According to the European Investment Bank all sales of CO2 allowances from the new entrant reserve (NER300) will be of a forward nature for settlement in December 2013 at the earliest. The options for the monetisation method are: auctions, on an exchange and over the counter.


It follows from the Cooperation Agreement between European Commission and the European Investment Bank on the implementation of Commission Decision C(2010) 7499 that the main elements of the monetisation method including the defined monetisation period and the expected total volume of monetisation should be published on the EIB's website but it has not been done yet.

This publication is impatiently awaited because there are some ambiguities as regards important for EUETS participants features of monetisation.


The closer 2013, the more questions regarding the availability of phase three CO2 allowances. They could come to the secondary market through 3 different channels:


1) free allocations - severely constricted in comparison with phase 2 rules,


2) early auctions,


3) monetisation of phase 3 allowances from the new entrant reserve (NER300) by the European Investment Bank.


CERs, ERU and any other credits different from EUAs (also potentially available in the third settlement period) are not the subject of the present considerations because the situation on this matter constitutes a separate, complex issue. On the contrary, the phase-2-EUA’s usage as from 2013 doesn’t rise concerns and ambiguities due to clear banking rules. Free allocations of phase 3 allowances will not start before 2013 and for this reason this tranche is omitted hereinafter.


Considering the volumes of phase 3 EUAs potentially available before 2013 we have ultimately at the disposal the allowances covered by the Article 10(1) and uncompleted currently Annex I to the Auctioning Regulation (so called “early auctions”) on the top of, mentioned at the beginning, sales of CO2 allowances from the new entrant reserve (NER300) by the European Investment Bank. There should, however, be borne in mind that mentioning “the availability of phase-3-EUAs before 2013” some kind of simplification is used because the products at issue are forwards and futures (see Art. 4 of the Auctioning Regulation).


Early auctions


Spot auctions (with immediate delivery) will be the rule in the third trading period. For such auctions, however, two things are necessary – a platform for auctioning spot and the single Union registry. The procedures for procuring such a platform seem to be underway but concerns are being expressed whether the single Union registry will be operational on time.

Before spot platform and a single Union registry is in place, the Auctioning Regulation provides for the possibility to procure transitional platforms for auctions of "futures" and "forwards" (with delayed delivery). This allows starting auctions of phase 3 allowances before the single registry with all features necessary for spot auctions commences its operations.


Article 10(1) of the Auctioning Regulation provides: "The volume of any allowances covered by Chapter III of the Directive 2003/87/CE to be auctioned in 2011 or 2012 [so-called "early auctions"] and the auctioned products by means of which the allowances are to be auctioned shall be set out in Annex I to this Regulation". 
Specifying the volumes of early auctions can be done by making an amendment of the Regulation to complete Annex I. The procedure for adopting such an amendment is the same comitology procedure as the one under which the Auctioning Regulation itself has been adopted.

 

According to the Commission’s proposition made on 15 March 2011 120 million allowances should be auctioned in 2012, ahead of the start of the 2013-2020 trading period in the EU Emissions Trading System. As was stated in the Jos Delbeke (Director-General for Climate Action) press release, the said proposal takes the form of a draft amendment to the EU ETS Auctioning Regulation, which has been submitted to the Climate Change Committee.


The Commission considered the proposed amount as appropriate to ensure a smooth transition to the third trading period starting in 2013 taking into account the additional 300 million allowances from the NER300 demonstration programme, “which the European Investment Bank intends to monetise by the end of 2012”.


Monetisation of phase 3 allowances from the new entrant reserve (NER300) by the European Investment Bank

 

Monetisation of phase 3 allowances from the new entrant reserve (NER300) serves the purpose of supporting demonstration projects of carbon capture and sequestration and innovative renewable energy technologies.

 

EIB on its Internet website as regards monetisation of allowances reads:

 

“The EIB is currently considering options for monetisation of the allowances. The selling options are: auctions, on an exchange or “over the counter” (i.e. transactions with one or more counterparties). Once decisions have been taken and before sales begin, the EIB will publish on this page the main elements of the monetisation method to be used.  The EIB intends to monetise the allowances with the objective to minimise any impact on the secondary market in carbon allowances.

The EIB will begin sale of the allowances one month after they have been transferred to the Bank and made available for settlement. Sales will take place in regular intervals and at least every second week. The allowances shall be sold for settlement in December 2013 at the earliest, meaning all sales will be of a forward nature.

Two hundred million allowances will be sold before the first award decisions to projects are made. The European Commission has said it aims to make the first award decisions in the second half of 2012. As previously stated, the sale of the remaining 100 million allowances is expected to be completed before 2013 when the third trading period of the EU ETS starts.”

