Influence of market structures and market regulation on the carbon market

Emissions Trading Systems (ETSs) are common instruments in the fight against global climate change to reduce greenhouse gas emissions. ETSs aim to create a scarcity price by limiting the quantity of greenhouse gas allowances, thereby generating a change in consumer behaviour, production, and investment decisions. This ultimately increases the attractiveness of low-emission products and services and drives innovation. For an ETS to achieve emission reductions at the lowest possible price, a free market is required that provides uniform and undistorted price signals to all economic decision-makers and market participants.

Experience with the European ETS has shown that loopholes in carbon market regulation and market surveillance have opened the door to fraud and market abuse. Market abuse can lead to distorted price signals and can cause companies to lose confidence in the market, thereby reducing its efficiency. The question of the interaction between market-based carbon pricing mechanisms and sectoral regulation is particularly relevant for the energy sector.

This project aims to identify and conceptually assess the impact of market structures and regulations on carbon markets and to investigate the interdependencies between carbon and energy markets. adelphi together with Öko-Institut e.V. and Züricher Hochschule für Angewandte Wissenschaften (ZHAW) identifies drivers and barriers for the development of trading of emission allowances in the primary and secondary market with regard to liquidity, price formation and price volatility. By selecting five regional case studies on market structures and market regulation within the ETSs of California, China, the EU, Mexico and South Korea and through the organisation of workshops and webinars, adelphi and the consortium helps carrying out knowledge sharing and capacity building activities regarding the influence of different market structures and regulations on the carbon market.