Derivative Instruments in the EU Emissions Trading Scheme — An Early Market Perspective

Abstract

The advent of the EU Emissions Trading Scheme (EU ETS) introduced CO2 emission allowances as a new tradable asset. Market participants now face the question how to manage the risks associated with these emission certificates. In this paper we discuss the market environment in the EU ETS and present the results and implications of an expert survey, which gives a perspective on the development of derivative markets in the EU ETS. Although the EU ETS exhibits some differences, in that it is not only driven by fundamentals but also strongly by regulatory and political factors, we find that the EU ETS develops in a similar fashion to other financial and commodity markets. Moreover, the expert survey gives a clear indication that there are realistic chances for the long-term success of derivatives, not only for futures and forwards but also – to a lesser extent – for more asymmetric, option-like instruments.