Homaio brings a new type of demand in the EU ETS market. Investors can buy and hold EUAs, thus contribute to long-term price appreciation of carbon allowances. In turn, this enhances the bloc’s decarbonization efforts.
Between 2005 and 2018, compliance entities and large institutional investors were the only ones to be able to participate in carbon markets. Compliance entities buy European Union allowances to match the CO2 emissions released from their activity, while financial players participate in the European Union Emissions trading scheme for economic profits. The market has been open to this latter group in seek of more stability in the price discovery process (the meeting between demand and supply to assess the carbon allowance price at the time). However, some have been concerned that non-compliance presence can artificially bring about more volatility for EUA prices.
Since the creation of the Homaio platform, yet another type of demand was brought about - that of individual investors. This new type of demand is positive for the EU ETS financials, as buy and hold strategies contribute to long-term price appreciation. In turn, this enhances the bloc’s decarbonization efforts.
Compliance entities (large industrial facilities and power plants) are covered by carbon markets. They buy a sufficient number of carbon allowances to correspond to the volumes of their emissions over the year. So, compliance entities can manage their carbon liabilities, either by reducing emissions or purchasing additional allowances as needed.
Financial actors like institutional investors, hedge funds, and trading firms, also participate in regulated carbon markets. Their goal is to capitalize on investment opportunities. They trade carbon allowances usually as part of their broader investment strategies, seeking to generate returns.
As we have launched the Homaio platform, individual investors now have access to carbon markets. They can purchase and hold EUAs. This enables anyone to become a carbon investor, combining financial returns with a positive environmental impact. Through the Homaio platform, investors can participate in carbon markets. This democratization of carbon markets allows individuals to align their financial goals with environmental engagement, adding up to the European collective effort to fight climate change.
Large financial institutions often share similar investment objectives, strategies, and timeframes. Their analysts typically approach the markets with a uniform mindset, they are only focusing on financial gains. So, they often collectively engage in simultaneous buying or selling of carbon allowances. However, these synchronized flows can contribute to market volatility, as sudden shifts in demand or supply can swiftly impact EUA prices in one way or another .
However, carbon markets cannot be restricted solely to compliance buyers. Cap and trade systems depend on the free market principles of supply and demand for price determination, and relying solely on compliance demand is insufficient. Various institutional and academic studies have confirmed this, as seen below.
The French Centre de recherche sur les stratégies économiques (CRESE) has published a report in 2023 “On the role of financial investors in carbon markets: Insights from commitment reports and carbon literature”. Their main findings are the following:
The European Parliament has published a study in December 2022 on “The role of financial operators in the ETS market and the incidence of their activities in determining the allowances’ prices”. The main findings are as follows:
During a recent speech, the Lord Mayor of London emphasized the significance of granting individual investors access to carbon markets to enhance their effectiveness. Drawing from his extensive experience in compliance carbon markets, he highlighted key points in his address as follows: “Each emissions allowance purchased (...) means one less allowance available for polluting: effectively “tightening the cap” for emissions worldwide and raising the price of carbon, while enabling a participating business to show their customers and competitors they’re serious about tackling climate change. “.
The Ministry of Environment in South Korea has announced the extension of its compliance carbon market to retail investors. The objective is to support and stimulate the market by "having a wider group of participants to trade in the market". This initiative aims to provide retail investors with an opportunity to participate in the country's compliance carbon market. By expanding access to individual investors, South Korea supports the cap-and-trade mechanism’s efforts towards carbon reduction.
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