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For carbon units purchased at auctions, it is proposed under the Australian cap-and-trade that collateral be in a form that would fully cover the maximum bid and be in Australian currency, a letter of credit from an Australian authorised deposit-taking institution (ADI), a bank guarantee from an Australian ADI, another form of collateral acceptable to the Regulator, or a mixture of these.
In the EUETS auction arrangements the clearing system is generally envisioned and where a successful bidder is in default of payment one of the following shall occur:
(a) the central counterparty interposes to take delivery of the allowances and effect payment of the sum due to the auctioneer;
(b) the settlement agent applies collateral taken from the bidder to effect payment of the sum due to the auctioneer.
5. RESERVE PRICE
The reserve price is the lowest price that carbon units would be sold at the auction and it will be set for each auction at a level below the expected market clearing price for the auction.
As part of the price floor arrangements for the first three years of the flexible price period under the Australian cap-and-trade it is proposed that there will be a minimum auction reserve for the vintage years 2015-16, 2016-17 and 2017-18 (respectively 15, 16 and 17.05 Australian dollars).
For auctions of units that are not subject to the above-mentioned legislative price floor, it is proposed that the Regulator will determine the reserve price for each auction having regard to elements included in the legislative instrument. The reserve price for the said auctions will be determined and published at least 14 days before the relevant auction.
In that regard EUETS auctioning arrangements have at their disposal Article 7(6) of the Auctioning Regulation according to which, ‘Where the auction clearing price is significantly under the price on the secondary market prevailing during and immediately before the bidding window when taking into account the short term volatility of the price of allowances over a defined period preceding the auction, the auction platform shall cancel the auction.’ – see: ‘Buying allowances in the auctions versus on the secondary market - pros and cons’.
6. PARCEL SIZE
Parcel size means the minimum and maximum number of units in a bid.
The lowest number of units that a participant can bid on is set under the Australian cap-and-trade at one carbon unit.
The maximum parcel bid size will be no more than 25 per cent of the total number of carbon units sold at each auction for a particular vintage. It is interesting that pursuant to the said Position paper the maximum parcel limit will apply to individual participants, rather than the bid aggregation of a number of participants who are controlled by the same corporation.
It seems that such a design expose the future Australian carbon auction to the risk of market manipulation (see for instance as regards the Californian cap-and-trade scheme: 'Beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade').
In this aspect the difference in comparison with the EUETS is significant because the volumes of the bids in European carbon auction arrangements must be integral multiples of lots of 500 or 1 000 allowances (depending on the type of the auctioned product). The Auctioning Regulation binding in the EUETS does not specify currently – as opposite to the legislative instruments regulating Californian carbon auction - the maximum bid-size.