Flawed application of the auction reserve price in the EU ETS
Thursday, 23 February 2012 08:07

“Each auction will be conducted with an auction reserve price.” “No allowances will be sold at bids lower than the auction reserve price.” Are these provisions present in the EU ETS legislation? No, obviously not. These are the citations from the California cap-and-trade scheme documents. The analogous stipulations we can find in the newest Australia’s emissions scheme.
Instead of this in the EU ETS we have Article 7(6) of the Auctioning Regulation.

Draft Tender Specifications for the Joint procurement of a common auction platform (dated  17 February 2012) seem to make desperate efforts in order this provision be more transparent. Draft Tender Specifications give, moreover, some clues which may be valuable for market actors preparing for auctions participation.


In the article ‘Buying allowances in the auctions versus on the secondary market - pros and cons’ I referred to the risk flowing from Article 7(6) which reads: “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.”


In the said post I made also the following remarks: “The above legal circumstances lead to the conclusion that theoretically it is possible to buy emission allowances in the auction cheaper than the price on the secondary market, but not ‘significantly’ cheaper (when big volumes are at stake this deal might, however, seem interesting).
The question what does it mean price ‘significantly under’ the price on the secondary market remains to answer. Clearing this issue up will in effect delineate the scope for potential benefits for auction participants - being the price on the secondary market (prevailing during and immediately before the bidding window) at one end of the spectrum of possible situations and the price ‘significantly under’ the said price at the other end of the spectrum (situation in which the auction will be cancelled).
In between those extremes are the fruits to be picked in the auctions.

It’s no wonder that information on the methodology to define what constitutes an auction clearing price ‘significantly’ under the prevailing secondary market price before and during an auction is listed as confidential data not disclosed to bidders (Article 62(1)(i) of the Regulation).


Draft Tender Specifications for the Joint procurement of a common auction platform draft of 17 February 2012 (http://ec.europa.eu/clima/policies/ets/auctioning/third/documentation_en.htm)
recalls Article 7(7) of the Auctioning Regulation which requires the auction platform to determine its methodology for the application of Article 7(6) of the Auctioning Regulation before an auction is started. The more detailed requirements put by Draft Tender Specifications with respect to the said methodologies are:

1) The methodologies should be determined separately for general allowances and aviation allowances,

2) The contractor must propose to the Commission no later than five days following the date of entry into force of the contract (for the procurement of the common auction platform) the draft approach towards the methodology. This document should notably set out:

- the proposed interpretation of "during and immediately before the bidding window" as provided in Article 7(6) of the Auctioning Regulation for the determination of the reference secondary market price;

- the elements which will help determining when it will be considered that the auction clearing price lies significantly under the reference secondary market price.
- the elements to be taken into account for determining the period over which short-term volatility of the price of allowances is to be considered;

- the products and market venues used for determining the reference secondary market price and an explanation why these products and venues have been selected as the most representative.



 

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