Emission permit auctions to net £2bn

By Fiona Harvey, Environment Correspondent
Published: July 29 2008 03:42

Auctioning off the right to emit carbon dioxide is likely to net the government nearly €2.5bn (£2bn, $3.9bn) over the next four years, under plans to be announced on Tuesday.
The terms on which the emissions permits will be sold for the first time this year will be set out by the Department for Environment, Food and Rural Affairs and the Treasury.

The power sector will be most affected, as electricity generators will have to buy almost a third of their permits to produce carbon, instead of receiving them all free of charge as they have done since 2005, when the European Union’s emissions trading scheme started.
Other sectors in the scheme, such as steelmakers and cement-makers, will continue to receive all of their permits for nothing, at least until 2013.
However, the government has yet to set the date for the first annual auction to begin.
Phil Woolas, environment minister, said: “Auctioning [permits] marks an important step forwards in developing a system where market forces create financial incentives for major carbon emitters to reduce their emissions. This will help stimulate the development of green technology and British business can begin to realise the benefits of being leaders of the low carbon revolution.”
Scheme sets quotas for carbon dioxide production
Companies covered by the European Union’s emissions trading scheme may only produce a certain quota of carbon dioxide each year.
They are given permits, each representing a tonne of the gas, to do so. Companies that need to emit more than their quota can buy spare permits from cleaner businesses.
The permits were issued free in the first phase, from 2005 to 2007, but from this year governments can auction a proportion.
Electricity companies gained hundreds of millions of pounds a year from the first phase of the scheme by passing on to customers the theoretical cost of buying the permits, although they received them free. They will be the only sector forced to buy any permits at auction in the 2008-12 phase of the scheme, but this should not raise power prices as the cost of permits has already been included.
Paying for permits should not prompt power producers to raise their prices, however, as the cost of buying permits has already been factored into electricity prices since 2005.
Some 85m permits – about 7 per cent of the total number of permits allocated to UK companies in the current phase of the scheme – will be auctioned by 2012. But the government plans to “front-load” the auctions so that more are sold this year and next year than in 2011-12.
Monday’s price for this year’s permits stood at about €25, with permits for 2012 selling in the forward market at nearly €30.
At these prices, the permit auctions would yield the government between €2.1bn and €2.4bn in total by 2012.
The next phase of the scheme, from 2013, is likely to swell the government coffers by much more. Paul Klemperer, professor of economics at Oxford university, estimates that the government would gain about £2bn a year from auctioning permits if the power sector were forced to buy all its permits, as the European Commission proposes.
Under the government’s plans for the first permit auction, bidders will be given two months’ notice of the auction date. The auction will run for a few days at most, and bidders will submit their bids, detailing how many permits they want to buy and at what price, electronically. The auctions, which will be open to banks and brokers as well as companies covered by the trading scheme, will be administered by the UK Debt Management Office.
Once all the bids are in, the government will calculate a single settlement price for all the permits available. This will be done by taking the lowest price at which all the permits can be sold to the bidders.
Copyright The Financial Times Limited 2008