May 05 2016

When is the right time to monetise allowances?

Before ETS Innovation Fund can begin to disburse money to projects, EU ETS carbon allowances will need to be sold. Federley, lead MEP on ETS Innovation Fund, hedges his bets on the timing of the sale of the EUAs:

“The monetisation of allowances for the innovation fund shall time the auctioning of allowances in such a way to provide certainty of available funds, while avoiding a negative impact on the orderly functioning of the carbon market.”

Amendment 23 Fredrick Federley Draft Opinion

CEPS hints at the problems caused by fluctuating EUA prices: “With the significant volatility in EUA prices, the NER has not been able to provide a stable pool of money, especially for the larger projects, including CCS. A mechanism that would make the funds more predictable for such projects is something that should be considered.” Projekt21plus agrees: “Currently when the price for allowances is at a quite low level, the support for the innovation fund is at a quite low level as well. We prefer a future structure of the programme which is independent from the variability of prices for emission allowances and deliver a reliable basis for financing innovation projects seriously.”

Perhaps the solution lies in doing what was suggested by Catalonia: “The EIB could sell in advance a portion of credits before the call of proposals”. This approach could satisfy DECC’s wish for “further clarity on how the funding will be handled, both to ensure that projects of each type are considered for and able to receive funding, and to have a greater understanding of the number of projects that could be funded in each area.”

The electricity sector speaks as one to say, “The timing of inflow of these NER400 allowances into the market should also be made predictable for market parties” with support from Hungary and IETA, which adds that the release should be “gradual and clarified well in advance”. But they are countered by voices saying the EIB could be given the freedom to be a little cannier in when it chooses to monetise EUAs. CEPS: “The EIB is currently strictly required to act as a price-taker. It could be considered to allow the EIB more freedom in determining when to monetise, so that the total amount of funds available would be maximised.” DECC: “The timescale for the auctioning of any allowances for the Innovation Fund [NER400] (as well as the Modernisation Fund) needs to be carefully considered to maximise the value of the Fund whilst minimising the impact on the wider carbon market. This may suggest a more flexible or staggered approach than was adopted in the NER300.” EFET (on a collision course with IETA): “Allowing the European Investment Bank more freedom in determining when to monetize allowances (setting temporal windows) will enable to maximise revenues and exploit the Fund as a market stabilizer.”

Burdening the EIB

What if allowances don’t fetch the price expected at the time the programme is designed? The Polish Electricity Association would pass all EUA price risk to the EIB: “It could be considered to determine in the future ex-ante the minimum value of allowances to be auctioned and have e.g. the EIB to cover potential differences between actual carbon prices and the previously determined floor price.” The think-tank Bruegel has suggested the same thing: “A public bank (eg the European Investment Bank) would offer contracts that agree to pay in the future any positive difference between the actual carbon price and a target level. Investors would bid to acquire such contracts to hedge their investments. Hence, public budgets would be significantly exposed to the functioning of the ETS.” (See also ‘Merging: towards a “NER 2020” and a “Horizon 400”?’ for Estonia’s wish for MS and EIB to share the risk of project underperformance)