The encyclopedia · Finance & Accounting · Financial decision · 2005-2020
EU ETS moved from free carbon allowances to auctioning them in 2013.
In 2013 the EU ETS made auctioning the default way to allocate carbon allowances, ending the windfall that came from handing them out free.
European Commission · EU power sector · EU industrial emitters
the move
The EU ETS put a price on carbon by capping emissions and issuing allowances, but for its first phases it mostly handed allowances to polluters for free, which blunted the signal and rewarded the polluter.
From Phase 3, starting in 2013, the Commission made auctioning the default: the power sector must buy all its allowances at auction, while other exposed sectors get a transitional free allocation based on benchmarked emissions performance.
Benchmarks were set from the best 10% of installations, so free allocations were achievable by definition; the change pushed the cost of carbon back to the polluter and let Member States spend auction revenue on the low-carbon transition.
why it works
- Free allocation produced windfalls and little incentive to cut
- Auctioning makes the polluter pay the real cost of carbon
- Benchmarks based on the best performers keep allocations defensible
- Auction revenue funds climate and modernisation spending
what transfers
When you give away a scarce right, you create a windfall and no incentive; selling it makes the polluter pay and funds the transition.
what came after
Auctioning became the default way allowances were allocated from 2013, making the power sector pay for its emissions and moving the EU ETS from a giveaway toward a real market, though a post-2013 surplus kept carbon prices low and triggered later reforms to tighten supply.
references
- Emissions trading: draft Commission Decision on free allocation rules for the ETS
- Commission Regulation (EU) No 1031/2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances
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