The European Union’s Emissions Trading System (ETS) does not currently have any major deficiencies in its functioning, the European Securities and Markets Authority (ESMA) concluded in a report published on Monday 28 March.
“Overall, ESMA considers that the data analysis has not unearthed any major abnormality or fundamental issue in the functioning of the EU carbon market from a financial supervisory perspective” the report states, confirming ESMA’s preliminary analysis issued on 18 November 2021 (see EUROPE 12837/9).
Commissioned by the European Commission at the request of some Member States who claim that speculation in the carbon market is contributing to higher energy prices, ESMA’s analysis aims to provide a factual basis for determining whether additional regulatory measures relating to the ETS are needed.
In particular, it shows that the respective shares of EU carbon market positions held by the different players have remained stable over time, even though the total number of position holders has increased.
According to the report, long positions are mainly held by non-financial entities, while short positions are mainly held by banks and investment companies.
Moreover, although the number of investment funds participating in this market is high, the volumes traded and the positions held (mainly by third country funds) remain low compared to other market participants.
The European Parliament’s rapporteur on the review of the ETS, Peter Liese (EPP, Germany), believes that this report shows that “radical reforms of the market mechanisms in the ETS are not necessary”.
Room for improvement
However, ESMA believes that it would be useful to improve transparency and market surveillance, particularly in view of the emergence of new participants with ‘buy-and-hold’ strategies.
These “may lead to a reduction in the supply of physical emission allowances available for trading, even though the available evidence suggests that their impact is only limited so far”, the report says.
The analysis also reveals significant trading activity by ‘high-frequency trading firms’ and market makers engaging in ‘algorithmic trading’, often based in the UK and the US, “that are however only holding small net positions”.
While ESMA does not consider the presence of these entities in the market to be a concern per se, it considers that “potential additional measures to improve the visibility of these activities in supervisory data might be needed”.
The report also highlights the complexity of assembling several very large datasets based on different pieces of EU legislation and from multiple sources.
This creates difficulties that make it very hard to obtain a clear picture of the participants in the trades and their origins, explains ESMA.
Mr Liese therefore stressed the importance of “further increasing transparency to avoid manipulation and limit speculation” and recalled his proposals on this subject (see EUROPE 12892/21).
See the report: https://aeur.eu/f/109 (Original version in French by Damien Genicot)