European countries allocate 71% of free carbon allowances

London — European countries have allocated 71% of the eligible total of free carbon allowances for 2020, according to European Commission data released late Friday.

Countries have handed out 538 million mt of allowances from an eligible total of 755 million mt for 2020, the figures showed, leaving 217 million mt still to be allocated this year.

The estimated value of the volume allocated so far is Eur13.1 billion ($14.7 billion), based on the average daily closing EUA price in January and February.

Three countries had not yet started the process – Spain, Finland and Portugal – as of March 6.

The largest CO2 emitter Germany had issued 88% of its total (136 million mt out of 154.5 million mt), while the UK was lagging behind many countries at only 66% (39 million mt out of 60 million mt), the figures showed.

The UK's free allocation for 2019 -- held back due to Brexit uncertainty -- were handed out to companies earlier in February, according to the UK's Environment Agency.

European governments hand out free allowances to companies in the industrial sectors every year in February, and the total amount is determined by the annual carbon cap, which declines every year. Of that total cap, 57% is auctioned, with the remainder given for free – mainly to non-energy industrial companies exposed to global competition.

The annual free allocation in February allows regulated companies to adjust their holdings ahead of the compliance deadline of April 30 to surrender allowances to match the previous year's verified CO2 emissions.

The influx of large volumes of free allowances into the market every February can contribute to temporary carbon price weakness in the first quarter.

EU Allowance futures contracts for December 2020 delivery on the ICE Futures Europe exchange gapped lower in early deals Monday, dropping sharply to as low as Eur22.33/mt, down 4.7% from Eur23.42/mt at the close Friday.

The EC is expected to update its free allocation data on March 20, it said.

Looking ahead to next year, free allowances given in February 2021 will not be eligible for compliance with calendar 2020 CO2 emissions obligations because allowances issued in phase four (2021-2030) cannot be used for phase three compliance (2013-2020).

This means companies making use of free EUAs to cover the previous year's emissions and who are short for 2020 will need to buy enough allowances this year to cover that obligation.