 

The Cooperation Agreement on the implementation of Commission Decision C(2010) 7499  between the European Commission and the European Investment Bank  (2010/C 358/01) (OJ C  358, 31.12.2010, p. 1) in Articles 11 and 12(1) casts some doubts as regards  concrete timelines for monetisation. To be precise this provisions are cited verbatim beneath:

 

“Article 11

Transfer of allowances to the EIB

The Commission shall ensure that the 300 million allowances are transferred to the EIB and made available for the settlement of transactions once the Union registry is operational.

Article 12

Monetisation of allowances

1. Within one month after the 300 million allowances have been transferred to the EIB and made available for the settlement of transactions, the EIB shall commence to monetise the allowances. This shall be done by selling them either on exchange, in privately negotiated (so-called over-the-counter) transactions with one or more counterparties or by means of auctions, provided such auctions are conducted in a manner compatible with the objectives and principles laid down in Article 10(4) of Directive 2003/87/EC and its implementing provisions. ...”

 

Putting together the content of Article 11 and the first sentence of Article 12(1) of the above-cited Agreement and assuming hypothetically that the Union registry could be operational only in the second half of 2012, the question arises whether it means that the monetisation doesn’t start before that deadline. But such a conclusion would be in contradiction with the EIB statement on its website (cf. three last sentences of the website release cited above).

 


 

The above-mentioned ambiguities relating to the concrete timelines for monetisation seem also to be the basis for anxiety of the IETA organisation which in the ‘IETA Response Early Auction Consultation’ of 7 February 2011 remarked:

“The European Investment Bank (EIB) does not seem to envisage starting the monetisation of the NER300 ahead of the registry commissioning through sales of futures...”

and

“When will the the Union registry be ready? This will determine the possible start dates for both the NER300 monetisation and auctions.”

 

To conclude this thread: the specification by the EIB of main elements of the monetisation method including, particularly, the defined monetisation period and the expected total volume of monetisation is impatiently awaited.

 

By the said moment EUETS participants wanting to inquire for particulars relating to the way, the monetisation-EUAs will enter into the market, have to be satisfied with few guidelines prescribed in the above-cited Cooperation Agreement. Pursuant to the said Agreement:

 

1. The EIB shall monetise the allowances for settlement in December 2013 at the earliest. The EIB shall not require payment from its counterparties except on delivery of the allowances.

 

2. The EIB shall perform the monetisation of allowances with the objective of minimising any impact on the market for EU emission allowances. The EIB will determine a monetisation method which shall include the timing and scheduling of monetisation as well as the distribution of the volumes over the monetisation period and over the means of monetisation (exchanges or other). The monetisation method shall respect the following principles:

(a) Monetisation of at least 200 million allowances shall be concluded no later than 10 months after the allowances have been transferred to the EIB and made available for the settlement of transactions:

(b) Monetisation shall take place periodically at least every second week. Monetisation volumes should be spread as evenly as possible over the monetisation period. Volumes and timing of monetisation may be adjusted to minimise any impact on the secondary market;

(c) The EIB shall ensure that the monetisation prices do not deviate significantly from the relevant secondary market prices over the monetisation period;

(d) Reports setting out at least the overall volume and aggregated prices of the monetisation shall be published on the website of the EIB on a monthly basis, within two weeks of the end of each month over the monetisation period;

(e) Monetisation shall be effected in accordance with applicable laws in respect of money-laundering, terrorist financing and market abuse and accordingly counterparties acting on the EIB's behalf shall be required to demonstrate their compliance with such laws.

 

3. The main elements of the monetisation method including the defined monetisation period and the expected total volume of monetisation shall be published on the EIB's website as soon as possible and prior to the start of the monetisation; any significant adjustment shall to the extent practicable be announced at least one month in advance as well.


4. With a view to minimising execution risk, the EIB shall apply a selection process which aims at ensuring the selection of a professional counterparty or counterparties with a rating acceptable to the EIB in its ordinary business. Moreover, the EIB shall, to the extent required by its normal guidelines and operating procedures, require counterparties to post collateral as a guarantee of execution.


The provisions of the Article 12 of the Cooperation Agreement are quoted above nearly verbatim in order to enable the readers to collect the precise information as regards the rules governing monetisation at this stage of procedures.

 

Editorial note: An update of the information on the issue concerned can be found in “The schedule and key parameters for the monetisation of CO2 allowances from NER 300 reserve specified by the EIB”.