Allocation
Allocation is the process of distributing allowances to covered entities in an emissions trading system. There are two basic options for allocation; allowances can be either given away (freely allocated) or sold, often by auction. Because allowances have a value, the allocation process is governed by rules to ensure their fair distribution. A simple, transparent and credible process facilitates this politically contentious part of operating a trading scheme.
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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.
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Source: ICAP ETS Brief #5 Emissions Trading Revenue |
Allocation | Trading period |
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Canada - Québec Cap-and-Trade System | |
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Auctions: Generally, electricity and fuel distributors have to buy 100% of their allowances at auction (or on the market). Allowances are auctioned quarterly. | In Québec's cap-and-trade system, a trading period is referred to as a "compliance period" (see below). Allowances are allocated and auctioned with calendar vintage years. |
China - Beijing pilot system | |
Mainly free allocation through grandfathering based on emissions or emissions intensity in the years 2009-2012 (stationary sources) or 2013-2016 (mobile sources). For 2017 vintage, benchmarking has been introduced for electricity (including co-generation) sector. For new entrants and entities with expanded capacity an advanced sector based emissions intensity benchmark is applied. | Five years (2013-2017)* |
China - Chongqing pilot system | |
Free allocation through grandfathering based on historic emissions (highest number in period 2008-2012). If the sum of allocation for all enterprises exceeds the cap, a reduction factor is applied.Different from other pilots, the covered companies are asked to submit their allocation quotas on a yearly basis of which free allocation is based on. Ex-post adjustments based on production data are also possible. | Five years (2013-2017)* |
China - Fujian pilot system | |
Allocation: Mainly free allocation on annual basis, with a view to introducing auctioning over time as appropriate. 10% of the total cap will be reserved for capacity extension and market intervention (when necessary). Free allowances to be allocated to new entrants. | One year (2016).* |
China - Guangdong pilot system | |
Mainly free allocation through grandfathering or historical intensity reduction method based on 2014-2016 emissions for 2017 vintage allocation. Annual emissions reduction factor of one is applied to sectors using grandfathering (the reduction factor was 0.99 in 2016). Benchmarking is applied for coal or gas fired electricity generators (including heating, combined heat and power), aviation, cement, paper and steel industrial processes. For those using benchmarking, the pre-issuance of allowance is based on 2016 production, and the final number will be updated based on 2017 production. | Five years (2013-2017) before the national carbon market is launched in 2017* |
China - Hubei pilot system | |
Free allocation of 2017 vintage allowances through benchmarks for power, heat, co-generation and cement (except the entities using outsourced clinker); historical carbon intensity method for glass and other building material, pulp and paper, and ceramics sectors; grandfathering based on previous three years’ historic emissions for all other sectors. Ex-post allocation adjustments are possible, especially for those sectors that use benchmarks and historical intensity (first receive half of the total allowance based on previous year’s actual emission data or historical emission baseline and then using the actual production data to update allocation). The total cap also includes a new entrants reserve as well as government reserve for potential market adjustment. | Five years (2013-2017)* |
China - Shanghai pilot system | |
Free allocation based on sector-specific benchmarks (power, heat, manufacturers), historic emissions intensity (industry, aviation, car glass, ports, shipping, and water suppliers, generally based on 2014-2016 data) or historic emissions (buildings, commercial sector, industry with complex products or considerable change in emission boundary, and airport, generally based on 2014-2016 data). | Three years (2013-2015; 2016-2018)* |
China - Shenzhen pilot system | |
Allowances are largely distributed for free. Benchmarking is applied to the water, power and gas sectors based on sectoral historical carbon intensity; while grandfathering based on the entity’s historical carbon intensity is applied to port and subway sectors, public buses and other non-transport sectors. For those using benchmarking and historical carbon intensity, the final number of allowances will be updated based on actual Output. | Five years (2013-2017)* |
