forCarbonNeutrality:IntroducingAuctioningLessonsfrominternationalexperiencefullspectrumincludingoil,gascoalsupplyanddemand,renewableenergytechnologies,electricitymarkets,energyefficiency,demandsidemanagementandmuchmore.Throughadvocatespoliciesthatwillenhancethereliability,affordabilityandsustainabilityofcountriesandbeyond.Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.IEAmembercountries:AustraliaAustriaBelgiumCanadaCzechRepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIrelandItalyJapanLithuaniaLuxembourgMexicoNetherlandsNewZealandNorwayPolandPortugalSlovakRepublicSpainSwedenSwitzerlandRepublicofTürkiyeUnitedKingdomUnitedStatesTheEuropeanCommissionalsoparticipatesintheworkoftheIEAcountries:ArgentinaChinaEgyptIndiaIndonesiaMoroccoSenegalSingaporeSouthAfricaThailandUkraineInternationalEnergyAgencyWebsite:IeaAbstractAbstractAbstracthereafter)overthecomacceleratethecleanenergytransitioAcknowledgements,contAcknowledgements,contAcknowledgements,contributorsEnhancingChina’sETSforCarCoordinatorandClimatePolicyAnalyprovidedvaluablefeedback,supportandoverallguidancetotheprCommission),SeungJickYoo(Sookmyung(MassachusettsDepartmentofEnvironmentalProtectioValuablecontributionsandfeedTheauthorsarealsogratefulforvaluablecommentsandfeedbac(Sookmyung’sWomenUniversity),WillEnvironmentalProtection),ZhengZhangSincerethanksgotDumondandThereseWalshforprovidingvaluableeditorAcknowledgements,contributionsAcknowledgements,contributionsProgramme,inparticulresponsibleforanyopinionorjudgementitcontains.AnyForquestionsandcomments,pleasecontactEEDatclimate.change@. 8 12 16Allowanceallocationmethods 16Statusquoofallowanceauctioning 18Benefitsofauctioning 21 25Definingsectoralcoverageofauctioning 25Definingtheauctioningshare 28Administrationofauctioning 31Implementingpriceorsupplyadjustmentmeasures 32 35Statusquoofauctionrevenuegeneration 35Waysofusingauctionrevenue 36Governanceofauctionrevenue 38 40KeybenefitsofintroducingallowanceauctioninginChina’sETS 40OptionsforintroducingauctioninginChina’snationalETS 44OptionsforthegovernanceanduseofauctionrevenueinChina 46 49Auctionandfreeallowanceshare 49Priceorsupplyadjustmentmeasures 50Overviewofdesignelementsforallowanceauctioning 52References 53Abbreviationsandacronyms 58Glossary 58ListoffiguresFigure1.1Developmentofallowanceauctioninginexistingsystemsovertime 18Figure1.2Statusquoofallowanceauctioningbysectorinexistingsystems,estimatedfor2021 20Figure2.1California’stieredcategorisationofleakageriskbasedonEITE*criteria 26Figure3.1Auctionrevenuesandallowancepriceinselectedemissionstradingsystemsorderedbysizeofthesystem,2021 35Figure4.1AdditionalemissionsreductionsbychannelcomparedwiththecounterfactualRPSScenario,2025-2035 41Figure4.2Totalsystemcostsandauctionrevenues,2035 42ListofboxesBox1.1Interactionoftheprimaryandsecondaryallowancemarkets 17Box2.1Consignmentauctions 28ListoftablesTable2.1Definingexposuretocarbonleakagerisks:EITE*criteria 27Table2.2Priceorsupplyadjustmentmeasuresbysystem,2021 33Table3.1Mainusesofauctionrevenueinselectedemissionstradingsystems 36Table3.2Administrationofauctionrevenuesinselectedemissionstradingsystems 38TableA.1Definingauctioningandfreeallowancesharesbysector 49TableA.2Priceorsupplyadjustmentmeasuresdesignbysystem 50TableA.3Keydesignelementsforintroducingallowanceauctioning 