Modelling the Phase III NER

According to the latest status update from the European Commission, the Phase III NER is currently 70% full, with 336 million allowances still remaining out of an original 480 million.

Using a simple model of how the NER works, we estimate that ~295 million allowances will be left by the end of Phase III.

Explanation:

• When new sites enter the ETS, or existing ones undergo a significant capacity increase, they receive free allocation from the NER. New entitlements are defined (retrospectively) from the start date of the entrance/expansion, and continue until the end of the Phase.
• This is represented by the grey rows in the above diagram; each one representing allocation entitlements established from consecutive start years until the end of the Phase.  
• The final column of the diagram indicates what proportion of total NER allocation each row represents, assuming that new entrance and expansion occurs at a consistent rate.
• The dark grey rows represent entitlements that will have been processed and accounted for in the Commission's latest figures (mentioned above); the dotted grey row represents entitlements that will have been partially processed; and the light grey rows represent future entitlements that will not have been processed.
• Counting the dotted grey row at approximately half value (5% of overall allocation instead of 11%), we can say that the Phase III NER has allocated (or committed to allocate) around 77% of the allowances it will allocate by the end of the Phase (assuming consistent rates of entrance and expansion).
• Given that the latest figures from the Commission show that 144 million allowances have been allocated (or earmarked for allocation), this means that the NER will allocate ~187 million by the end of the Phase, leaving ~293 million allowances unallocated.
• It is unclear, however, whether expansions with a start date in 2020 (especially the second half) could be processed before the end of the Phase. Given that unused Phase III NER allowances are due to enter the MSR in 2020, this means that such expansions may not receive allowances.
• If this is the case, ~295 million allowances could be left in the NER by the end of the Phase.

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For further information, please contact ​damien.green@perspectiveclimate.com