EU ETS auctions are the primary markets for emissions allowances in the EU. It is estimated that auctioned EUAs represent, since 2018, circa half of the annual supply of emission allowance (47% according to ESMA Final Report of 28 March 2022 Emission allowances and associated derivatives (ESMA70-445-38).
The primary market for EUAs consists of auctions to which, in addition to compliance entities (companies and aircraft operators who are obliged to participate in the EU ETS) most categories of market participants are able to participate in (e.g. credit institutions, investment firms, commodity trading firms without compliance requirements).
EUAs are issued by 25 Member States (and the EEA EFTA States since 2019) through an auctioning process which is hosted by the German trading venue EEX.
The other two Member States (Germany and Poland) issue emission allowances through a similar auctioning process also on EEX.
Entities willing to participate in auctions have to comply with some regulatory eligibility criteria (Articles 18 and 19 of Regulation 1031/2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances - the Auctioning Regulation).
According to the Auctioning Regulation, the following persons are eligible to apply for admission to bid directly in the auctions:
- operators with compliance obligations (including other subsidiaries of the same group of undertakings as the operator with compliance obligations),
- investment firms authorised under Directive 2014/65/EU,
- credit institutions authorised under Directive 2013/36/EU,
- business groupings of compliance operators bidding on their own account and acting as agent on behalf of their members,
- public bodies that control any compliance operator, and
- persons covered by the “ancillary activity exemption” of MiFID II (Article 2(1)(j) of Directive 2014/65/EU) when the Member State where they are established has enacted legislation enabling the “relevant competent national authority” in that Member State to authorise them to bid on their own account or on behalf of clients of their main business.
As regards the latter category, Article 18(2) of the Auctioning Regulation states the following: Without prejudice to the exemption in Article 2(1)(i) of Directive 2004/39/EC, persons covered by this exemption and authorised pursuant to Article 59 of this Regulation shall be eligible to apply for admission to bid directly in the auctions either on their own account or on behalf of clients of their main business provided that a Member State where they are established has enacted legislation enabling the relevant competent national authority in that Member State to authorise them to bid on their own account or on behalf of clients of their main business.
Furthermore, the Auctioning Regulation foresees a series of requirements for eligible persons to be admitted to bid in auctions.
Among others, these admission requirements notably require all the entities that are not compliance buyers to be established in the EU.
In addition, all entities participating in the auctions must open an account in the Union registry, appoint at least one bidder’s representative and comply with the admission requirements of the auction platform.
Investment firms, credit institutions and persons covered by the “ancillary activity exemption”, when submitting bids on behalf of their clients, must comply with additional conditions.
These additional conditions aim at ensuring that their clients are eligible persons and that the necessary contractual agreements are in place (especially with regards to the process of bids from their clients, the prevention of disclosure of confidential information and to ensure that their clients when acting themselves on behalf of other clients apply the requirements relevant to eligible persons).
EEX further requires potential bidders to provide evidence of personal reliability and professional qualification, to be recognised as a trading participant by the CCP ECC and to conclude an agreement with a clearing member of this CCP.
Once an entity has been admitted by EEX (and ECC), it can participate in the auctions and submit bids. The number of unique participants in EUA auctions held between January 2021 and December 2021 was 48 (of which 34 were non-financials and 14 financials).
EEX auctions two types of allowances: EU general allowances (EUA) and EU aviation allowances (EUAA).
EU aviation allowances (EUAA) are specifically foreseen for the aviation sector.
Nevertheless, as of 2021, both types of allowances are fungible and aviation allowances can be used to fulfil compliance obligations by stationary installations and vice versa.
The auctions take place on a daily basis according to a fixed calendar (see auction calendar).
Allowances are auctioned Monday, Tuesday and Thursday for auctions on behalf of the Member States and the EEA EFTA States participating in the common auction platform, Wednesday on behalf of Poland and Friday on behalf of Germany.
The amount of auctioned EUAs is fixed in advance and can be adjusted only a few times during the year.
One allowance permits the emission of one tonne of carbon dioxide equivalent (CO2).
The success of a bid will depend on the price and the amount of allowances auctioned.
