EU Emissions Annex: Difference between revisions
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{{a|emissions|}}Some thoughts on what emissions trading documents should do, given the idiosyncrasies of the European compliance carbon market. | |||
====It’s entirely dependent on regulation==== | |||
The compliance emissions business is entirely a function of prevailing regulation: an emissions allowance is a regulatory derivative (compare with the voluntary carbon market, which is more like a fashionable opinion derivative). Unlike any other asset, its “issuer” has virtually unlimited ability to change the terms of the market — including by abandoning it altogether — without any sanction. (Central banks can freely restructure their debt, but do it on pain of censure by the bond and credit derivative markets). | |||
Not only can the regulators change the terms of the EU Trading Scheme, but they do. It has structural changes — compliance phases — and the regulators also consider ad hoc changes from time to time, to shut down the inevitable speculative loopholery that comes from a new and inchoate asset class. Crypto is going through he same kind of thing. | |||
This means owning an {{euaprov|Allowance}} is a fraught occupation. And financing an Allowance owned by someone else, is an even more fraught occupation. Hence, the terms on which one buys and sells — and sells ''forward'' — are import to the stability of the market. | |||
Revision as of 10:21, 7 November 2023
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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
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Some thoughts on what emissions trading documents should do, given the idiosyncrasies of the European compliance carbon market.
It’s entirely dependent on regulation
The compliance emissions business is entirely a function of prevailing regulation: an emissions allowance is a regulatory derivative (compare with the voluntary carbon market, which is more like a fashionable opinion derivative). Unlike any other asset, its “issuer” has virtually unlimited ability to change the terms of the market — including by abandoning it altogether — without any sanction. (Central banks can freely restructure their debt, but do it on pain of censure by the bond and credit derivative markets).
Not only can the regulators change the terms of the EU Trading Scheme, but they do. It has structural changes — compliance phases — and the regulators also consider ad hoc changes from time to time, to shut down the inevitable speculative loopholery that comes from a new and inchoate asset class. Crypto is going through he same kind of thing.
This means owning an Allowance is a fraught occupation. And financing an Allowance owned by someone else, is an even more fraught occupation. Hence, the terms on which one buys and sells — and sells forward — are import to the stability of the market.