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Carbon is becoming a major commodity and European Union Allowances (EUAs) are the financial assets in a booming market. The European Union Emissions Trading Scheme (EU ETS) is rapidly expanding in scale and gaining crucial importance across major financial exchanges and the wider macroeconomy.
Carbon is becoming a major commodity and European Union Allowances (EUAs) are the financial assets in a booming market. The European Union Emissions Trading Scheme (EU ETS) is rapidly expanding in scale and gaining crucial importance across major financial exchanges and the wider macroeconomy.
Carbon markets are a vast trading arena, with an annual trading volume approaching one trillion euros. Among these, the EU ETS is the largest contributor, by far. Recently, the total trading volume has grown significantly. For instance, in 2023, the trading volume reached €881 billion. Of this, €770 billion (about 87%) was from EUAs, while €111 billion (about 13%) came from other types of trades. This represents a growth of 588% for overall carbon markets and 553% for the EU ETS. This strong trading activity highlights the market's liquidity and efficiency, allowing investors to buy and sell whenever they want to do so.
The EU ETS includes a broad spectrum of market participants, particularly since EUAs were classified as financial assets under the MiFID II regulation in 2018. This change brought financial institutions, and investment firms into the fold, alongside compliance entities. In addition to the approximately 11,000 installation operators involved in trading, there are now numerous trading desks and brokers that contribute to the market's liquidity and stability. The market supports daily trading of about €3 billion in EUAs for spot contracts, and roughly ten times that amount for futures contracts.
The adoption of carbon pricing schemes is growing globally, leading to increased correlations between assets, the link between EUAs and UKAs is a great example. This interconnectedness adds complexity to the EU ETS as a financial market and improves the price discovery, also. Additionally, the introduction of the CBAM has attracted more participants to EUA trades, further boosting market involvement. Looking ahead, potential links between the EU ETS and other international markets could significantly expand the scale and liquidity of the carbon financial system.
The EU ETS has evolved into a central tool for various aspects of the broader economy due to its size as a financial market and its role as a policy instrument. The increasing price of EUAs, driven by the expanding market size and sophistication mentioned above, has significantly boosted the funds collected from their sale. In 2023, the EU ETS generated €43.6 billion from EUAs, representing a significant 1287% increase over the past decade. The funds are redistributed to Member States, supporting national climate policies as well as social, modernization, and innovation initiatives - the EU ETS contributes to the broader macroeconomic health and investment.
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