exposure is qualitative and based on the existence of transoceanic trade in the good in question.

As a part of the ‘Climate Change Response (Emissions Trading Reform) Amendment Bill’, 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.

Post-1989 Forestry Sector and Other Removal Activities: NZUs are granted to participants that voluntarily register in the scheme for removal activities, as outlined below. There is no limit on the number of units that can be granted for removal activities.

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. 10.5 million NZUs were issued for forest removal activities from 1 July 2018 and 30 June 2019.

Other Removal Activities: Participants are entitled to receive one NZU per tonne of removal from the export of products that embed carbon and export of HFCs and PFCs. 2.7 million NZUs were issued for other removal activities for the 2018/2019 financial year.

Forestry and Fisheries Sectors: 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: Following the second review, the government plans to introduce an auctioning mechanism. Auctioning is expected to begin in late 2020.

There are no fixed trading periods or phases under the NZ ETS.

For most sectors the NZ ETS has annual 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 allocations and surrenders for these participants occur when they choose to report their emissions.

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.

MANDATORY PHASE (2013-2020):
Free allocation: 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, such entities received 80% free allocation whereas in 2020 the share of free allocation will be reduced to 30%.

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

Free allocation for aircraft operators is 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 are not allocated for free are auctioned. Auctions take place two or three times a year, depending on available auction volumes. As of 1 January 2020, auctions are open to entities covered by the Swiss ETS and the EU ETS and noncompliance entities are 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. In such a situation, allowances are transferred to subsequent auctions scheduled at the same trading platform.

5% of the allowances are set aside in a reserve for new entrants and significantly growing operators.

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

VOLUNTARY PHASE: 2008 - 2012
MANDATORY PHASE: 2013 - 2020

USA - California Cap-and-Trade Program

Allowances are distributed via auction and/or free allocation.

Free Allocation: Industrial facilities: Facilities receive free allowances for transition assistance and to minimize carbon leakage. For nearly all industrial facilities, the amount is determined by specific benchmarks, production amounts, 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 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 as well.

There is no cap on the total amount of industrial allocation.

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: Utilities receive allowances on behalf of their ratepayers. All natural gas and electrical utilities must use the allowance value for ratepayer benefit and for emissions reductions.

Auctioning: In 2019, about 65% of vintage 2019 allowances were available through auction, including both allowances owned by CARB (about 40%) and allowances consigned to auction by utilities (about 25%). The revenue from consignment allowances is mandated to benefit ratepayers or contribute to emissions reductions. The remainder of allowances was allocated for free.

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).

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 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.

FREE ALLOCATION, GRANDPARENTING: Until 2021, remaining allowances will be freely allocated proportionally 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” above).

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. Regulated entities must cover 50% of their emissions with allowances in each of the first two years of a control period. They must cover 100% of the remaining emissions at the end of the three-year control period.

China National ETS

The ETS competent authority will develop detailed allocation rules in cooperation with energy sector authorities.

Free Allocation: Free allocation is expected to be based on subsector benchmarks with ex-post adjustments for changes in actual production.

In 2017, draft allocation plans for power, cement, and electrolytic aluminum were developed and trial allocation work was carried out in two provinces. In 2019, MEE released the ‘Implementation plan of carbon emission allowance allocation for key emitters in power generation industry (including captive power plant and co-generation) in 2019 (trial version),’ which provided further information on the approach to benchmarks for the power sector.

First Phase (~a year as of 2018): Development of market infrastructures

Second Phase (~another year as of 2019): Simulation trading

Third Phase (~from 2020 on): Expanding sectoral coverage and deepening and expanding the system

Colombia
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]

2021: EUR 10 (EUR 25) / USD 11.19 (USD 27.99)
2022: EUR 20 (EUR 30) / USD 22.39 (USD 33.58)
2023: EUR 25 (EUR 35) / USD 27.99 (USD 39.18)
2024: EUR 30 (EUR 45) / USD 33.58 (USD 50.38)
2025: EUR 35 (EUR 55) / USD 39.36 (USD 61.57)

In 2026 auctioning of allowances starts and a price corridor with a minimum price of EUR 35 (EUR 55) and a maximum price of EUR 60 (EUR 65) (USD 72.77) per tCO2 will apply.

The cap will be based on Germany’s reduction targets for the non-EU ETS sectors as defined by the European Effort Sharing Regulation (ESR) and decline each year. However, i­­­­n case the allocation of allowances within the national ETS exceeds the available German emissions budget set out in the ESR, allowances for emissions reductions will be acquired under the ESR flexibility mechanisms, including inter–member state trade.

PHASE TWO (FROM 2027):
Based on a review of the system it will be decided in 2025 whether a price corridor should also be applied from 2027 onwards.

Allowances will be allocated through auctions, and the annually declining cap will be based on Germany’s reduction targets for the non-EU ETS sectors as defined in the ESR. If not decided otherwise, the cap will be fixed.

[1] fixed price level foreseen as a compromise between the legislative bodies Bundesrat und Bundestag. Corresponding amendments of the ‘Fuel Emissions Trading Act’ expected in the first half of 2020.

No information available yet.

Montenegro
Ukraine
USA - Pennsylvania
USA - Transportation and Climate Initiative (TCI)
USA - Virginia
Brazil
Chile
Indonesia
Japan
Pakistan
Philippines
Taiwan, China
Thailand
Turkey
United Kingdom
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.

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.