Who participates in the EU ETS financial market?

The EU emissions trading scheme (EU ETS) has evolved to be a massive liquid trading marketplace. It welcomes a variety of participants with different investment horizons and strategies.

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The participants in the EU ETS secondary market 

The most significant activity in the EU ETS happens in the secondary market, where carbon allowances are traded after their initial issuance by regulators.

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Early restrictions and compliance obligations

From 2005 to 2018, the EU ETS had limiting rules on who could purchase and trade EU Allowances (EUAs). Only industries and power producers with compliance obligations were allowed to participate. This policy ensured that only entities directly responsible for decarbonization efforts were involved in trading allowances, keeping the scheme's focus as a policy tool.

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The participation reform in 2018: MiFid 2

In 2018, the introduction of the Markets in Financial Instruments Directive II (MiFID II) brought significant changes to the EU ETS. By classifying carbon allowances as financial instruments under European law, MiFID II expanded the pool of market participants. The directive aimed to improve transparency, market efficiency, and investor protection, leading to the inclusion of:

• Investment firms and credit institutions
• Investment funds
• Other financial institutions
• Commercial organizations
• Operators with compliance requirements

This expansion made the market more liquid and sophisticated, leading to an improved trading environment.

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The participants in the EU ETS primary market 

The primary market accounts for a small share of trades in the EU ETS. In 2023, each daily auction typically saw around 20 bidders, with about 15 winning bids per auction, and approximately 2.4 million allowances issued daily.

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Eligibility for EU ETS auctions

To participate in the daily EU ETS auctions, eligible bidders include:

• ETS operators, including those in aviation
• Business groupings acting as agents for ETS operators
• Public bodies or state-owned entities that control ETS operators
• Investment firms and credit institutions authorized under EU law, able to bid for themselves or on behalf of clients, provided they have the necessary national authorization

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Expansion to individual investors in 2024

Before 2024, individual investors could only participate in the EU ETS indirectly by buying market price trackers like ETFs, which offered exposure to EU ETS futures but did not allow for purchasing physical spot EUAs. Starting in 2024, individual investors can now directly buy carbon allowances through Homaio's investing platform. Market participation is expanding due to this new type of demand, and its variety is also increasing thanks to the buy-and-hold investment strategy of these investors.

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