Auctioning in Emissions Trading · Glossary

Auctioning in emissions trading means that the state sells emission allowances at auction instead of distributing them free of charge. Anyone covered by an emissions trading system must surrender one allowance for every tonne of CO₂ equivalent emitted. In the EU Emissions Trading System, this applies to operators of power plants and industrial installations, aircraft operators and, since the expansion in 2024, also shipping companies. An allowance, known in English as an EU Allowance (EUA), entitles the holder to emit one tonne of CO₂ equivalent. When allowances come from auctions, companies do not receive them as a gift. They buy them either at one of the regular auctions or later on the secondary market.

It is important to understand what the auction does and what it does not do. The total number of allowances is set by the politically agreed upper limit, known in English as the cap. This quantity falls every year. The auction only determines how, and at what price, part of this quantity first enters circulation. It is therefore a distribution mechanism and not a climate target.

How the auction works

Since 2013, auctioning has been the standard method for distributing allowances in the EU ETS. Member States auction their allowances in accordance with the rules of the Emissions Trading Directive 2003/87/EC and the Auctioning Regulation. Since 2023, Delegated Regulation (EU) 2023/2830 has applied, replacing the earlier Regulation (EU) No 1031/2010. The auctions are intended to be open, transparent, harmonised and non-discriminatory. Each country appoints an auctioneer. The auctioneer places the allowances on the platform and passes the proceeds on to the state. For the Innovation Fund and the Modernisation Fund, the European Investment Bank takes on this role.

Almost all auctions run through the European Energy Exchange (EEX) in Leipzig. It is the common auction platform for 25 Member States as well as for Iceland, Liechtenstein and Norway. Germany uses the EEX as its own, separately designated platform and holds its auctions on Fridays. On the common platform, auctions take place on Mondays, Tuesdays and Thursdays. In June 2026, the Commission again appointed the EEX as the common platform for five years, starting in 2027. The current platform will continue to hold auctions until and including 14 December 2026.

The procedure is a single-round, sealed-bid, uniform-price auction. Bidders submit as many bids as they wish within a single bidding window, each in lots of 500 allowances with a price per allowance. They cannot see the bids of other participants. All bids are then sorted in descending order by price and the quantities are added up. The price at which the quantity on offer is reached becomes the clearing price. All successful bidders pay the same price, even if they bid more. The principle is similar to the pay-as-cleared procedure on electricity exchanges. Eligible bidders include installation and aircraft operators and their group companies, authorised investment firms and credit institutions, and certain other authorised market participants.

The auction alone does not determine the price. Most price formation takes place in ongoing allowance trading on the secondary and futures markets, and clearing prices are usually close to these market prices. To prevent an auction from closing significantly below the market price, there is a secret reserve price that is based on the market price. If the bids fall below it, or if demand is too low, the auction is cancelled. For April to September 2026, the Commission has published an average allowance price of around 79 euros per tonne. This figure is a snapshot and fluctuates.

Auctioning and free allocation

In the EU ETS, auctioning and free allocation exist side by side. From 2021 to 2030, up to 57 percent of general allowances are in principle to be auctioned. Because quantities are set aside for reserves and funds, only about 51.5 percent of the annual cap was initially auctioned from 2021 to 2025. The Market Stability Reserve additionally reduces auction volumes when too many allowances are in circulation. The remainder is received free of charge mainly by industrial sectors at risk of production relocating to countries without comparable CO₂ costs (carbon leakage). This allocation is now based mainly on efficiency benchmarks and production data and no longer, as in the early period, largely on the installations' past emissions. For aircraft operators, the share of auctioned allowances is being raised in stages: from 2026, most aviation allowances will be auctioned.

A clear rule applies to electricity generators: since 2013, they have generally had to buy their allowances in full. An exception applies to Member States with a lower level of economic development, which may still give their energy sector free allowances until 2030. In the current trading period, only Bulgaria, Hungary and Romania make use of this. The form of payment mainly changes how heavily a company's liquidity is burdened and how visible the costs are. The incentive to reduce emissions, however, arises from the scarcity of allowances and the resulting CO₂ price.

Significance in the power sector

Power plants include the CO₂ price in their variable generation costs. A coal-fired power plant emits significantly more CO₂ per megawatt hour generated than a modern gas-fired power plant. Wind and solar plants have neither fuel nor CO₂ costs in operation. When the CO₂ price rises, coal-fired electricity therefore becomes more expensive above all, and gas-fired electricity does too, but to a lesser extent. This shifts the dispatch order of power plants, the merit order. Power plants with high specific emissions move further back when lower-emission generation is available.

It makes no difference whether a power plant operator buys its allowances directly at the auction or later on the market. For the decision whether a power plant runs, only the cost of an additional megawatt hour counts. The CO₂ price is therefore part of the marginal costs. An example: at 80 euros per tonne and around 0.35 tonnes of CO₂ per megawatt hour, a gas-fired power plant incurs about 28 euros per megawatt hour in addition. For a lignite-fired power plant with around one tonne per megawatt hour, it is about 80 euros. These are rounded reference values that vary depending on the plant and its efficiency.

