Financial firms dominate market for carbon allowances, regulator finds.

Financial firms are driving activity on European carbon markets, which saw the price of carbon emissions decline, as the volume of allowances that were issued rose and trading activity increased, according to a new report.

On Wednesday, the European Securities and Markets Authority (ESMA) published its second annual report on the emissions trading system, which found that the market — that aims to facilitate the flow of carbon allowances to firms that have obligations under climate policies to control their emissions — is working as intended.

The regulator reported that it didn’t uncover “any significant issue in the integrity or transparency” of the markets — and its analysis of trading and derivatives positions found that “the market accommodates different acquisition strategies, reflecting the different needs and capabilities of participants.”

As for the market metrics, the report noted that the annual average price of emission allowances declined by 22% in 2024, “driven by weak demand from continued power sector decarbonization and higher auction volumes.”

During the year, the volume of allowances auctioned on the market was up 15%, the report said, and all of the auctions were oversubscribed, although the ratio fell from over 200% to 172%.

Trading activity increased by 35% in 2024, the report said, with 13.7 billion tonnes of CO2-equivalent emissions (tCO2) traded in 4.7 million transactions.

“Market growth was primarily driven by exchange trading, while over-the-counter (OTC) trading activity remained stable,” it noted. Investment firms and credit institutions dominated both exchange and OTC markets, as they accounted for 63% of total trading volumes, up from 56% in 2023, ESMA further noted.

Derivatives were also a key part of the market, the report said, by enabling polluters with net long positions to acquire allowances from financial intermediaries that had net short positions.

“Central to this are futures contracts, which accounted for three-quarters of volumes traded in 2024,” it said.

Investment firms and credit institutions accounted for 51% of derivative positions, while investment funds had another 6%, ESMA noted.