Germany’s ruling grand coalition agreed Monday to auction 40 million CO2 allowances per year over the 2008-2012 period of the EU emissions trading scheme, some 8.8 per cent of the total number of allowances to be issued by the government.

An official with the Social Democratic Party told Point Carbon yesterday that the government prefers to arrange a government auction of the credits rather than using an independent agency to sell the 40 million EUAs to the market.

However, market sources say an auction could lead to delays in offering the credits to market players.

"If they decide to auction there could be a time problem. It would create an additional factor putting time pressure on the market, and we think the first auction could only happen in 2009 or maybe even in 2010,” Thomas Langrock, senior manager with carbon investment advisory 3C Group told Point Carbon.

“Selling can be implemented on time and take place already in early 2008," he said.

The Social Democrat official said there was a chance that the regulatory framework required to complete an auction would not be in place until 2009. In that case, Germany would auction 40 million allowances for the year 2008 in 2009, at 2008 market prices.

"We don't really need an auction, the market already provides a reliable price signal. Auctioning would require more infrastructure and increase transaction costs," Langrock argued.

The European carbon market has limited experience with auctions, as only Hungary and Ireland have completed government auctions in the first phase of the scheme. Criticism was directed at Ireland for pushing the allowance price down when it announced its auction of 963,000 allowances in December last year.

Germany putting 40 million credits up for sale at one auction would have the potential to distort the market to a much larger degree, Langrock claims

"The 40 million allowances should be sold in equal portions every day, meaning just below 200,000 allowances per day. Implemented that way, it wouldn't interfere with the market," he said.

While the German government says it prefers auctioning over sales, it remains open to both solutions and the legislation that will be approved in parliament on Friday will not include details on how Germany will make the credits available to the market.

Additional regulation specifying the design of the auction – or sales – is not expected to be finalised until after the summer break.

Oslo