The EU Emissions Trading scheme directive requires 95 per cent. of allowances to be allocated for free in Phase I and 90 per cent. of allowances to be allocated for free in Phase II.
The UK’s Phase I National Allocation plan (NAP) states that we intend to sell or auction any surplus allowances remaining in the new entrant reserve (NER). The original NER consisted of 6.3 per cent. of the total allocation and most of this has now been allocated, so the UK has been able to quantify the surplus available for auction or sale. On 23 February, DEFRA announced that we would sell some surplus allowances through brokers. The exact number of allowances to be sold is market sensitive information.
The UK’s Phase II NAP states that we will auction 7 per cent. of allowances plus any surplus NER and allowances from closures. Should the total which makes up this “auctioning pot” reach more than 10 per cent. we will cancel allowances so that we don't exceed the maximum allowed in Phase II. “Auction” encompasses sale, auction and any other routes to market for charge. The route to market will be dependent on market conditions. We expect to hold the first Phase II auction early on in this phase.