EU watchdog recommends tougher controls in carbon market

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium May 5, 2021. REUTERS/Yves Herman

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LONDON, March 28 (Reuters) – There are no major deficiencies in how the European Union’s market for carbon emissions operates, but tighter controls could improve transparency and monitoring, the EU’s securities watchdog said on Monday.

The market, made up of a primary market of allowances and a secondary market of mainly derivatives based on allowances, puts a price on the carbon dioxide that companies emit and is a key tool for cutting greenhouse gas emissions.

The European Securities and Markets Authority’s (ESMA) final report echoed conclusions from a preliminary assessment last November which followed accusations that hedge funds were speculating in the European Trading System, a market that accounted for 8.1 billion tonnes or 90% of global carbon market value in 2020.

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“The measures proposed would provide more information to market participants, regulators and the public and are intended to contribute to the continued smooth functioning of the market, which plays an important role for the EU’s transition to a low-carbon economy,” ESMA said in a statement.

Long positions in carbon derivatives are mainly held by non-financial entities for hedging purposes, with short positions mainly held by banks and investment firms providing liquidity and carbon financing, the report said.

Positions by investment funds remain limited, and principally held by funds based outside the bloc, it said.

“ESMA has also observed activity from high-frequency trading firms and market makers engaging in algorithmic trading, often from the UK and U.S., that are however only holding small net positions,” it said.

The watchdog proposed more comprehensive “management” of positions in the market for allowance derivatives and closer tracking of transactions.

EU policymakers could go further and consider introducing limits on positions that can be held in carbon derivatives, along with centralised market monitoring of the carbon market at the EU level, it added.

The war in Ukraine has had a major impact on the carbon market, sending allowance prices down by 30%, but they have since recovered, ESMA said.

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Reporting by Huw Jones; Editing by Stephen Coates

Our Standards: The Thomson Reuters Trust Principles.

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