The graph on the homepage and in our market reports shows daily price movements in the most-traded European Union Allowances (EUAs), the emissions permits issued under the EU Emissions Trading Scheme (EU ETS). The graph also shows the secondary market prices of Certified Emissions Reductions (CERs), the Kyoto Protocol’s leading carbon offset credits.

The EUA prices reported refer to those in futures contracts called carbon financial instruments (CFIs), struck in trade on the European Climate Exchange (ECX). The most traded is the December 2009 forward contract, the second year of the current second phase of the EU ETS coinciding with the first commitment period of the Kyoto Protocol.

CER prices are increasingly important in the EU and global carbon markets. CERs can be substituted for EUAs by European emitters to meet obligations under the EU ETS. The prices shown are are those under forward contracts for December 2009 delivery of CERs issued from Kyoto CDM projects. They have been historically cheaper than EUAs. The graph shows Dec 09 CER prices struck on the ECX.

Futures and forward contracts

Most of the EUA and issued CER trade is in forward and futures contracts, where the price is agreed now but allowances and payment don't change hands until a set date in the future. There is also increasing trade in the 'spot' market (buy now, exchange immediately).

Companies that are covered under the EU ETS, so called ‘compliance’ buyers, buy and sell EUAs in an effort to manage their expected future needs of emissions permits based on their forward production plans of, for example, electricity, steel or cement.

Half or more of the trade in EUAs has up to now been 'over the counter' (OTC) in bilateral forward deals negotiated through brokers which may have varying terms and conditions. But there is growing trade in standardised futures contracts on various electronic energy and emissions exchanges such as the ECX, EEX, Nord Pool and Powernext.

The most-traded forward/futures contracts for EUAs in both the OTC and exchange markets have December maturities, that is, they are for delivery in December of upcoming years. This is because emissions targets are based around calendar years. Companies must reconcile their books for actual emissions and allowances, and demonstrate compliance with their annual target by March 31 of the following year. 

Energy price link

A fundamental influence on the price of EUAs is the cost of energy, particularly the prices of oil, electricity and the 'spread' between coal and gas prices. More demand for power drives up the cost of electricity but also leads to more demand for EUAs to offset higher emissions from fossil fuels burnt to increase that power supply.

The bigger the coal-gas spread gets, the greater the cost to power utilities of converting from coal to gas. Such a switch is the easiest strategy currently available to energy companies for reducing greenhouse emissions - burning gas produces less than half the greenhouse emissions of burning coal.

So the greater the spread, the greater the cost and the less the attractiveness of switching. The less conversion, the more demand there is for EUAs as an alternative to meet emissions reduction targets.

More:
Read the latest market analysis in our EUA market reports and CER market reports

What is "emissions trading"?
What are CERs?
What is the EU Emissions Trading Scheme?
How does the EU Emissions Trading Scheme work?
What are the emissions caps of EU nations?