allocation methods of emission allowance

Training for local DRC representatives

Learning by doing towards the establishment of robust cap setting and allocation for National ETS

全国碳交易能力建设培训会全国碳交易能力建设培训会全国碳交易能力建设培训会全国碳交易能力建设培训会

Supporting the Design and Implementation of Emissions

Trading Systems in China - 中欧碳交易能力建设项目中欧碳交易能力建设项目中欧碳交易能力建设项目中欧碳交易能力建设项目

Beijing, 25th – 26th April 2015

北京北京北京北京，，，，2015年年年年4月月月月25-26日日日日

This project/programme is funded by the European Union under the Service Contract No. : DCI-ASIE/2013/334-592.

Project implemented by: ICF International together with Sinocarbon, SQ Consult and Ecofys

Allocation Methods of

Emission allowance

Duan Maosheng

Tsinghua University

April 25,2015

Outline1. Key words for allowance allocation

2. Considerations when determining the allocation method

3. Types of allocation methods

�auctioning

�Free allocation

4. Allowance allocation for new entrants

5. Features of allowance allocation of pilots in China

6. Evolvement of allowance allocation methods in EU ETS

7. Foundamention work for an unified national ETS allowance allocation

3

1. Key words for allowance allocation1. Allocation: initial allocation of emission allowance（government→enterprise）

2. Impact:

� different allocation methods bring different incentives, which will impact

acceptance of the methods and the realization of systematic targets. e.g.

allocation based on renewed data may motivate the enterprises to increase

output or emission.

3. Stakeholders:

�Government: fairness, efficiency, policy acceptance and implementation

cost, etc.;

�Enterprise: production cost, impacts on competitiveness, etc.;

� Consumer: increase of product price.

4. Related elements: need be in accordance with other elements such as emission

cap setting, price-formation mechanism , existing energy and climate policies4

2. Considerations when determining allocation

method� Core element for consideration during allowance allocation：

political acceptance

• Fairness: sharing emission reduction responsibilities, impacts on related sectors,

enterprises, consumers and regions, etc.

• Efficiency: management cost, transaction cost, rate of product market distortion,

etc.

• Availability, acquiring cost and reliability of basic data

� Other issues to be considered

• Early emission reduction actions

• New entrants（newly-built enterprises or facilities)

• Shutdown, suspension, merger or business shifting of the enterprise

• Avoid carbon leakage, and consider the competitiveness of local enterprises5


Theoretically, allocation methods can be categorized by the

following criteria:

Free or not

• Free allocation

• Open auction

• Fixed sale

price

Time scope of data applied

• Historical data

• Renewed data

Type of data applied

• Based on

emission

• Based on input

• Based on

output

6


In practice, there are normally three kinds of allocation methods:

� Auctioning

� Grandfathering: allocation based on historical data of the

enterprises

�Based on historical emission

�Based on historical emission intensity（ex post adjustment necessary）

� Benchmarking: allocation based on unified sectoral benchmark

�based on historical output

�Based on current output（ ex post adjustment necessary ）

7


auctioning

Grandfathering

Low political

acceptance

Early emission

reduction action

The best gets

punished

benchmarking

“windfall

profits”

Compensate for the

“leakage”

“leakage coefficient”

Free

allocation

Poor d

ata foundatio

n

Hard

to im

plem

ent

design

sector/product

benchmarking design how to

use the

income

� Comparison of three widely-used allocation methods:

8

Auctioning� Main strengths and weaknesses

weaknesses strengths

9

Auctioning method�Unified price, sealed bidding, single-round bidding (used in

pilot cities(provinces) of China, EU ETS, California, etc..)

� bidding price equals the settlement price

• Allocated randomly

• “come first, get first”

• In proportion to

• bidding quantities

10

Auctioning: key design elements

11

Time, frequency and

amount of auction

Auction method and

limitations for bidding

Reservation price and

price cap

Auction under the price-

controlled mechanism

Auction of the linking

system

Entry qualifications for

auction

Bidding deposit

Issuing auction rules

Checking the bidding

Deciding the winning bidder

and bid-awarding quantities

Allowance delivery

Allowance

settlement

Auction platform

Bidder registration

Bidding and Deposit

Regula

tory s

yste

m

Regulation on auction

Financial(trading) regulation

Auctioning: pilot practices in China1. Purpose of auctioning

�Allocation of a small amount of allowances

�Market regulation methods

• Price regulation: allowance overpriced

• Compliance regulation: poor market liquidity due to reluctance to

sell by enterprises covered

2. Amount of allowance to be auctioned (or set aside for

auction) differ significantly

12

Free allocation method: grandfathering� Is it “ex post adjustment”?