China - Tianjin pilot system | |
Mainly free allocation through grandfathering based on 2009-2012 emissions or emissions intensity. Benchmarking for new entrants and expanded capacity. | Five years (2013-2017)* |
EU Emissions Trading System (EU ETS) | |
Phase one (2005-2007): Nearly 100% free allocation through grandfathering. Some Member States used auctioning and some used benchmarking. | Phase one: Three years (2005-2007) |
Japan - Saitama Target Setting Emissions Trading System | |
Grandfathering based on historical emissions is calculated according to the following formula: Base year emissions x (1-compliance factor) x compliance period. | First Period: 1 April 2012 to 30 September 2016 (compliance period and adjustment year). |
Japan - Tokyo Cap-and-Trade Program | |
Grandfathering based on historical emissions calculated according to the following formula: base year emissions x (1-compliance factor) x compliance period (5 years). | First Period: 1 April 2011 to 30 September 2016 (compliance period and adjustment year) |
Kazakhstan Emissions Trading Scheme (KAZ ETS) | |
Phase I (2013): 100% free allocation based on emissions data from 2010. | Phase I (Pilot phase): 2013 |
Korea Emissions Trading Scheme | |
Phase one (2015-2017): 100% free allocation, no auctioning. | Phase one: Three years (2015-2017) |
New Zealand Emissions Trading Scheme (NZ ETS) | |
Emissions Intensive and Trade Exposed (EITE) activities: Intensity-based allocation for 26 eligible activities (industrial): 90% free allocation for highly EITE activities (1,600 tCO2e/NZD 1 million of revenue [EUR 652,740]); 60% free allocation for moderately EITE activities (800 tCO2e/NZD 1 million of revenue [EUR 652,740]). | For most sectors the NZ ETS has year-on-year allocations and surrender obligations. |
Swiss ETS | |
Voluntary phase (2008-2012): Each participant was granted free allocation of allowances covering emissions up to their own entity-specific emissions target. | Voluntary phase: 2008 - 2012 |
USA - California Cap-and-Trade Program | |
Allowances are distributed either via auction or free allocation. | California's trading period is referred to as a "compliance period" (see “compliance period”). |
USA - Massachusetts Limits on Emissions from Electricity Generators | |
In 2018, allowances are allocated freely based on prior production volumes (electricity generation). A reserve for new entrants also exists to allocate allowances to facilities beginning operation in 2018. | Allowances can be traded year-round except for the month of March. |
USA - Regional Greenhouse Gas Initiative (RGGI) | |
The vast majority of CO2 allowances issued by each RGGI state are distributed through quarterly, regional CO2 allowance auctions using a “single-round, sealed-bid uniform-price” format. Auctions are open to all parties with financial security, with a maximum bid of 25% of auctioned allowances per quarterly auction. | RGGI’s trading period is referred to as a control period. |
Canada - Nova Scotia | |
China | |
Detailed allocation rules are yet to be developed by NDRC in cooperation with energy sector authorities (Article 13, Work Plan). However, based on officially released documents during trial allocation, free allocation is expected based on sub-sector benchmarks with ex-post adjustments for changes in actual production. | Phase one (roughly a year): Development of market infrastructure |
Mexico | |
Taiwan, China | |
Ukraine | |
USA - Virginia | |
Brazil | |
Chile | |
Colombia | |
Japan | |
Thailand | |
Turkey | |
USA - Oregon | |
USA - Washington | |
Vietnam |
Studies
Kopp, R. (2008) Allowance allocation. Assessing U.S. Climate Policy Options. Resources for the Future.
Lopomo, G., Marx, L.M., McAdams, D., Murray, B. (2011) Carbon Allowance Auction Design: An Assessment of Options for the U.S. Duke University (published in Review of Environmental Economics and Policy, 2011, 5(1), 25-43).
Neuhoff, K., Matthes, F., et al. (2008) The Role of Auctions for Emissions Trading. Climate Strategies.
Tänzler, D. & Steuwer, S. (2009) Cap and Invest. Why Auctioning gains Prominence in the EU’s Emissions Trading Scheme. Heinrich Böll Foundation North America.
Official Websites and Presentations
Australia
Clean Energy Future Website
Presentation of James White at the PMR Technical Workshop of 12-13 March 2013
EU ETS
European Commission Website - Allocation
European Commission Website - Auctioning 1
European Commission Website - Auctioning 2
European Commission Website - Leakage
California
Air Resources Board Website - Allocation
Air Resources Board Website - Auction
New Zealand
NZ ETS Website - Allocations
Québec
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (Division II and III)
FAQ (Allocation: Section III)
RGGI
RGGI Website - Allocation
RGGI Website - Auctions in Brief
Switzerland
BAFU Website - Allowances Issued for Free (Benchmark Approach)
BAFU Website - Auctions