• Fewer participants buy majority of emission allowances at auctions.
• Emission allowances trading mostly involves derivatives.

The European Securities and Markets Authority (ESMA), the EU's financial market regulator, has published its first report on the EU Carbon Markets for 2024.

The report shows how the EU Emissions Trading System (EU ETS) is functioning, and the following are some highlights.

Prices and Volatility

The report notes that prices in the EU ETS have decreased since the beginning of 2023. This decline can be attributed to a lower demand for emission allowances due to cheaper natural gas, reduced industrial activity, and the decarbonisation of Europe's energy sector.

More allowances were introduced to the market to back the REPowerEU plan, which increased supply and contributed to the price drop.

Auctions

A small number of participants buy the majority of emission allowances at auctions. These auctions are not quite appealing to many EU ETS operators, as they prefer to receive their allowances through financial intermediaries like banks or brokers.

Trading and Positions

The majority of trading in emission allowances happens in the form of derivatives (financial contracts based on the allowances); non-financial sector firms hold long positions ( buying allowances for compliance), while investment firms and banks hold short positions.

The report follows up on ESMA's previous report from 2022 and was published because energy prices were surging, and the price of emission allowances tripled in 2021. The 2024 report has been prepared in line with the EU ETS Directive, which establishes the trading system for greenhouse gas (GHG) emissions in the EU.

For a detailed analysis of the report, click here.

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Source: ESMA