First carbon allowances to be auctioned next month

EU carbon trading entered phase 2 this year

The government has announced it will auction its first ever batch of carbon credits under the Emissions Trading Scheme (ETS) next month.

In the first phase of the ETS, which ran from 2005 to 2007, credits were allocated to UK businesses for free rather than sold, leading to large windfalls for companies who were given too many due to inaccurate calculations.

But, as recommended by the EU, the government will auction about seven per cent – some 85 million credits - in the second phase of the scheme, which runs from 2008 to 2012, raising £1.4bn at current prices.

Experts say a greater percentage of permits auctioned will reduce the distortions associated with free allocation, and increase management attention and market efficency.

"Auctioning may also provide a hedge against projection uncertainties, reduce price volatility, and increase investor stability," says a report by the Electricity Policy Research Group at Cambridge University.

Four million allowances will be auctioned by the UK Department of Energy and Climate Change on 19 November 2008 between 8am and 10am.

A further 25 million credits will be auctioned in 2009, with another 57 million over the final two years of the scheme.

Earlier this year a coalition of business and environmental leaders wrote to Gordon Brown to insist that income from the auctions should be used to help fund clean technology innovation in the UK.

"The UK government will accrue significant revenues from the auctioning of allowances from the Emissions Trading Scheme," said the letter. "This is a substantial additional transfer of funds from business and consumers to government."

"This represents a tremendous opportunity for the government to demonstrate its real commitment by announcing an equivalent scale investment in securing the transition to a low-carbon economy and in adaptation," the coalition added.

The government has not yet decided how the money will be used.