Confidential

Overview of EUA Trading
October 2023
CF Partners
ITOCHU Corporation1【1】EU-ETS as Compliance Market
The EU-ETS works on the 'cap and trade' principle. A cap is set on the total amount of GHGs that canbe emitted by the operators covered by the system. The cap is reduced over time so that total
emissions fall. Within the cap, operators buy or receive emissions allowances (free allocation), which
they can trade with one another as needed.

Compliance Market

Voluntary Market

 Obligation to comply with a regulatory act Offset GHG emissions voluntary Cap and trade principle Baseline & credit principle

 Companies with low emissions can sell its
extra allowances to others Companies can generate carbon credits byprojects like avoidance/removal beyond abusiness-as-usual scenario

EU-ETS2【2】Difference between Two Principles
Carbon markets exist both under compliance and voluntary programs.
①Cap & Trade Principle②Baseline & Credit Principle

CreditEmission

Emission outlook

Allowance

Emission

Emission

Shortage

Surplus

Allowance

Company A:
Company B:
Sales of Allowance Purchase of Allowancee.g. Switching to renewable energy,afforestation

Compliance markets

Voluntary markets3【3】EU-ETS Development• EU-ETS initially began in 2005 covering power generation, industry and manufacturing. It then
expanded to include aviation in 2012.
• Operates in all EU countries plus Iceland, Liechtenstein and Norway, and limits emissions fromaround 10,000 installations.
• EU-ETS covers around 40% of the EU's greenhouse gas emissions.
Phase 1
(2005-07)

Phase 2
(2008-12)

Phase 3(2013-20)

Phase 4(2021-30)

Power Generation, Industry and Manufacturing
Production of nitric acid. Expanded to include Iceland, Liechtenstein and Norway
Aviation-flights within EUAviation-flights within EU and to Switzerland & UK
Maritime-within and to EU waters
Buildings &Transport4【4】EU-ETS Supply• An EU Allowance (EUA) gives an operator the right to emit 1t-CO2e.
• There are 3 ways to get EUAs as below.

Primary Auctions
 Since Phase 3, auctions of
EUAs have increased.
 European Energy Exchange
appointed to manage this.
 Stringent requirements toparticipate in auctionsmainly for large buyers.
(>1M per year)

Free Allocation
 Industry receives a share of
their EUAs for free, but theamount has significantlyreduced.

Secondary Market
 Main route to market for
operators to buy EUAs forcompliance.

 Sectors at risk of carbon
leakage still receive 100% but
this will reduce with CBAM.

 Includes standardized
exchange traded products
and Over-The-Counter (OTC)
bespoke trades.

 Airlines free allocation removed
by 2026.

 Trading firms (e.g banks,hedge funds) also active.

 NO free allocation forshipping.

5【5】EU-ETS Registry• The Union Registry is an online database that records the holding and surrendering of allowances
for operators as well as the transfer of allowances between accounts.
• A single EU registry but each Member State manages the account opening procedure.
• There are two main types of registry account.

Operator Holding Account
Account given to an eligible EU-ETS
operator to receive, hold, transfer andsurrender EUAs.

Trading Account
Account for any company to hold andtransfer EUAs.

 Opening a Registry Account takes time - the process requires a number of identity checks anddocuments.
 The assignment Member State authority list for ship owners is expected from February 2024.
6【6-1】EU-ETS Market• After each compliance year(1st Jan-31st Dec), an operator must surrender enough EUAs to cover
fully its emissions in that year.
• The deadline to surrender EUAs will be the 30 th September from 2024.The penalty for noncompliance is €100 per tCO2e plus the liability to surrender EUAs.
• New contracts on ICE - August Expiry for EUA Futures and Options.
• High liquidity and December future contract.

7【6-2】EU-ETS Market• The EU Carbon market has changed dramatically in the last 2 years both in terms of EUA prices,market volatility and active market participants. We have seen a tripling of prices, from €30 in 2021
to highs above €100 per EUA and an increase in market volatility, as both fundamental andtechnical drivers impact the market.
• Daily EUA price fluctuations are influenced by weather, renewable availability, coal to gas fuelswitching and wider energy markets. In addition, an increasing number of investors and funds
looking at carbon has put an added focus on technical trading indicators and also exposed the EUA
price to wider macro-economic market impacts.
EU Emission Allowance Nearest-December
110
100

Price (EUR/t)

90
80
70
60
50
40
30
20
04/01/2021

14/04/2021

23/07/2021

31/10/2021

08/02/2022

19/05/2022

27/08/2022

05/12/2022

15/03/2023

23/06/2023

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【7】ContactPlaceCompany

PIC

Contact

Tokyo

ITOCHU Corporation

Keita Miura

toklw@itochu.co.jp

London

CF Partners

Sumit Sharma
Miles Tanaka

s.sharma@cf-partners.com
m.tanaka@cf-partners.com

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