NO YES

13

Free allocation method: grandfathering� Main strengths and weaknesses

14

weaknesses strengths

Grandfathering- based on historical emissions

15

Grandfathering –based on historical emission intensity and actual output

16

Free allocation method: benchmarking� Main strengths and weaknesses

strengths

17

weaknesses

Benchmarking-based on historical output

18

Benchmarking-based on actual output

19

Free allocation: data requirement for different allocation methods

Historical dataHistorical dataHistorical dataHistorical data

EmissionEmissionEmissionEmission

benchmarkingbenchmarkingbenchmarkingbenchmarking

Controlled Controlled Controlled Controlled emission emission emission emission factor(emission factor(emission factor(emission factor(emission intensity/emission intensity/emission intensity/emission intensity/emission reduction rate)reduction rate)reduction rate)reduction rate) Actual outputActual outputActual outputActual output

emission output

Grandfathering Grandfathering Grandfathering Grandfathering

based on based on based on based on

historical historical historical historical

emissionemissionemissionemission

● ○ ○

◑

○

Grandfathering Grandfathering Grandfathering Grandfathering


emission emission emission emission

intensityintensityintensityintensity

● ● ○

◑

●

benchmarking benchmarking benchmarking benchmarking


historical historical historical historical

outputoutputoutputoutput

◑

● ●

◑

○

benchmarking benchmarking benchmarking benchmarking

based on actual based on actual based on actual based on actual

outputoutputoutputoutput

◑ ◑

●

◑

●

Note:●required ◑ probably required ○not required 20

4. Allowance allocation for new entrants（pilot in China)

1. Newly-established enterprises

�Not including: Shanghai, Chongqing, Hubei Province and Tianjin

�Same allocation method as newly-build facilities: Beijing, Guangdong Province, Shenzhen

2. Newly-built facilities

�Auctioning: EU ETS

�Benchmarking based on actual output: Beijing, Tianjin

�Benchmarking based on designed production capacity: part of production processes in

Guangdong Province (difficult to set the benchmark)

�Allowance calculated based on presumed energy consumption: part of production

processes in Guangdong Province (not difficult to set the benchmark)

�Compensate allowance based on actual situation: Shanghai, Hubei Province. For newly-

built facilities with output, energy consumption or carbon emission above certain levels,

compensated allowance can be applied

21

5. Features of allowance allocation of pilots

in China

1. Almost all allowances are allocated for free, while auctioning as an allocation

method has been used in very limited way;

2. Need of enterprises have been given great emphasis in the design of allocation

method;

3. Allocation method, parameter design method and specific values for each

pilot city(province) may differ;

4. Grandfathering approach based on emission is the most widely-used free

allocation method;

5. Compared to systems outside China, allocation method with ex post

adjustment has been applied more frequently, especially for the power and

heat generation sector. 22

6. Evolvement of allowance allocation

methods in EU ETS

� Allocation method determined

by member states: National

Allocation Plan (NAP)；

� Ratio of free allowance＞

95%,most of which were

grandfathering allocation

based on emission;

� Little allowance for auctioning;

� Over-allocation , no saving of

allowance permitted, leading

to allowance price fall to

ZERO at the end of phase 1.

Phase 1

（2005-2007）

Phase 2

（2008-2012）


by member states: National

Allocation Plan (NAP）；

� European Commission

strengthened requirement on

NAPs;

� Ratio of free allowance＞

90%,most of which were

grandfathering allocation based

on emission;. Benchmarking

start to be applied in countries

like Germany;

� Ratio of auctioned allowance

rose.

Phase 3

（2013-2020）


by the European Commission;

� Auctioning become prevailing

allocation method;

� Qualification for acquiring free

allowance;

• Sectors facing “carbon leakage”

• Power sector of a few member

states;

� Benchmarking based on

historical output is used for free

allocation.

23

6. Evolvement of allowance allocation

methods in EU ETS

�Methods getting unified gradually, preventing the

member states from “bidding for the lowest price”, and

reduce the “distribution effect”;

�Amount of allowance for auction gradually increase,

avoiding surplus of allowance and “windfall profits”;

�Methods and purposes of free allocation gradually

adjusted.

24

7. Foundation work for an unified national ETS

allowance allocation

Calculate “baseline

allowance”

“tight adjustment”

Compile and report the

pre-allocation scheme

review pre-allocation scheme

determine and release allocation

plan

Government

department in charge

at the national level

Implement allocation

Statistics on basic dataDetermine the list of enterprises

included

Clarify category of enterprises,

select method of allocation

Note:

25

Government

department in charge

at the local level

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Supporting the Design and Implementation of Emissions

Trading Systems in China - 中欧碳交易能力建设项目中欧碳交易能力建设项目中欧碳交易能力建设项目中欧碳交易能力建设项目

This project/programme is funded by the European Union under the Service Contract No. : DCI-ASIE/2013/334-592.

Project implemented by: ICF International together with Sinocarbon, SQ Consult and Ecofys

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