Carbon markets - ESMA preliminary report

ESMA has published a preliminary report which:

• presents an overview of the financial regulatory environment for the carbon market under MAR, MiFID II and EMIR and the tools available to securities supervisors to fulfill their responsibilities; and
• provides an analysis of price evolution and volatility in emissions allowances ("EUAs") and derivatives on EUAs. 

Among the findings of the report:

• the number of counterparties holding a position on EUA futures has tended to increase since 2018 in all categories of counterparties, in relatively homogeneous proportions in line with the observed expansion of the EU ETS market;
• open positions are to a large extent, and almost evenly, held by investment firms and credit institutions on the one hand and by non-financial counterparties on the other hand, while the remaining percentage of open positions, held by investment funds and other financial counterparties, remains relatively low; and
• the breakdown of open positions between the various categories of counterparties does not appear to have significantly changed since 2018 and is broadly in line with the expected functioning of the market, where non-financial entities buy EUA futures to hedge their carbon price exposure, while financial counterparties act as intermediaries to facilitate trading and provide liquidity to the market.

ESMA is due to conduct an in-depth analysis of the EU carbon market based on data sources available to securities regulators, and to deliver its final report to the Commission in early 2022. The Commission will then assess whether there is a need for targeted actions in the EU carbon market.

About the European Trading Scheme (ETS)

This puts a price on the CO2 that entities subject to compliance obligations can release to the atmosphere, with the overall objective of reducing net greenhouse gas emissions.

The Commission's Communication on Energy Prices, adopted to help tackle the exceptional rise in global energy prices, which is projected to last through the winter of 2021, and help Europe's people and businesses, includes a "toolbox" that the EU and its Member States can use to address the immediate impact of current prices increases and identifies actions for strengthening resilience against future shocks.

One of the measures put forward by the European Commission in this Communication is to step up market surveillance of energy markets, including of the European carbon market. In this respect, the European Commission has asked ESMA to further enhance the monitoring of developments in the European carbon market highlights that questions have emerged around the functioning of the European carbon market.

In order to examine more closely patterns of trading behaviours and the potential need for targeted actions, the Commission asked ESMA for a first preliminary assessment of European carbon markets by 15 November and tasks it to analyse, by early 2022, the trading of emission allowances (EUA). This report presents the preliminary assessment of carbon markets and derivatives thereof.