European Securities and Markets Authority Publishes First Annual Report on EU Carbon Markets

The European Securities and Markets Authority has published its first annual report on EU carbon markets. The report delivers insights into the functioning of the EU Emissions Trading System market. Key findings highlighted by ESMA relate to:

• prices and volatility - the price of EU emission allowances declined in 2023, driven in part by lower demand for emission allowances from weak industrial activity, falling natural gas prices which led to a reduction in coal-based power generation and an increase in renewable energy, along with increased supply following the decision to auction additional allowances to finance the REPowerEU plan;
• auctions - the volume of emission allowances increased in 2023, and the primary emission allowance market remains considerably concentrated, with ten participants buying 90% of auctioned volumes in 2023, reflecting a preference by most EU ETS operators to source allowances from financial intermediaries; and
• trading and positions - the vast majority of emission allowance trading in secondary markets takes place through derivatives, reflecting the annual EU ETS compliance cycle where non-financial sector firms hold long positions (for compliance purposes) while banks and investment firms hold short positions.

The report concludes that no significant issue has been identified in the functioning of EU carbon markets. No major policy issues have been identified, although further analysis may be needed in the future as ESMA will continue to monitor carbon market developments.

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