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Financials threaten to undermine the functioning of emissions markets

Abstract

The participation of financial actors is a key design issue in all emissions allowance markets. Although financials perform several necessary market functions, excessive speculation may undermine market functioning. The potential for harm is gaining prominence as tighter emission limits increasingly attract speculators and investors into allowance markets worldwide. However, adequate warning systems and tools to appraise the beneficial and detrimental facets of financial trading are wanting. We develop preliminary elements of a diagnostic toolbox to assess the scale and impacts of speculation and apply it to the EU emissions trading system. This Perspective seeks to inform current policy debates and invites further research to establish speculation-monitoring systems for allowance markets.

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Fig. 1: The recent advent of financials.
Fig. 2: Disentangling different futures trading purposes.
Fig. 3: Stylized decomposition of allowances in the market.
Fig. 4: Detecting excessive speculation.

Data availability

Weekly Commitment of Traders reports used in Figs. 1, 2 and 4a are provided free of charge by trading venues (ICE and EEX) and centrally re-published by ESMA at the following links: ICE, https://www.theice.com/marketdata/reports/234; EEX, https://www.eex.com/en/markets/mifid-ii-mifir; ESMA: https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_coder58.

Daily trading data (price, traded volume and open interest per futures contract) used in Figs. 1 and 4b and in the Box 1 graphics are proprietary and only available on a paid subscription basis from trading venues (ICE and EEX).

Code availability

This study does not use custom code or mathematical algorithm that is deemed central to its conclusions.

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Acknowledgements

For comments and discussions, the authors would like to thank E. Cantillon, B. Doda, M. Kosch, A. Levesque, F. Müsgens, J. Richstein and L. Taschini, as well as participants at the FSR Climate Annual Conference 2020 and EAERE 2022. The authors would also like to thank ESMA and EEX for helpful exchanges and EEX for providing data. This Perspective is neither commissioned by, nor does it reflect the views and opinions of, Électricité de France. All errors and views expressed in this Perspective are solely those of the authors. Funding from the German Federal Ministry of Education and Research under the Kopernikus-Projekt Ariadne (FKZ 03SFK5A) is gratefully acknowledged.

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S.Q. and M.P. conceptualized the project, developed the methodology, performed visualization and wrote the manuscript. S.Q. curated and analysed the data.

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Correspondence to Simon Quemin.

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Nature Climate Change thanks Roweno J.R.K. Heijmans, Simone Maxand and Sam Van den plas for their contribution to the peer review of this work.

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Quemin, S., Pahle, M. Financials threaten to undermine the functioning of emissions markets. Nat. Clim. Chang. 13, 22–31 (2023). https://doi.org/10.1038/s41558-022-01560-w

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