November 29
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Emilija Berzanskaite
19th November 2021
Banking & Finance Consumer, Health & Environment

Preliminary Report on EU carbon market published by ESMA

The European Securities and Markets Authority (ESMA) has published its Preliminary Report on the EU carbon market and derivatives thereof, in order to help the Commission to assess whether certain trading behaviours would require regulatory actions.

The European Trading Scheme (ETS) is considered one of the key tools of the EU policy against climate change. It puts a price on CO2 that entities subject to compliance obligations can release to the atmosphere, with the overall objective of reducing net greenhouse gas emissions. In order to examine more closely patterns of trading behaviours and the potential need for targeted actions, the Commission requested ESMA for a first preliminary assessment of European carbon markets and the trading of emission allowances.

The Report presents an overview of the financial regulatory environment for the carbon market under various EU legislative acts – Market Abuse Regulation (MAR), Markets in Financial Instruments Directive (MiFID II) and European Market Infrastructure Regulation (EMIR) – and the tools available to securities supervisors to fulfill their responsibilities. The Report also contains an analysis of price evolution and volatility in European emission allowances (EUAs) and derivatives on EUAs. 

The findings of the Report show that the number of counterparties holding positions in EUA futures is relatively uniform across all counterparty categories since 2018, in line with the observed expansion of the market for EU emissions trading. Further, ESMA has identified that open positions are held almost equally by investment companies and credit institutions on the one hand and non-financial counterparties on the other, but the remaining proportion of open positions by mutual funds and other financial counterparties remains relatively low. 

Lastly, the results demonstrate that the distribution of open positions among various counterparty categories does not appear to have changed significantly since 2018, while non-financial companies buy EUA futures to hedge carbon price risk, while financial counterparties act as intermediaries to facilitate trading and provide liquidity to the market.

As a next step, ESMA will conduct an analysis of the EU carbon market and will deliver its final report to the Commission in the first part of 2022, upon which the need for future regulatory actions will be decided. 

Read ESMA’s press release here.


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