UK successfully auctions four million carbon allowances

The UK today took a significant step towards its eventual goal of auctioning all carbon allowances to a raft of industries covered by the EU emissions trading scheme, with the completion of the first carbon allowance auction to be undertaken in Europe under phase II of the scheme.

The auction saw four million EU allowances (EUAs) sold at €16.15 (£13.54), raising £54m for the Treasury in the process, and paving the way for a series of further auctions next year designed to result in 25 million allowances being sold.

A spokesman for the Department for Energy and Climate Chance hailed the auction as a huge success, adding that the government was now positioned to expand the auctions next year and make them accessible to a wider number of bidders.

The first auction was undertaken with four primary participants – Barclays Capital, JP Morgan, BNP Paribas and Morgan Stanley – to act as intermediaries for other firms, but the government is now looking to sign up more firms to help make future auctions more accessible.

Andreas Arvanitakis of analyst firm Point Carbon said the auction marked an important step towards the UK government's vision for the post-2012 phase of the ETS that will see 100 per cent of allowances auctioned to participating firms in the ETS – barring a number of sectors such as steel and aluminium that could see their competitiveness diminished as a result of higher costs.

"The auction demonstrates that it is possible and the auctions do not disrupt the market," he said, adding that the government had helped reassure the market that it would not speculate to try and maximise its revenue by pressing ahead with the auction as planned, despite the recent fall in the price of EUAs.

He also claimed that the price fetched at auction of €16.15 was in line with expectations, despite being 45 cents below the market price at the time the auction closed of €16.60.

"Prices at auction are always fractionally below the market price, because buyers have to factor in an administrative cost and transaction fees," he explained. "They are never going to pay more than the spot price, because it would then make more sense to buy the allowances on the open market."

However, James Emanuel, commercial director at emission trading brokers CantorCO2e, said that the price attained at auction had been poor, adding that it was likely to be the result of the auction failing to reach enough potential bidders. "The government has effectively given away €1.8m, as people could have bought those credits and sold them straight away on the market for a tidy 45 cent per allowance profit," he said.

He also raised questions over the wisdom of the EU's plan to impose 100 per cent auctioning on energy firms and other carbon-intensive industries without gaining assurances from the UK that the revenue raised as a result is ring-fenced to help support the transition to a low carbon economy.

"Auctioning takes money away from those who can do something about climate change, the emitters, and gives it to those who can't, the politicians," he said. "Through auctioning, a company that is unable to reduce its own emissions will now purchase additional emission allowances from the government and that money will no longer find its way to the companies with low cost emission abatement opportunities to further invest in those opportunities, but instead will be siphoned out of the system by the Treasury."