The Carbon Market



The EU carbon market is characterised by trades in 2 different commodities - EU Allowances (EUAs) and International Credits (CERs).

EU Allowances - EUAs

Article 3(a) of the EU ETS Directive defines an EU Allowance as "an allowance to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable in accordance with the provisions of this Directive". 

EU Allowances are either issued directly to operators, sold through auctions or traded on the secondary market.

International Credits - CERs

The EU ETS Directive also allows installations to 'exchange' International Credits - Certified Emission Reductions (CERs)* - for allowances in order to comply with their a portion of their target up to a limit set by the European Commission (EC) for Phase 3 (2013-2020).

Operators can check any remaining CER 'exchange' limit by logging into your EU ETS Registry Account and clicking on the "Holdings" tab - check the Remaining Entitlement in the ICH table at the bottom of the screen

Wholesale Market

  • Dominated by forward trades of EUAs involving Energy, Large Industrial, Financial and Commodity Trading companies
  • The EUA December forward contract for this year is the most liquid and sets the benchmark price
  • Spot, Forward, Swap and Option contracts all traded with forward contracts available up to Dec 2020

  • Counterparties mainly trade through exchanges

Industrial "Compliance" Market

  • Enter the market periodically to manage specific EU ETS needs - purchase allowance shortfalls or sell surpluses
  • Mainly use the "Over the Counter" or OTC market - allows for bespoke volumes and straightforward market access
  • Use Spot transactions - simplified contract and settlement
  • Purchase CERs for EUA exchange to reduce compliance cost or generate revenue