Scope
The European Securities and Markets Authority (ESMA) Final Report on Emission Allowances and Associated Derivatives provides a comprehensive overview of the functioning of both primary and secondary EU carbon markets. It details allowance prices, analyses supply-demand dynamics, and analysis abnormal behaviours in the market.
Summary
The European Securities and Markets Authority (ESMA) report (European Securities and Markets Authority (ESMA, 2022) provides an overview of the functioning of the primary and secondary EU carbon markets, allowance price, and supply and demand behavior over time.
The main driver for carbon pricing is the supply and demand of EUAs. New EUAs enter the market annually through free allocations or auctions. Firms under EU ETS must surrender allowances based on their verified emissions from the previous year. The requirements for verification by accredited verifiers and the details of the information to be reported are set out in the EU Monitoring and Reporting Regulation ((EU) 2018/2066) and the EU Accreditation and Verification Regulation ((EU) 2018/2067).
EUAs are issued by Member States through an auctioning process which is hosted by the German trading venue EEX (European Energy Exchange). The number of auctioned EUAs is fixed in advance (determined to match supply with demand at the clearing price) and can be adjusted only a few times during the year and take into account the number of EUAs in circulation (e.g., cumulative surplus).Can participate in auctions: compliance entities, business groupings of compliance operators, investment firms, credit institutions, etc. All entities participating in the auctions must open an account in the Union registry, appoint at least one bidder’s representative and comply with the admission requirements of the auction platform.
The report shows a significant rise in the spot price compared to 2018. The figure below shows that the per unit EUA prices rose from 8 EUR in January 2018 to 96 EUR in February 2022, before dropping below 70 EUR in March 2022. This is compared to several other jurisdictions that introduced cap and trade systems to reduce GHG. By 2018 ETS were pricing carbon between 5 and 15 EUR/tCO2 and prices were until 2020 approximately following the same steady upward trend.
The EUA price increase from 2021 is attributed to rising utility demand and gas and power prices, making coal more attractive than gas. However, coal’s higher CO2 emissions required more EUAs, boosting demand and driving up carbon prices. Other events like COVID-19 and the war between Russia and Ukraine are reported correlated with the dropping the carbon price.
Based on the auctions from 2021, it is reported that the EU primary market appears to be fairly concentrated, with 10 top players accounting for 90% of the volumes auctioned. The top 3 participants were non-financial entities, purchasing 49% of the EUAs, while the top 4 financial entities bought 28% of the EUAs as shown in the figure below.
Relevance for EXIGENCE
This report (ESMA, 2022) provides insights into the EU ETS market behaviour and carbon price related to green incentives and incentives mechanism.
European Securities and Markets Authority (ESMA), 2022. Emission Allowances and Associated Derivatives Final Report, s.l.: European Securities and Markets Authority (ESMA).
