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Why are there so many different prices in the European Carbon Allowances (EUAs) world? There are the EU ETS daily auctions and the secondary market, there are also several market exchanges, then comes the difference between spot and futures contracts... We are mapping it all for you.
When looking online for the EUA price ( the live market price of European Carbon Allowance (EUAs) from the EU Emissions Trading Scheme (EU ETS)), things can get a little confusing. We’ve made it simple to view the live market price on our dedicated page to EUAs.
Today's EUA price might seem challenging to obtain at first glance.
We’re breaking it all down below.
The primary market is when the European Union, through the European Commission, issues new allowances on the market. This happens through an auction process, hosted on the European Energy Exchange (EEX) platform.
EEX is an energy and commodities exchange platform based in Germany. It was appointed by the European Commission as the common auction platform for the EU Emissions Trading Scheme. Auctioning is the way allowances are brought to the market. An Auction Calendar informs market participants the days during which auctions are held and the number of allowances being auctioned. At the end of the auction, the price at which the auction cleared is published on the EEX website.
Market participants can also trade EUAs between themselves. These trades can happen over the counter or through an organized exchange. Most of the trades happen through an exchange - this is typically the price one looks for. However, there are multiple exchanges that can sometimes display tiny differences in EU ETS prices of carbon. This can sometimes be used for speculation. Arbitrage traders look for such differences and try to benefit from them by buying EUAs at the lowest price that they find and simultaneously sell the same amounts at a higher price. This behavior eventually ends up correcting the price difference.
There are two main platforms in the EU ETS secondary market: Intercontinental Exchange (ICE) and European Energy Exchange (EEX). As we’ve seen above, EEX is also the auction platform for the primary market.
European Allowances are mainly traded through these exchanges. However, there are also loads of other financial contracts that are related to European Allowances, and that are also traded on these exchanges: mainly, the futures contracts.
Like in every commodity market, European Allowances can be traded “physically” at their spot price, or through a derivative contract.
A spot, or physical trade, is when the asset itself - in this case, the carbon allowance - is traded. Or a ton of wheat, or soy, or corn. Or a gallon of oil. However, many market participants don’t want to have the immediate physical delivery of the asset. They simply want exposure to the price variation, or to settle on a future delivery price ahead of time. For this reason, a large number of trades don’t actually move physical assets: they are simply binding contracts whose value is derived from the contract. They are called: “derivatives”.
One of the most popular derivative contracts on the EUA market is the December contract of the current year. That means that, regardless of the date the contract is purchased, the delivery of allowances will not happen until December of that year, at the initially agreed purchase price. More often than not, the delivery doesn’t ever happen: Comes December, the contract is “rolled forward” to the next year or settled for cash.
Purchasing a European Allowance “spot” and purchasing a derivative contract are actually two very different things. The difference in the contracts structure and expiry dates explains the difference in prices.
At Homaio, we like to keep things simple and intuitive, so we follow the spot price. That means that we care about the price of an actual allowance - the current CO2 price at which you can purchase it “right now”, or “on the spot”. Unfortunately, things always have to be a little bit more complex than we’d like in financial markets. This “spot price” is what is encountered as the “daily future” contract. It’s very misleading.
It is called the daily future contract because the delivery is made at the end of the day. So not literally “on the spot”. You can find the current, “live” market price (EU ETS allowance price at the moment) of European carbon allowances (EUAs) on our dedicated asset page here.
Often times, when looking online, you will find other contracts, namely the “front month future” (the futures contract with the closest expiration date) or the end of the year contract. But these trade at different price points than the spot. And, as we’ve seen above, it’s not technically the EUA price, but the price of a contractual obligation whose value is derived from EUAs.
On the European Carbon Allowance market, Futures trade in “contango”. That’s a fancy term to say that the price of futures is above the price of the spot contracts, and the further away the maturity, the greater the premium.
Below is an example of the term structure of EUA Futures compared to the spot price (dark blue in lower left corner) at the date of writing (Feb 13th 2024).
At the expiry date, the spot price and the futures price are the same. That means that when the Feb24 Futures contract expires at the end of the month, it will have the same price as the spot price at that date. So spot and future prices converge over time. That means that purchasing spot contracts has a better performance than futures contracts in contango markets: they start lower and end up at the same place.
That’s why we say that Futures have a “performance drag”. And this is why it is a good idea to always verify which contract you’re considering when looking up EUA prices.
Sources
European Energy Exchange, 2024. EU ETS Auctions
The Economic Times, 2023. What is expiry date?
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