Auctions are the pivotal element of the primary market for emissions allowances in the Californian cap-and-trade as well as EUETS. The Auctioning Regulation present in the EUETS (No 1031/2010 of 12 November 2010) seems generally more detailed than the Regulation Order proposed by Air Resources Board. Contrary to the ARB proposal it specifies for instance such details as consequences of late or non-payment etc.
There are many similarities in the auction design and also some differences of technical nature. But several economical and legal assumptions and measures are original in the Californian model for auctions.
Let’s analyse several specific points.
1. Auctioned products – Californian model, contrary to the European one, does not specify auctioned products, the latter provides for two-day spots, five-day futures, and forward and futures (but only on a temporary basis).
2. The number of platforms – under European model several auction platforms are planned: apart from opt-out national platforms (according to the recent news UK, German and Polish), one joint auction platform for auctioning two-day spot or five-day futures and one or two auction platforms for auctioning futures or forwards.
Under Californian scheme pursuant to the Regulation Order proposed by Air Resources Board, the Executive Officer of the ARB may serve as auction administrator or designate an entity to serve as auction administrator. The Executive Officer may direct that the California allowances designated for auction be offered through an auction conducted jointly with other jurisdictions to which California links pursuant to the said Order.
Both schemes are therefore not conclusive on this point.
3. Auction format – under both rules provisions are the simillar: single-round, sealed-bid auction.
4. Lots - under both rules provisions are the similar as regards futures and forwards (1000 allowances in single lot) but differences occur with respect to two-day spots and five-day futures (500 allowances in single lot in EUETS)
5. Resolution of the tied bids – both schemes adopt provisions for random selection of tied bids.
6. Clearing (settlement) price – the clearing (in the Californian scheme: settlement) price refers to the price paid for winning bids. In EUETS as well as in the Californian scheme bidders don’t 'pay-as-they-bid’ (so-called ‘discriminatory-price auctions’ model wasn’t adopted), but pay a uniform-price regardless of the amount of their individual bids. In the latter case, the clearing price is generally set as the price of the lowest accepted bids. Furthermore, in the Californian scheme the auction settlement price is not only the price that all successful bidders will pay for their allowances but also the price to be paid to those entities which consigned allowances to the auction (consignment of allowances to the auction by certain participants is a specific, original measure for the Californian scheme and deserves a separate considerations).
7. When placing the Californian model of auctions in the context of EUETS the specificity of the European Union Emissions Trading Scheme is visible in some original concepts like the possibility for separate national platforms, temporary provisions on auctioning forwards and futures, provisions on auctioneer and special auction monitor (in Californian model the ARB itself carries out the functions of market monitoring).
8. There are also certain differences in auction calendars. In the California the first auction will be conducted on February 14, 2012 with subsequent auctions conducted on the twelfth business day of the first month of each calendar quarter).
In EUETS auction calendar is generally more complicated and uncertain.
As a preliminary issue it should be noted that the concrete dates of auctions in the EUETS are not established in law but leaved to the discretion of the auction platform.
Pursuant to the Auctioning Regulation the auction platform determines the dates and times of the auctions taking account of public holidays that affect international financial markets and any other relevant events or circumstances that, in view of the auction platform, might affect the proper conduct of the auctions necessitating changes. No auctions shall be held in the two weeks over Christmas and New Year of each year. Additionally, in exceptional circumstances, auction platform conducting the auction in the EUETS scheme may, after consulting the auction monitor and obtaining its opinion thereon, change the times of any bidding window, by giving notice to all persons likely to be affected. As from the sixth auction or earlier, the auction platform will conduct auctions of allowances on a weekly basis at least (save for auctions of allowances meant for aircraft operators which shall be conducted on a two-monthly basis at least). There are also specific provisions for national auction platforms.
9. In the Californian model for auctions there are specific cost containment mechanisms (principally absent in the EUETS save Article 7(6) and Article 57 of the Auctioning Regulation) like reserve price and auction purchase limit (for particulars see "The Cost Containment Mechanisms in the California Cap-and-Trade Program – why absent in the EUETS?").
10. Persons eligible to apply for admission to bid – The main, most frequent categories of persons eligible to apply for admission to bid directly in auctions, pursuant to Article 18(1) (a) – (c) of the Auctioning Regulation, are in the EUETS the operators of the installation (or aircraft operators) having an operator holding account (but bidding only on its own account), including any parent undertaking, subsidiary undertaking or affiliate undertaking forming part of the same group of undertakings as the operator, investment firms authorised under Directive 2004/39/EC, and credit institutions authorised under Directive 2006/48/EC (the two last categories bidding on their own account or on behalf of their clients). Participants listed in Article 18(1) (d) – (e) of the Auctioning Regulation are passed over here because they seem to be of minor importance.
The eligibility to admission to bid in the auction is in this manner in the EUETS regulated more restrictively than the general requirements for participation in trading in emission allowances (the scheme is open for any person wishing to create an account in the registry). The issue is analysed in more detail in “The eligibility to admission to bid in the auction pursuant to the Auctioning Regulation”.
Under the provisions of the Regulation Order proposed by Californian Air Resources Board, however, an entity registering as an auction participant must be registered as ‘covered entity’, ‘opt-in entity’ and ‘voluntarily associated entity’ and the scheme seems not to provide for restrictions present in that field in the EUETS.
Especially the category ‘voluntarily associated entities’ will be capacious because Californian cap-and-trade Regulation Order reads in this field as follows:
“The following entities may qualify as voluntarily associated entities:
(A) An entity that does not meet the requirements of sections 95811 and 95813 that intends to purchase, hold, sell, or voluntarily retire compliance instruments; or (B) An entity operating an offset project that is registered with ARB pursuant to subarticle 13”.
It follows that any entity wishing “to purchase, hold, sell, or voluntarily retire compliance instruments” in California may qualify. To conclude this thread, Californian model of auctioning is far more open for participants than EUETS in that field.
Finally, it should be recalled that rules on Californian cap-and-trade are still work-in-progress and in the course of further analyses the envisioned measures may change. The above-considered comparisons are based on the version adopted by the ARB on 16 December 2010 (see: California Environmental Protection Agency Proposed Regulation to Implement the California Cap-and-Trade Program PART I Volume I Staff Report: Initial Statement of Reasons, Release Date: October 28, 2010, http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm).
Furthermore, the answer to the question, which of these two sets of rules, dealing with the same matter, is better suited to the market, is obviously not easy. The considerations on the issue should inevitably take into account the differences in the regulatory environment and the actual structure of the European and Californian markets, in particular, for the energy. One of the main purposes of the primary market in emission allowances is to secure constant influx of sufficient amounts of emission allowances into the secondary market, without disturbing the latter to an excessive extent. The near future will show in practice which scheme better serves such a function.