CM Capital Markets


Operation of the European Market in CO2

The operation of the European emission rights market "of which the final aim is to transfer the EU's Kyoto commitments to the major sources of emissions" is simple: at the beginning of the period (2005-2007 and 2008-2012) each national plan assigns a fixed amount of emission rights to all the companies affected by the Directive and, from there on, the agents buy and sell rights to adjust to the real level of emissions, which is verified annually.

EUA: European Emission Rights (European Union Allowances)

EAUs are European permits granted to the industrial installations which participate in the European Union Emissions Trading Scheme (EU ETS). Each industrial installation should have the same number of EUAs as the number of tons of CO2 emissions it creates, at the date of verification.

European Union Allowances (EUAs) are, furthermore, the main currency of the Carbon Dioxide (CO2) European Emissions Trading Scheme.

1 EU allowance = 1 ton CO2e.

In the short term, the position within the market of each of the industrial installations will mainly be determined by the assignment of emission rights it receives. In the medium and long term, however, the industrial installations will have to weigh the cost of reducing emissions against the market price of the emission rights and consequently opt for one of the following three positions in respect of the market:

  • neutral, adjusting production to the level of authorised CO2 emissions
  • seller, reducing production in relation to the assignment of emission rights
  • buyer, maintaining or increasing production.

There are two types of market in the European Trading Scheme:

Spot: is a short term market with day to day transactions. The price and quantity of EUAs is fixed on the date of the transaction but delivery and payment takes place on a nearby future date. CM Capital Markets is a member of the electronic spot exchange for emission rights, BlueNext, since 30th January 2007. It is one of the 5 Spanish members out of a total of 73 members).

ICE Futures: in the futures markets, a certain quantity of carbon credits is traded at today's market price but delivery and payment takes place in the future, usually according to a specific delivery schedule. CM Capital Markets can operate on the ICE Futures trading platform with delivery guaranteed through the London Clearing House.

Other kinds of transactions in the Carbon markets:

Forward Contract: is a contract between two parties whereby they agree to trade a certain article on a future date. It differs from a future in that it is transacted directly between the parties without the presence of a clearing house and can only be implemented at maturity date. All the terms and conditions of delivery and form of payment are specified in a commercial contract.

Options: an option provides the right to buy or sell a futures contract.

Repo: is a specialised transaction based on the purchase and sale of EUAs, in which the purchaser enters the commitment to transfer the EUAs purchased back to the initial seller in a certain period of time in previously agreed terms and conditions.

Swap: the transaction called a EUAs-CERs swap is a possibility offered by the regulatory framework of Law 1/2005 concerning the Trading of Emissions and the National Allocation Plan 2008-2012. Basically, it consists of selling a percentage of EUAs (European Union Allowances) and buying the same percentage of CERs (Certified Emission Reductions) to take advantage of the spread on the prices to make a profit.


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