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European Union Emissions Trading Scheme Background

Since 2005, the European Union Emissions Trading Scheme (EU ETS) has helped lower greenhouse gas emissions throughout Europe.

Cap & Trade

The EU ETS was launched in 2005 in order to help tackle climate change. It sets a Europe-wide annual cap on CO2 emissions which reduces each year. From 2005-2019, the reduction goal was approximately 1.5%. In 2020 the reduction was set at 1.74%, and from 2021 onward it is set at 2.2%. Companies under the programme may trade allowances known as EUAs, each equivalent to 1 tonne of CO2, setting a price per tonne for carbon.

EUA Auctions

EEX hosts primary EUA auctions on behalf of EU member states, as well as a liquid secondary market incuding: spot, fututres and options contracts.

Key Dates

  • 2005
    Phase 1
    2005-2007: Pilot Phase
  • 2007
    Phase 2
    2007-2012: Cap lowered by 6.5%
  • 2013
    Phase 3
    2013-2020: Cap lowered by 20% (goal achieved prior to 2020)
  • 2021
    Phase 4
    2021-2030: Aim to increase pace of emissions cuts to 43% compared to 1990

Market Players

Energy Sector

Industrial Sector

Utility Companies

Aviation Sector

Financials

Banks, trading houses, hedge funds, trading firms

Quick Facts

  • 1 EUA is a certificate to emit 1 tonne of CO2 or CO2 equivalent
  • The EU ETS covers approximately 11,000 energy intensive installations in the 28 EU Member states plus Iceland, Liechtenstein and Norway
  • Sectors included: Energy intensive sectors including oil refineries, steel works and iron production, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals
  • The EU ETS covers approximately 43% of the carbon footprint in Europe
  • Ultimate aim is to reduce GHG emissions by 100% by 2050 compared to 1990

Historical EUA Price Chart

Supporting Prices: Backloading and Market Stability Reserve (MSR)

Backloading was the first step to tackle the large surplus of EUAs – it delayed the supply of EUAs into the market in the short term by postponing some auctions.

The MSR supports prices by removing surplus EUAs from the market. Beginning on 1st January 2019, it reduces new supply by cancelling government auctions, until the calculated surplus falls below a specified threshold.

Primary and Secondary Market

During Phase III of the scheme (2012-2020), 57% of the total amount of allowances was auctioned, while the remaining allowances were allocated to certain industries.

2018’s secondary market volume exceeded 13 billion tonnes as either spot, futures or options contracts.

EU Aviation Allowances

EUAAs – Airlines flying into or out of Europe may comply with the EU ETS using EU Aviation Allowances (EUAAs) or EUAs.

CORSIA – Carbon Offsetting and Reduction Scheme for International Aviation

  • Global market based measure to offset aviation emissions growth
  • Phase I: 2021-2027 – Voluntary 85% coverage
  • Phase II: 2027 – Mandatory ~99.5% coverage

Key Benefits of Trading on EEX

  • Emissions Spot Market Margining
      • No requirement for an upfront initial margin payment
      • Margin offsets are available between Carbon, European Power and Gas Markets
  • EUA as Colleterial (Margin Credit) – EUAs can be used to reduce the initial margin requirements for:
      • EUA Spot Market (unrestricted number of certificates used)
      • EUA Derivatives Market (up to a covered net short-position in EUA futures
  • Expiry dates & delivery times of EEX contracts are aligned with other exchanges
      • In addition: T+0 delivery possible vial the same-day transfer service, regular T+1 request for transfer can be pre-dated to current day
  • Most competitive fee structure

 

  • Strong customer focus and personal assistance through account managers in London, Leipzig, Paris, Milan, Madrid, Chicago, Oslo.

Key Benefits of Trading on EEX

  • Emissions Spot Market Margining
      • No requirement for an upfront initial margin payment
      • Margin offsets are available between Carbon, European Power and Gas Markets
  • EUA as Colleterial (Margin Credit) – EUAs can be used to reduce the initial margin requirements for:
      • EUA Spot Market (unrestricted number of certificates used)
      • EUA Derivatives Market (up to a covered net short-position in EUA futures
  • Expiry dates & delivery times of EEX contracts are aligned with other exchanges
      • In addition: T+0 delivery possible vial the same-day transfer service, regular T+1 request for transfer can be pre-dated to current day
  • Most competitive fee structure

 

  • Strong customer focus and personal assistance through account managers in London, Leipzig, Paris, Milan, Madrid, Chicago, Oslo.

ADDITIONAL RESOURCES

PDF

EU ETS Market Background

Webpage

NA Carbon Contract
and Exchange Info

PDF

Key Benefits of Trading on EEX

Webpage

NA Carbon Contracts
on Nodal Exchange