ESMA shares Final Report on the EU Carbon Market, and it comes with policy recommendations.
Yesterday, The European Securities and Market Authority (ESMA) published their final report on the European Union Carbon Market. Key findings from the ESMA website note that while there weren’t any major deficiencies found, there are a few policy recommendations that to no surprise, end up centralized around transparency and monitoring. We’re seeing a trend around transparency and monitoring across the globe when it comes to emissions. This report acts as an,
“In-depth analysis of the trading of emission allowances (EUA) and emission allowance derivatives based on data gathered from different sources, including EMIR reporting, MiFIR transaction reporting, MiFID II daily and weekly position reports, auction data and data obtained from the EU Registry.”
What does this mean?
In summary, the EU operates under the ETS otherwise known as The European Emissions Trading System. This system implemented in 2005, essentially sets a limit on the total amount of greenhouse gasses that entities within this system are allowed to emit each year. The idea is that over time this limit will decrease and act as an invaluable tool to lowering the emissions by the EU overall. According to an article by the European Commission,
“Since the EU ETS was introduced in 2005, emissions have been cut by 42.8% in the main sectors covered: power and heat generation and energy-intensive industrial installations. As a market-based system, the ETS ensures that emission reductions take place where it is cheapest to do so. As a result, most emission reductions until now have taken place in the power sector” (2021, European Commission).
This trading system allows entities within the system to buy, sell, and trade their emissions allowances as needed, assuming that at the end of the year and during reporting each entity will have enough “credits” or allowance left to cover all of their own emissions. This trading system was the catalyst for this new report by ESMA.
“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 tasked it to analyse, by early 2022, the trading of emission allowances” (2022, ESMA).
Policy recommendations and considerations.
The main recommendations for policy changes all hinge on one item; transparency. The policies summarized here, would help to provide more information to those participating in the market, the regulators, and the public. This includes changes to reporting, controls, tracking transactions, and even proving the ESMA with access to transactions. This push for increased transparency, is believed to be a key item in the EU’s transition to being a low-carbon economy.
The ESMA outlined two main considerations or possible paths forward. These considerations are coupled with arguments both for and against action. Those considerations, are as follows:
The introduction of position limits on carbon derivatives – cited in public discussions as a potential addition to the legislative framework
A centralized market monitoring of the carbon market at EU level, in line with the ACER-style monitoring for gas and power.
Going forward.
In terms of what to expect, at this point the Council of the EU and the European Parliament will determine what policy changes or regulations - if any - are necessary to implement moving forward. ESMA has already shared it’s willingness to help with any implementation measures or data collection that may be necessary.
Sources:
ESMA. “ESMA Publishes Its Final Report on the EU Carbon Market.” ESMA Publishes Its Final Report on the EU Carbon Market, ESMA, 28 Mar. 2022, https://www.esma.europa.eu/press-news/esma-news/esma-publishes-its-final-report-eu-carbon-market.
McPhie, Tim, and Lynn Rietdorf. “Questions and Answers - Emissions Trading – Putting a Price on Carbon .” European Commission, European Commission, 14 July 2021, https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3542.
ESMA. “Final Report - Emission Allowances and Associated Derivatives.” ESMA - European Securities and Markets Authority , ESMA, 28 Mar. 2022, https://www.esma.europa.eu/sites/default/files/library/esma70-445-38_final_report_on_emission_allowances_and_associated_derivatives.pdf.
