Climate change risks and the energy and emission allowances market. An analysis based on EMIR data

The European Union (EU) Green Deal [2021] assigns a significant role to the EU Emissions Trading System (ETS) for the trading of EU Emission Allowances (EUAs) to achieve climate neutrality in the EU by 2050. EUAs are classified as financial instruments under the Markets in Financial Instruments Directive (MiFID II) as of January 2018.

This research on the Euro Area (EA) European Market Infrastructure Regulation (EMIR) Trade Repository (TR) data intends to promote knowledge and better understanding of how the EA commodity derivatives on Energy and Emissions and related clearing practices interact. Climate Change Risks (CCRs), both physical and transitional, have already led to some events with profound consequences for these markets and their participants. One of these events is described and analysed based on the EMIR TR database to the extent possible due to confidentiality issues. The results provide valuable insight into market participants and their clearing behaviour. They also show how cleared markets are concentrating towards a single central counterparty (CCP) (market share). This may pose a challenge in the future with the expected increasing importance of commodities and commodity derivatives markets. Overall, specific disruptions in the commodity derivatives market caused by CCRs could potentially have an impact on the business of a CCP. As CCRs are here to stay, it is important for market participants, as well as authorities and regulators, to take these risks into account.