However, auctioning does not guarantee low-emission electricity. If renewable generation, grids, storage and flexible demand are not sufficient, fossil power plants continue to be needed to meet the load. The CO₂ price then helps determine which fossil power plant runs and how expensive this electricity is. It can trigger investment in low-emission plants, efficiency and flexibility. It cannot, however, replace grid connections, permits, land and reliable investment conditions.

Costs, prices and pass-through

In the wholesale market, the electricity price is often determined by the costs of the last power plant still needed to meet demand. If this power plant has CO₂ costs, they feed into the market price. Wind and solar plants, which need no allowances themselves, also benefit from this, provided they sell at the market price. This is not a flaw of auctioning but a consequence of price formation on the electricity market.

Allowances allocated free of charge also have a market value, because their holder could sell them. Anyone who uses them for their own emissions forgoes this revenue. These are opportunity costs, which can likewise be reflected in product prices. If companies nevertheless factor allowances received free of charge into their prices, additional profits arise, so-called windfall profits. The European Commission explicitly names the avoidance of such profits as one reason for auctioning.

For households and businesses, it is not the allowance price alone that matters, but the overall effect on energy prices, grid charges, levies and investment. Who ultimately bears the costs depends on how strongly individual consumers are affected by energy prices and on what the auction revenues are used for.

Revenues and their use

The auctions raise a great deal of money. According to the Commission, the EU ETS has generated more than 230 billion euros in auction revenues since 2013, around 38.8 billion euros in 2024 alone. About 25 billion euros of this went directly to the Member States. Part of the revenues flows into EU funds: the Innovation Fund, the Modernisation Fund for 13 Member States and, from 2026, the Social Climate Fund. About 90 percent of the auction volumes are distributed among the Member States according to the countries' past emissions. The remaining 10 percent go to 16 economically weaker Member States as compensation.

Previously, Member States had to spend at least half of their auction revenues on climate and energy purposes. Since mid-2023, they have had to use the entire revenues, or an equivalent amount, for the climate-friendly transformation. This explicitly includes measures against social hardship. They report annually to the Commission on how the funds are used. Within this framework, the states decide for themselves what they spend the money on. For example, they can reduce individual electricity price components and thereby facilitate electrification with heat pumps, electric mobility and electric industrial processes. They can support investment or return money to citizens as a lump sum. Each of these options creates different incentives and distributes the costs differently.

Germany accounts for about 22 percent of the EU-wide auction volume. Here, auction revenues flow entirely into the Climate and Transformation Fund (KTF), apart from the costs of operating the emissions trading system. In 2025, European and national emissions trading together generated more than 21.4 billion euros, according to the German Emissions Trading Authority (DEHSt).

Distinctions

CO₂ tax: With a tax, the state sets the price, and how much emissions fall remains open. In emissions trading, the quantity is capped and the price is formed on the market. The auction is only the route by which allowances enter the market. Both instruments belong to carbon pricing but distribute the risks differently: with emissions trading the price fluctuates, with a tax the emission reduction is less certain.
Secondary trading: The auction is the primary market, where allowances are issued for the first time. Afterwards, companies, banks and traders trade them further on the exchange and over the counter, hedge against price fluctuations and continuously form expectations about future scarcity.
Subsidies: Auctioning makes low-emission technology more economically attractive because emission-intensive alternatives become more expensive. A subsidy, by contrast, pays directly for investment in or the operation of specific installations. The two instruments can complement each other.
EU ETS 2: A separate emissions trading system is being established for buildings, road transport and other sectors, whose allowances are not interchangeable with those of the existing system. According to the Commission, operation begins in 2028, but the auctioning of allowances already starts in January 2027 via the EEX. To be distinguished from this is the existing national emissions trading in Germany, which has its own price rules.

Assessment

Through auctioning, emissions become a scarce right that must be paid for. It is important for the power system because CO₂ costs are reflected in power plant dispatch, in electricity prices, in investment decisions and in public revenues. However, it does not by itself explain how quickly emissions fall or how fairly the costs are distributed. For that, the cap, the Market Stability Reserve, electricity market design, infrastructure and the use of revenues must be considered together.

Sources

Auctioning of allowances — Europäische Kommission, GD Klimapolitik; unbekannt (abgerufen November 2026; Preisindikator für Oktober 2026). Abschnitte About auctioning, Auctioning revenues and their use, Auction platforms, Article 29a monitoring, FAQ
Auction Design (EU ETS1 Auctions) — European Energy Exchange AG (EEX); unbekannt. Abschnitte At a glance und Determination of auction clearing price
Factsheet: Auktionierung im EU-ETS — Deutsche Emissionshandelsstelle (DEHSt) im Umweltbundesamt; unbekannt (Fassung mit Daten bis Dezember 2025). Textabschnitte zur Zuteilungsmethode, zum deutschen Anteil und zur Erlösverwendung
European Energy Exchange appointed as EU ETS common auction platform from 2027 — Europäische Kommission, GD Klimapolitik; 2026-06-04. Nachrichtenmeldung, gesamter Text
Infothek: Was passiert mit den Einnahmen aus dem Emissionshandel? — Deutsche Emissionshandelsstelle (DEHSt) im Umweltbundesamt; unbekannt (Angaben zu 2025). Infothek-Artikel zur Verwendung der Einnahmen

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Edited by eCMS on 11.11.2026 14:34