52CO2emissionspeakbefore2030andach“dualcarbon”goals).Insodoing,transformationaswellasaframeworkforsustainablesocio-economicwillbeanimportantfwiththeParisAgreement,asthecountryaccountannualCO2emissionsfromtheenergysector.emissions–about40%ofChina’senergysectorexpectedtoexpandfurtherinthecomingyearCO2emissions.Strengtheningthenationalemandguidelow-carboninvestmeenergytransitionandChina’sprogressindicateditsintentiontoexplorcarbonemissionstradingsystems,thisreportanalysesinternatiinimplementingallowareportaimstoinformpolicymakeKeylessonsfrominternationalexperience1EnergysectorCO2emissionsincludprimarily:redistributedtocompaniesand/orcitizenstoaddresssocialandpricediscovery,reducesnon-compliancerisksofpriceandsupplyadbystrengtheningdomesticanotherwaytocombinecertainadvantagesofconventionalauctieventuallybereturneddefaultallocationmethodforemissionallowances.Howunderlyingeconomics,theexposurecosts.Theseassessmentsaretypicallyconductedintroducingauctioningaswellasthebalanceoindifferentsectors.Whiledetailsvarybyjuris2Carbonleakagereferstothephenomenonwhere,ftootherjurisdictionsleakagecanleadtoasectorsfacingmodefreeallowancestoidecarbonisation.Suchmethodsincludecorrectionfactors.ofthisapproach.Thejurisdictionsanalysedhaveincinvestmentsingreenhousegasconcernsorlowerthelong-termcostsachievingtheintendedobjectives,streminimisingadministrativecosts.SuchartimeastheemissionstradingsysPolicyinsightsforChinastrengthenitsenvironmentaachievementofChina’s“dualcarbon”goals.Agradualintrodutackleinintroducingaucompetitivenessandlegovernancecomplexities.ConsideringcouldhelpguidepolicydeciEmissionstradinginthepowersectorcouldadopteitherconventiooremployconsignmentauctionsasatransitionalmethod,reducetheneedforcross-ministerialcoordinationforrevenuegovetradingtoindustry,toauctionsforindustryaremadewithinapredictableandtransparentframemissions-intensiveandtraauctions,toensuresufficientdecarbonisationincemaintainingcompetitivenessinanevolvinginternatioofallowanceauctions.Auctioningprovidesanopportunitytointroduceanauctionreservepriceorcostcontainmentmechallowancepricesignalandprovidegreatervisibilityforinvestmethisthroughmonitorinworkers,industrialandeconomicdiversificationandforcommunitireformandthederegulationofitselectricitymarkets,direcintensiveindustriesand/orhouseholdClimatechangehasemergedasthetheirclimateambitions,includingdecade.ThepaceofChitheParisAgreement,asitseconomyaccountsforone-thineutralitybefore2060”settransformationofthecountry’ssocio-economicdevelopmCarbonpricingisapowerfulinstrumentfordrivingcleanenergytransitionsaclearpricesignaltoreduccanincentivisetheimplementationostructureofmarketsimportantthatanyemissionstradingsystemcarbonpricinginstrutradingmechanism(India,LokSfromcleanenergytransitionsatdifferentspeedsacrosscotherdemand-sideresponsChina’snationalETSasakeyinstrumentforachievingitsclimategoalscoveringthepowersectorwhichisrespsectorCO2emissions.China’shigh-leveldevelopment“bygraduallyexpandingitscoaccountforanother30%ofenergysectoremissiCouncilGeneralOffice,2021).representedonlyabout4%ofannuallycoveremarketawaitsthegovernment’sallocationplanforcoal-firedpowercapacity,coalfuelledmorethantheaverageageofthecountry’arestrengtheningt2022a).focusesonpolicyaimsStates3andQuebec’sCap-and-TemissionstradingsystemanddiscusseskeybeVirginia.representativeness.Thisreporttherecentsystems,includingnjurisdictionshaveintroducedallowanceauctioning,aallowanceallocationenhancestheeffectivenessofanAllowanceallocationmethodsassetsultimatelydetermineshowcostsaredemittersreactintermsofprotoconsumers.Ingeneral,ttheallowancestobiddingentitiesforfree.Thisisgenerallydoneinoneofthreeways:grandfathsetsemissionsintensitylimitvolumes.specificsectorsreceivesomeoftheiraBothallocationmethodsservedifferentobjectivesreducethepossibilityofwindfallprofi–tomanagethetransitiontoanemiscompetitiveness–particularlyforSinceallocationmethodallocationoptionsgiventheiruniquenationalcircstrategies.Thesecondarymarketiswhere(derivatives).Introducing(partial)allowanceallowanceallocation,insecondarymarket),thedesignthesecondarymarket.IntheoperationofthesecondarymarkinjectingnewallowancesintothesystfacilitatescoveredentitiesinmeetShareofauctioningShareofauctioningstilldivergefromstilldivergefromthefurtherprovideaccesstoriskmanagementproductsSource:WorldBank(2021),UKGoStatusquoofallowancadoptionofasubstantialauNewZealand)andgradualintroduction(Korea).100%90%80%70%60%50%40%30%20%0%200520072009201120132015201720192021RGGICaliforniaQuebecKoreaNewZealandverifiedemissions,allowanceallocationandauctionresultsconsignmentareincludedforCwerereluctanttosubjecttheirdomesticentitiestoauctierosionfollowingthe2008financialcrisis,tofurtherreducefreealloaCarbonBorderAdjustmentMeprogramsinCaliforniaandQuebec–whichwereconceivedorlforthepowersectorfromthebeginningwhilesimultaneouslygranting(whoaresubjecttoahighershareofauctioning).shareofauctioningtosectorsthatwerenotemission-intensiveortrade-eUnion’sCBAMproposal(CaFigure1.2Statusquoofallow(1600MtCO2)(320MtCO2)Auctionedallowances:(90(90MtCO2)(590MtCO2)(55MtCO2)(35MtCO2)versusfreeallocationineachsector.Assessmenemissions,2021allowanceallocaAuctioningenhancesenvironmentaledecarbonisationasitstrengthensincentivesforcost-allowanceswithinanemissionstradingsystem(providedtauctioningrequiresafirmtopuranexplicitcost.Whileafirfirstmoverssincetheywillhave(WorldBank,2021).Thishastheeffectivenessinreducingallowancesasitssystemshiftstowardsactiveencouragereduction(RepublicofKorea,Theextenttowhichfirmscanpassthroughcostsnon-EuropeancompetitioninthissentitiesfaceanacAuctioninggeneratesarevenuesAuctioningemissionsallowancesgeneratesaAuctioningincreasestransparencymechanismforallactorsinvolved.Forgovernmentstoadministrateandimplementthanfreereduceseconomicinefficengagestheminthemechanispurposeandfunctioning,whichcanfostertrustandacceptan2022b).Auctioningimprovesthecarbonmarket’sfunctioningAuctioningalsobringsaboutarangeoftechBank,2021).governmentsarereluctanttincreaseliquidity(seeBox2.1).thewishtoimplementacostcontainm(MSR),aquantity-basAuctioningstrengthensdomesticindustry’spapproachesarealsogainingtractionascountleakage)astheyraisetheirdomesticarebasedonthecomparabil2021).mechanismsforadjustingaauctioning).However,mostsystewhichareeligibleforfreeallocation.powersectorandfuelsuppliersbeingmostlytendstoreceiveasubstantialshareoffreeallospecificshareofallowancesthatneedstobesystem.Instead,theygenerallydefinecreligibilitytoreceiveauctioningisthedefaultaauctionedforsectorssubjecttopartialauctioningfoltheircarboncoststhrouglossandcarbonleakage).Typicintensityofasectoranditstradeeexposure–typicallym7Evaluatingpotentialquantitativethresholdsaredefinedforbothindicators(eitrade-exposedtobegrantedfreeallowances.TodifferentiatetheextQuebecandNewZealanthresholds(Figure2.1).Figure2.1California’stTradeTradeexposure(%)Medium10%LowHigh19%VeryLowLow1000Medium5000HighEmissionsintensity(tCO2eq./millionUSDvalueadded)Notes:*EITE=emissions-intInadditiontothecriterjurisdictionsgrantfreealconsiderations,includingdistributionaleffects,theabilitydecarbonisationpotential.ForeproducersaresubjecttofullauctionHowever,lower-incomememberstatesmaygraallowancestoelectricitycompaniestosupportinvestmentstodiversifyinitiativestodecarbonisethesectorarebeingrantfreeallowancestopowersupintroductionoftheemissionstradingsystem.Table2.1DefiningexposETSEmissionsETSEmissionsintensity[(directemissions*auctioningfactor)+(electricityconsumption*electricityemissionfactor)]carbonpricegrossvalueaddeddirectemissions+electricityconsumption*electricityemissionfactorvalueadded exports+importsturnover+imports.Costincrease>30%;or.Tradeexposure>30%Tradeexposurexemiss.Tradeexposurexemissionsinonabatementpotential,marketchaGHGemissions*averageallowancepricevalueaddedexports+importssales+imports.Costincrease>30%,or GHGemissions valueadded exports+importsvalueofshipments+importsandtradeexposure,withgreaterweightgiv.High:>5000tCO2valueadded.Low:100–999tCO2e.Medium:10-19%GHGemissionsGDPexports+importsandtradeexposure,withgreaterweightgiv.Medium:500–2500tCO2e/m.High:>30%.Medium:20-30%domesticproduction+importsZealand GHGemissions revenue(quantitative)andtradeexposure(qualitative)..Moderate:800-1600tCO2eNotes:*EITE=emissCaliforniaAirResourcesBoard(2013),seeFigure2.1forCalifornia’scategorisationofleakagerisktiers.allowances,jurisdictionsthendefinetheshareofallowanestablishallocationrulesforeachsector(seeAnnex,TableA.1).DuetotheirlimitedexposureatleastsomeoftheirallNorthAmericaandNewZealand)powercompaniesandconsignalltheirfreeallowancreflectedindispatchdecisionsandwholesaleUnderconsignmentauctiaresubsequentlyobligedtoretuWhilethismethodseethetechnicalbenefitsofauctioningwiththepoliticaladvanttradingsystem.Consignmentauctionsalso:Thisalsoensuresregularpricediscoprice-andsupply-containmentmeascentralisedgovernanceandcoordination).foremissionsreductSource:CaliforniaAirResourcesBoard(2021),WorldBank(2021),Caeligibleforfreeallowances(eithejurisdictionsthatdefinetiersNewZealand–“assistancefactors”areestablishedtodeterminetheleveallocationpereligiblesector.Theassistancefactorreflemissions-intensiveandtrade-exposedsectorsforitsfirstthreecompliancedesignshouldbetailoredtonationalcirallowancesaredistributedaccordingtoapre-definepertonneofcrudesteelproduced).highlyemissions-intensiveortrade-exposedasystems,mostofthe97%oftotalcoveredindustrialemisatapredetermined(ICAP,2020).Nonetheless,forthesesectors,jurisdictionshaveusedvwithinthecaptrajectory.SomeoftheintensitybenchmarksforfreeallocatioThisisdonetoensurestringency,tocreateanincentivefordmeetsthe90%average(CaliforniaAirResourcesBoard,2010b).applyafactorthataimstoensurethattheleveloffreeallowancesfallsovertime,andQuebecwillintroduceacapreductionfactothefactorissetinproportiontothAirResourcesBoard,2022).Itreducedthevolumeoffreeallowancesbythesamepercentawhenthebottom-upcalculationoffreeallowancesexceedsthenumberofallowancesthatareavailabletobehandedou2021-2025,thefactorissetat100%(i.freeallowancesisnotprojectedtoexceedtheavaicouldapplyforlaterAscountriesraisetheirclimateambitions,jurisdictionsvaluesdeterminedbasedonproductionandemiratesforthe2026-203settingnewrulesforfreeallowancealloauctionsforindustrialemittAdministrationofauctioniFrequentandsmallerauctionsareeasierforsmallerentitieswithlimitedfinancialquarterlyinCalifornfrequency,jurisdictionspredictability.WorldBank,2021).Intwouldbewillingtobuyandatwhichprice.Thesanaggregatedemandcurveandamarkesecondarymarket.Jurisdictionshaveoftenprovidedcomprmaterialsforparticipantsontheplatform’sfunctionComplianceentitiesareentitiesthatneedtosurrenderallnon-complianceentitiesareentitiesthatparticipaterestrictthemaximumnueitherasaspecificamountofallowancesorasashacapoftheentireemissionstradingsysbiddingandliquidity,whicharebothvitaltosuccessfsmallerones–toobtaintheirallowanceseasily.TheEurreceive100%oftheirrequiredallopredictabilityandhelpmakeemimakesauctionsacrAdjustmentmeasuresormaximumprice,whileothers(seeTable2.2,withmoredetailsintheAnnex,TableA.2).Ultimately,thechoiceanddesignofanadjustmentemissionsreductionsarekoftensetasanadditionalvolu“trigger”priceisreachedallowancesupplywhenacouldmodifytherulesonallowanceholding,borrowingoroffsets.Table2.2PriceorsupplyadjustmentmeasAuctionXXXXXXXXXXXXXXensurestrongpriceandoccasionallyse11Acarbonoffsetisaredoffsetsareoftensoldintheexample,fromforestry,energyefficiencyorcarbonc2022toUSD28by2026(NewZequantity-basedadjustmentmeasure.TheMSRautomaticofallowancesavailableforauctioningbaserangewithoutdirectlyCommission,2021b).Revenue(millionUSD)AllowanceRevenue(millionUSD)Allowanceprice(inUSD)Revenuegenerationispotentialformanagingsocio-economicchallengessdisbursementofauctionrevenuesisAuctionrevenuescapturerentsandpotentialwiauctionedandthesizeoftheemissionstradingsystemitself(FigureFigure3.1Auctionrevenuesandallosystemsorderedbysizeofthesystem,202140000350003000025000200001500010000500007060504030200EUETSKoreaCaliforniaRGGIQuebecNewZealandORevenueAverageAllowancePriceEmissionstradingrevenuesprioritiesofeachsystem.mitigationthroughinvestmentsinrenewablesandenergyefficitermcostofdecarbonisation,aswellascommunicatingthefinancialbeneficommunities,jurisdictionscanbuildandsttrading.Table3.1summarisestheprimarywTable3.1MainusesofauctionrevenueinselectedemissionstradingsystemsxxTechnologicalsupportxClimateEnergysystem/adaptationmodernisation**communitysupportsupportxxxxxxxxxxxxxxxxNotes:*Greenhousegas(GHG)mi(e.g.low-carbontransportorrenew**Energysystemmodernisatthisincludes“beneficialelectrification”whichisthedisplacemenand2022relatetothedecommissandsmallbusinesses,whileefficiencyprogrammes.Meanwhile,state-ownedutilitiesmusprogrammesincleantransportation,sustainablecommunities,cleaenergyefficiencyandwastemanagement.Thesdirectpaymentstohousehocostpass-throughofthecaAppropriateandtransparentgovernanminimaladministrativecosts–administrativeframeworks,processesformanagingrevenueflothespendingofassociatedfunds,whichincludeauauctionrevenueisfullyearmarkedandadministeredtseeninTable3.2.Table3.2AdministrationofauctionrevenuesinselectedemissionstradingsystemsJurisdictionAdministrativeJurisdictionAdministrativebodyEarmarkingofrevenueYesYes