This week ESMA, the pan-EU financial regulator, published (click here) its EU Carbon Markets Report for 2024, this being the first report of its type from ESMA. The 19-page report delves into the functioning of the EU Emissions Trading System (EU ETS) and highlights key trends and developments in this market. The report is divided into several sections covering prices and volatility (page 6), auctions (page 8), trading in secondary markets (page 10), and positions in EU derivatives (page 14). A brief summary of the report is provided below:
- This first edition builds on this 2022 report from ESMA on the trading of EU emission allowances (EUAs), this report mandated in the context of rising energy prices and a three-fold increase in EUA prices in 2021;
- Since the above report, carbon prices have reduced significantly against a different economic, geopolitical, and political backdrop;
- Prices in the EU ETS have declined since the beginning of 2023, averaging EUR 83 per tonne of CO2-equivalent emissions during the year;
- This reflected a combination of lower demand for EUAs from weak industrial activity, falling natural gas prices and the decarbonisation of the European energy sector, along with increased supply following the decision to auction additional allowances in order to finance the REPowerEU plan;
- Intraday and historical volatility measures remained low throughout the 2022 period;
- Several structural features of EU carbon markets have remained unchanged since the 2022 ESMA report however;
- EUA primary markets remain significantly concentrated, with around 10 participants buying 90% of auctioned volumes;
- This, according to ESMA, reflects a preference by most EU ETS operators to source allowances from financial intermediaries;
- The vast majority of trading in secondary markets is done through derivatives, reflecting the annual EU ETS compliance cycle where non-financial firms hold long positions (for compliance purposes) while banks and investment firms hold short positions;
- The EU ETS Directive also mandates ESMA to make recommendations in its assessments – the only small issue of note relates to the reporting of prices for transactions combining the simultaneous purchase and sale of financial instruments under MiFIR transaction reporting (RTS 22) – they believe this could be improved to help with the identification of trading strategies.
Beside the final point above, the report notes however that ESMA’s analysis has not revealed any significant issues in the functioning of EU carbon markets.