Behaviours

Question 1

Tell me about a time when you had a difficult challenge

Answer 1

SITUATION:

• EXPLAIN THE ETS: Having left the EU Emission Trading Scheme (ETS) the UK had decided to set up it’s own ETS. In this scheme companies must submit an allowance per tonne of CO2 they produce each year. The government allocates some of these to the market but sells the remainder at auction.
• AUCTIONS WERE DELAYED: Auctioning of the allowances for the first year of the UK ETS were delayed to Q2 creating a dilemma of how to distributed allowances through auction throughout the first year.
• LOBBYING FOR FRONT-LOADING: We were experiencing significant lobbying from the power sector to “front-load” the allowances and sell a majority of allowances with the first 2 months of the market opening, to allow the power sector to purchase allowances for the power they had already sold and to rebuild their “hedge” for future power.
• CONCERN OF POWER SECTOR: These companies were concerned they would not be able to meet their demand for allowances, and that there would be significant price spikes in the initial months.
• POLICY POSITION: Finally, the director of the policy team in charge of setting auctions, was inclined to accept this recommendation.

TASK:

• ROLE TO GATHER EVIDENCE: My role was initially to gather evidence for or against front-loading within an auction period. However, I quickly realised that there was no applicable evidence, due to the unique circumstances of the UK setting up a new system, that would be required to act like a mature ETS from its inception.
• THEORY AND PARAMETERS: Upon recognising this issue, I realised that we would have to base any decision on economic theory. My team’s challenge would be to decide upon an auction schedule with four parameters:
  
  • 1. Start date
  • 2. Frequency of auctions
  • 3. Distribution of allowances
  • 4. Whether or nor to reduce volumes under certain conditions – i.e. The August period
• OUTCOMES: And we were trying to meet a number of conditions:
  
  • 1. Ensure auctions cleared
  • 2. Minimise volatility (try to prevent price spikes)
  • 3. Ensure the market operated efficiently.

ACTIONS:

• IDENTIFY ISSUES: I identified a number of issues: •
  
  • We were considering each of the above parameters in isolation.
  • We were only considering the views of one sector.
  • We were not looking at the other mechanisms to address potential issues.
• INTERACTIVE CALCULATOR, GRAPHS AND BENCHMARK: I took the initiative and built an interactive auctions calculator for the policy team, to highlight the trade-offs of the different parameters. Within the calculator I made a graph of some of the options the power sector had asked for, and benchmark it against our auction volumes from the EU ETS. This allowed me to communicate the trade-offs quickly and easily to non-analysts persuading policy that the requests from the power sector would not be feasible.
• CONSIDER OTHER STAKEHOLDERS: I highlighted to policy that the power sector only made up a third of the expected traded UK emissions (UKAs) and that whilst we had not heard demands from other stakeholders, it was important to consider their demand when setting up the system. We contact academics, stakeholders and the auction provider to better inform our decision.
• OUTCOME OF VIEWS: These views helped to highlight that other stakeholders would not be expecting front-loading; some companies would be unable to purchase in the early auctions and that some companies tended to buy late. By highlighting the need to weigh views appropriately, I was able to convince policy that front-loading would not be in the interest of a large percentage of participants and that there were unconsidered costs to this policy.
• OTHER POLICIES: I highlight that we must not consider the auction schedule in isolation of our other policies. CCM and our overall “allowance cap”. I provided quantitative evidence to policy, that some of hedging demand would already be addressed by the cap. And that the appropriate policy for dealing with price spikes, was the CCM.

RESULT:

• CONVINCE SENIORS: By highlighting the unconsidered costs to non-power-sector stakeholders, the implications of front-loading for our other objectives (continuity, simplicity), evidence of the other mechanisms to address the concern of power sector I was able to convince the policy G6 and DD and my G6 and analytical DD of the benefit of an even spread of allowances across the year.
• PDG DECISION: my policy colleague and I presented and convinced a director led group to implement our recommendation of even spread of allowances across fortnightly auctions.
• AUCTION CALENDAR PUBLISHED: The auction calendar was published on time in February ahead of auctions, with positive reactions from stakeholders.