Although applying holding limits as well as auction purchase limits in cap-and-trade schemes sometimes meet with criticism, the absence of such limits in the EU ETS current design, particularly when the concept of backloading failed, brings important risks for the system.
On 16 April 2013 European Parliament voted against freezing auctions of a portion of CO2 emission quotas, so as to boost the price of EU "polluter's permits". Pursuant to the European Parliament press release: 'A majority felt that interfering with the supply of credits would undermine confidence in the Emissions Trading System (ETS), designed to cut greenhouse gas emissions.'It was also added that 'MEPs opposing the measure advocate deeper reform of the ETS and fear that interfering with the supply of credits could undermine players' confidence in the scheme.'
Such an outcome of the backloading issue is logical and could have been predicated earlier (see for instance The European Parliament resolution of 14 March 2013 on backloading – on the verge of legal order?).
Thus it is clear now that the European lawmakers when laying foundations for the EU ETS architecture did not take into account possible future changes in economic environment and set rigid cap-and-trade framework with 2020 perspective ignoring the possibility for any economic downturn.
The above flaw notwithstanding, another issue may, however, be reasonably posed towards European lawmakers regarding the absence in the EU ETS of such constraints as auction purchase limit and, more importantly, holding limit.
It is woth noticing that the California purchase limits for the auction of current vintage allowances are as follows:
- The purchase limit for covered entities and opt-in covered entities will be fifteen (15) percent of the allowances offered for auction;
- The purchase for electrical distribution utilities will be forty (40) percent of the allowances offered for auction; and
- The purchase limit for all other auction participants is four (4) percent of the allowances offered for auction.
For the Advance Auction of future vintage allowances, the purchase limit is 25 percent of the allowances offered for auction for all participants.
In turn, the California holding limit is the maximum number of California GHG allowances that may be held by an entity or jointly held by a group of entities with a direct corporate association.
Arguments were formulated that holding limits are difficult to effectively enforce and can impede the proper functioning of a cap-and-trade program, particularly in its early years when liquidity is most needed. The unprecedented character of the California measure, which does not exist in any other major carbon or commodities market was also raised (see the Australian approach for position limits).
It was also indicated that the rules for holding limits were conceptually developed by the U.S. Commodities Futures Trading Commission for different than carbon allowances purposes – i.e. limiting financial exposure in futures commodities markets.
In the current situation of the EU ETS, the absence of such rules is particularly striking. However, the scheme appears to stick in limbo in that regard because the introduction of such radical measures in the course of the settlement period would, in turn, expose the EU ETS to claims from the point of view of legal certainty and predictability.