Article 7 of the Auctioning Regulation details how the auction clearing price is to be determined by following the process below:
• Bids are sorted in descending order of the price bid;
• Bid volumes are added, starting with the highest bid; the price at which the sum of volumes bid matches or exceeds the volume of allowances auctioned shall be the auction clearing price;
• Tied bids will be sorted through random selection according to an algorithm determined by the auction platform before the auction;
• All bids with a price higher than the auction clearing price are successful. Execution of bids made at the auction clearing price depends on their ranking in the random selection (i.e. all bids at the same price are not executed following an order based on their timestamp, but according to the order given by the platform’s algorithm). All successful bids pay the same auction clearing price even if they bid higher.
• Partial execution of orders may be possible for the last successful bid matching the auction clearing price, depending on the remaining quantity of allowances.
Entities who submit successful bids during the auction process can get allowances delivered in their accounts at the EU Registry.
From an operational perspective, two parallel processes are to be distinguished.
Firstly, at the level of the EU Registry, EUAs will be transferred from the EU Auction Account in the EU Registry (which together with the Free Allocation Account are the Registry accounts managed by the European Commission to the successful bidder’s account in the Registry, going through the CCP accounts.
Secondly, at the level of the CCP ECC, internal accounts of the auctioneers and of the buyers are credited and debited.
At the level of the EU Registry, auctioned EUAs are transferred from the EU Auction Account to the CCP Auction Collateral Delivery Account.
Once the payment has been made to the auctioneers, ECC is allowed to transfer the EUAs from its Auction Collateral Delivery Account to its trading account at the Union Registry.
ECC delivers the emission allowances to the buyer’s registry accounts on their request.
At the level of the CCP deliveries of EU emission allowances are effected by booking within ECC’s internal accounts.
ECC transfers the holdings from the internal accounts of the auctioneers to the internal accounts of the buyers on the delivery day, after payment on T+1. This involves the transfer of the allowances in exchange of the received cash, where the cash payments are processed via the clearing members.
Once the allowances are within the buyer’s account at the CCP, the buyer can keep them in the account, sell them or request delivery to another registry account.
The accounts at the EU Registry can act as omnibus accounts and as such ECC’s account can hold the allowance of a successful bidder without transferring them to the successful bidder’s own registry account.
This implies that there might be mismatches between the information displayed through the holdings of EU Registry accounts and the accounts at the CCP level.
According to ESMA Final Report of 28 March 2022 'Emission allowances and associated derivatives' (ESMA70-445-38) from June 2020 until December 2021:
- The total quantity of EUAs auctioned was just under one billion for a total market value of EUR 41.8 billion (around EUR 120 million per day), including EUR 31 bn in 2021 only;
- The total quantity of EUAs auctioned over this timeframe was just under one billion for a total market value of EUR 41.8 billion (around EUR 120 million per day), including EUR 31 bn in 2021 only. In comparison, the total quantity of EU aviation allowances (EUAAs) auctioned amounted to just 7 million, or 0.7% of the total;
- The number of unique participants in EUA auctions held between January 2021 and December 2021 was 48, the daily number of participants was smaller, with 18 auction participants on average, this number declined slightly over the course of 2021 but was broadly on par with the second half of 2020;
- Participants in 2021 EUA auctions included 34 non-financials (including 3 UK entities and 3 Swiss entities) and 14 financials (including 3 UK entities and two from other third countries);
- Altogether, third-country entities bought 15% of the EUA volumes auctioned in 2021;
- More than two thirds of auctioned EUAs were bought by non-financial entities (69% in 2021), with this proportion holding relatively steady over time;
- The top 10 auction participants accounted for 90% of the volumes auctioned in 2021, with the remaining 38 participants accounting for just 10%;
- The top three auction participants were non-financials and bought a combined 49% of 2021 EUA volumes< in contrast, the top four financials in 2021 auction volumes bought 28%.
Overall, the market appears to be fairly concentrated in the hands of a few entities. The small number of entities participating to EUA auctions, relative to the number of participants in secondary markets (between 400 and 700 active participants monthly in 2H21) suggests possible barriers to entry. These may stem, for example, from the costs of participating in auctions as opposed to relying exclusively on services provided by investment firms in secondary markets.