Informational only
This page explains how the EU carbon market works. It is not financial advice.
The EU Emissions Trading System is the world’s first carbon market, launched in 2005Source 1. Its allowances, known as EUAs, are the asset behind most of the carbon funds that investors hear about. This page explains how allowances are created, sold and traded, and who can hold them. It is part of our invest section.
How the EU ETS works
The EU ETS covers emissions from electricity and heat generation, industrial manufacturing and aviation, about 40% of the EU’s total greenhouse gas emissions. Maritime transport has been included since 2024Source 1. It operates in all EU countries plus Iceland, Liechtenstein and Norway, and has been linked to the Swiss ETS since 2020Source 1.
The system sets a cap on total emissions, expressed in allowances, with one allowance giving the right to emit one tonne of CO₂ equivalentSource 1. Companies must monitor and report their emissions each year and surrender enough allowances to cover them, or face heavy finesSource 1. The cap is reduced every year, and it has been tightened to bring emissions down by 62% by 2030 compared with 2005Source 1.
How allowances are issued
Most allowances are sold at auction, and companies receive some for freeSource 1. From 2021, 57% of the EU ETS cap is in principle to be auctionedSource 2. Most countries auction through the European Energy Exchange (EEX) in Leipzig, which acts as a common auction platformSource 2.
Only certain bidders can take part in auctionsSource 2:
- operators covered by the ETS and their affiliates, and business groupings of operators;
- public bodies that control operators;
- investment firms and credit institutions authorised under EU law;
- other persons authorised under national law.
Small emitters and SMEs covered by the ETS can bid directly after due diligence checks, use an intermediary, or form a business groupingSource 2. All successful bidders pay the same clearing priceSource 2.
How allowances trade
After auction, allowances are traded on the secondary market. ESMA reports that three European venues offer contracts on EUAs: EEX in Germany, ICE Endex in the Netherlands and Nasdaq Oslo in NorwaySource 4.
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| Contract | What it is |
|---|---|
| Daily futures or "spot" | Contracts with a daily expiry |
| Futures | Contracts with various maturities, most trading in the next December expiry |
| Options on futures | The right, but not the obligation, to buy or sell a futures contract |
All contracts have a standard size of 1,000 allowances (1,000 tonnes of CO₂). Source: ESMA final report, March 2022.
Most secondary trading happens through derivatives rather than spot purchases. ESMA found that many compliance companies take long futures positions with investment firms instead of buying allowances on the spot market. Secondary trading averaged €57 billion a month between June and December 2021Source 4. ESMA describes the derivatives market as dominated by compliance companies and other non-financial firms holding long positions to hedge. Investment firms take the opposite, short positions to make a marketSource 4. ESMA also found that investment funds mostly trade futures with less than a year to run, and trade options more than other groupsSource 4.
ESMA also confirms that emission allowances are financial instruments, subject with their derivatives to the full set of EU market abuse rulesSource 4.
Who can hold EU allowances?
Allowances are held in electronic accounts in the Union Registry, which tracks who owns every allowance issuedSource 3. Accounts are opened through a national administrator, who collects and checks supporting documentsSource 3. Former person holding accounts were turned into trading accounts on 1 January 2021Source 3.
Without a registry account, you can get exposure through a broker that offers allowance futures, or through listed funds and exchange-traded commodities. Our guide to carbon credit ETFs explains how those products work, and can you invest in carbon credits? compares the routes.
What moves the allowance price?
Allowance prices depend on supply, which governments set, and on demand from covered companies. ESMA’s review of the market showed how far prices can move. After trading for many years below €10 per tonne, EUAs rose from €8 in January 2018 to €30 in July 2019. They reached €63 in October 2021 and a record €96 in February 2022, before a sharp sell-off took them below €70 in early March 2022Source 4.
Policy decisions are the main thing to watch:
- The cap. It is reduced every year in line with the EU’s climate targetSource 1.
- The Market Stability Reserve, which the Commission has revised for the reformed marketSource 1.
- New schemes. A separate system, ETS2, will cover fuels for buildings and road transport. Its start has been postponed by one year to 1 January 2028Source 5.
Our EU ETS price page tracks the latest auction results and is updated monthly.
EU allowances vs voluntary carbon credits
EU allowances and voluntary carbon credits are different things. An allowance is a permit to emit inside a compliance scheme. A voluntary credit comes from a project that reduces or removes emissions, and is usually bought to be retired. See voluntary vs compliance markets and what is the carbon market? for more. Our guide to carbon registries explains how voluntary credits are tracked and retired.
Be wary of unsolicited offers
The UK’s FCA warns that carbon credits are often sold to investors who are called out of the blue, and that many have reported they can’t sell themSource 6. If someone offers you carbon allowances or credits as an investment, check that they are authorised before you do anything else.
Holding voluntary credits rather than allowances? See how to sell carbon credits.