Template:M summ EUA Annex Transactions

The two major types of transaction in EUAs are Allowance Forward Transactions: an agreement now to buy (and sell) later of some Allowances at a price agreed now that is expected to reflect their price later, as that price is agreed now — and Allowance Option Transactions, at which one has the right to buy (or sell) later some emissions at a price agreed now that is expected to reflect their price later, as that price is agreed now.

Why none of the other weird and wonderful derivatives flows we see in other asset classes? mainly because allowances themelves, are rather boring instruments. They just sit there, then you give them to the government. They don’t pay interest, they can’t merge or demerge, they don’t declare a Record Date, they don’t suddenly blow up.

Almost unusually, there is no credit component instrinsic to a Carbon Allowance. Emissions are like financial instruments in most ways: they are dematerialised, they trade, they don’t have a physical presence, they can’t go off or rust — but they are like commodities, currencies and metals in one peculiar sense: they can’t go bust.