Auction purchase limit
Staff of ARB proposes to implement a limit, known as a purchase limit, on the amount of allowances that a single entity and its affiliates are able to purchase at any single auction to ensure that all entities with a compliance obligation have fair and equitable access to allowances sold at auction. Each covered entity and opt-in covered entity can purchase of a maximum of 10 percent of the total number of allowances offered for each budget year. Each voluntarily associated entity can purchase a maximum of four percent of the total number of allowances offered at each auction. ARB believes this purchase limit, together with direct allocations to covered entities and the option to use offset credits, would allow covered entities to obtain a sufficient part of their compliance obligation at auction. In addition, ARB proposes to exempt the investor-owned utilities from the purchase limit because entities do not receive a direct allocation that they can use for their own compliance needs.
In the EUETS pursuant to the Article 56(2) of the Auctioning Regulation the maximum bid-size may either be expressed as a percentage of the total number of auctioned allowances in any given auction or a percentage of the total number of auctioned allowances in any given year. In the EUETS the maximum bid-size is generally intended to mitigate an actual or potential discernible risk of market abuse, money laundering, terrorist financing or other criminal activity, as well as anti-competitive behaviour and may be imposed by any auction platform after consulting the Commission and obtaining its opinion thereon. The Commission may consult the Member States concerned and the auction monitor and obtain their opinion on the proposal made by the auction platform concerned. The imposition of restrictions on the bid-size in the EUETS relates to the same group of undertakings including any parent undertakings, its subsidiary undertakings and affiliate undertakings.
Comparing the designs mentioned above it is worth considering that, contrary to the California cap-and-trade where there are fixed auction purchase limits expressed as a percentage of the total number of allowances offered for each budget year (10% and 4%) in the EUETS imposition of the maximum bid-size is only an option which may be struck by the auction platform in specific circumstances and after conducting a required procedure. The design of the EUETS seems to be more confident in the market forces, but the American model gives the investors more certainty as regards shaping market position.
To combat the tactic to “corner” a market, in the California cap-and-trade there is a proposition to use a holding limit, which is the maximum share of available compliance instruments that an entity or group of affiliated entities may own. Holdings by affiliated entities will be evaluated as if they belonged to a single entity. This issue deserves a broader description and in this article is only mentioned.
Safeguards to limit the excessive downwards price movements
It is also useful to point out that the safeguards are provided in the Californian cap-and-trade, to limit the excessive downwards price movements. The reserve price has been proposed in the auction design at 10$/per metric ton for auctions in the 2012. For all years following 2012, this reserve price will be increased by 5 percent plus a consumer price index.
In this context the Article 7(6) of the Commission Regulation No 1031/2010 of 12 November 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community could be recalled which reads:
“Where the auction clearing price is significantly under the price on the secondary market prevailing during and immediately before the bidding window when taking into account the short term volatility of the price of allowances over a defined period preceding the auction, the auction platform shall cancel the auction”.
The obvious question emerges on the ground of the Auctioning Regulation in the EUETS – what does it mean price “significantly under” the secondary market, but the answer is not simple, because Article 62 of the said Regulation treats the methodology as confidential.
As opposite, there is nothing confidential as regards the auction reserve price in the California cap-and-trade because it has been set at 10$/per metric ton for auctions in the 2012 with the increase by 5 percent plus a consumer price index for all years following 2012.
From the point of view of the predictability and certainty of market rules the Californian design in that field seems to be more transparent.
This is the mere, cursory overview of the subjectively chosen features of the California cap-and-trade and the EUETS. It is apparent that the first of them is currently under construction and characteristic of it’s main components may change over time. But the comparison of the constituent elements of both systems may lead to interesting conclusions as to the theoretically possible designs of the cap-and-trade schemes as well as facilitate the potential future linkage.