Carbon Markets

There are a number of carbon emissions trading markets established around the world, the better known markets are; the EU Emissions Trading Scheme (EU ETS), the Regional Greenhouse Gas Initiative (RGGI) and the California Emissions Trading Scheme.

Other less well-known emissions trading markets are active in New Zealand, South Korea, Kazakhstan and the 7 regional pilot schemes in China. China plans to implement a national scheme by the end of 2016 which will dwarf even the world's largest ETS in Europe. Currently most of carbon trading liquidity resides in Europe where European Union Allowances (EUAs) and Certified Emissions Reductions (CERs) are used annually for compliance by installations covered by the EU ETS. Carbon allowances are held in digital form in ‘registry accounts'.

Due to the low storage costs (essentially annual registry maintenance fees), high volatility and excellent liquidity EUAs are an attractive commodity to trade. Aside from installations with compliance obligations (be they small factories or large multinational electricity generating utilities) typical carbon market participants include banks, hedge funds, pension funds, intermediaries (such as broker dealers) and individual investors. More mature carbon markets see the majority of trading executed via futures contracts on exchanges.

The benefit of exchange trading is that contracts are completely standardised and credit exposure is concentrated in one place. It also has the benefit of concentrating the available liquidity in a small number of market places which aids transparency and in theory drives down transaction costs. In the early stages of any market OTC trading tends to dominate but even in the most mature carbon market many market participants do not have or do not want to incur the cost of access to exchanges.