Description This presentation discusses below topics: • Key words for allowance allocation • Considerations when determining the allocation method • Types of allocation methods • Auctioning • Free allocation • Allowance allocation for new entrants • Features of allowance allocation of pilots in China • Evolution of allowance allocation methods in EU ETS • Fundamental work for an unified national ETS allowance allocation

1. 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

2. Allocation Methods of
Emission allowance
Duan Maosheng
Tsinghua University
April 25,2015

3. Outline
1. 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

4. 1. Key words for allowance allocation
1. 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 policies
4

5. 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 enterprises
5

6. 3. Types of allocation methods
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

7. 3. Types of allocation methods
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

8. 3. Types of allocation methods
auctioning
Grandfathering
Low political
acceptance
Early emission
reduction action
Thebestgets
punished
benchmarking
“windfall
profits”
Compensate for the
“leakage”
“leakage coefficient”
Free
allocation
Poordatafoundation
Hardtoimplement
design
sector/product
benchmarkingdesign how to
use the
income
Comparison of three widely-used allocation methods:
8

9. Auctioning
Main strengths and weaknesses
weaknesses strengths
9

10. 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

11. 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
Regulatorysystem
Regulation on auction
Financial(trading) regulation

12. Auctioning: pilot practices in China
1. 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

13. Free allocation method: grandfathering
Is it “ex post adjustment”?
NO YES
13

14. Free allocation method: grandfathering
Main strengths and weaknesses
14
weaknesses strengths

15. Grandfathering- based on historical emissions
15

16. Grandfathering –based on historical emission
intensity and actual output
16

17. Free allocation method: benchmarking
Main strengths and weaknesses
strengths
17
weaknesses

18. Benchmarking-based on historical output
18

19. Benchmarking-based on actual output
19

20. Free allocation: data requirement for different
allocation methods
Historical dataHistorical dataHistorical dataHistorical data
EmissionEmissionEmissionEmission
benchmarkingbenchmarkingbenchmarkingbenchmarking
ControlledControlledControlledControlled emissionemissionemissionemission
factor(emissionfactor(emissionfactor(emissionfactor(emission
intensity/emissionintensity/emissionintensity/emissionintensity/emission
reduction rate)reduction rate)reduction rate)reduction rate)
Actual outputActual outputActual outputActual output
emission output
GrandfatheringGrandfatheringGrandfatheringGrandfathering
based onbased onbased onbased on
historicalhistoricalhistoricalhistorical
emissionemissionemissionemission
● ○ ○
◑ ○
GrandfatheringGrandfatheringGrandfatheringGrandfathering
based onbased onbased onbased on
emissionemissionemissionemission
intensityintensityintensityintensity
● ● ○
◑ ●
benchmarkingbenchmarkingbenchmarkingbenchmarking
based onbased onbased onbased on
historicalhistoricalhistoricalhistorical
outputoutputoutputoutput
◑ ● ●
◑ ○
benchmarkingbenchmarkingbenchmarkingbenchmarking
based on actualbased on actualbased on actualbased on actual
outputoutputoutputoutput ◑ ◑ ●
◑ ●
Note:●required ◑probably required ○not required 20

21. 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

22. 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

23. 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）
Allocation method determined
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）
Allocation method determined
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

24. 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

25. 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

26. 段茂盛
电话：010-62772596
邮箱：duanmsh@mail.tsinghua.edu.cn
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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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