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The Community Emissions Trading Scheme (Allocation of Allowances) Scheme 2008

DEPARTMENT FOR ENVIRONMENT, FOOD AND RURAL AFFAIRS News Release (Information Bulletin ref :251/08) issued by The Government News Network on 29 July 2008

The Community Emissions Trading Scheme (Allocation of Allowances) Scheme ("The Scheme") setting out the conduct and terms of allocation of allowances in the UK's auctions in Phase II of the EU ETS was published by HM Treasury today.

The Scheme sits below the Regulations governing auctions and sets out the conduct and terms of allocation, along with the detailed design of the auctions, and the requirements in order to participate.

Government aims to hold the first auction before the end of the year with confirmation of the date at least two months in advance.

This version of the Scheme covers competitive bids only, which must be placed through an intermediary. Government is aiming to have the non-competitive element of the auction in place for early 2009. The Scheme sets out how to apply to become an intermediary

(Primary Participant) and the terms governing that appointment. A full copy of the Scheme is available at: http://www.hm-treasury.gov.uk/consultations_and_legislation/community_emissions/consult_community_emissions.cfm

Notes to editors

1. The EU Emissions Trading System (EU ETS) aims to reduce emissions of carbon dioxide at least cost to industry. Participants are allocated emissions allowances that they can trade to help them meet their emissions reductions targets.

2. The System works on a "cap and trade" basis. Member States' governments are required to set an emissions cap for all installations covered by the scheme. Each installation will then be allocated allowances for the particular commitment period in question. The number of allowances allocated to each installation for any given period is specified in a document called the National Allocation Plan (NAP). Anyone who is not covered by the System will be able to open an account on the Registry and buy and sell allowances.

3. If an installation fails to surrender sufficient allowances to cover its annual emissions, it will face financial penalties (currently set at E100 per tonne), and also the requirement to surrender sufficient allowances the following year.

4. The UK NAP for the second trading period (2008-2012) sets aside 7% of the allowance cap for auctioning, amounting to approximately 85 million allowances over the phase. HMT has appointed DEFRA as the person conducting the auction. DEFRA has appointed the DMO to act as its agent. 5. The auctions are open to anyone who holds an account on the Registry. The auctions will comprise two bidding stages - i) non-competitive and ii) competitive. The first auctions will involve competitive bidding only. The Government aims to implement the non-competitive bidding facility in time for the first compliance period of Phase II.

6. The Government will be appointing intermediaries (known as Primary Participants) to facilitate the competitive stage of auctions. Organisations will need to apply to Defra to become Primary Participants and will be assessed against the eligibility criteria set out in the Scheme. These include having an office in an EEA state, having the ability to meet financial commitments supported by suitable credit ratings, the ability to effectively participate in an auction on behalf of others, and systems to prevent the disclosure of confidential information (including having 'Chinese walls' within their organisation).

7. Once appointed, Primary Participants must abide by the "Terms" set out in the Scheme. These include accepting instructions to act on behalf of any organisation with an EU Registry account (known in this process as 'indirect bidders'), subject to anti-money laundering checks and their own objective checks on the indirect bidders' ability to pay for allowances. This ensures that UK auctions are open to all and that Primary Participants cannot refuse to place bids on behalf of an indirect bidder without good reason.

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