Investment Idea

The market for carbon emission rights

05/11/2021 | 4 min read

Climate change, mainly caused by greenhouse gases, is keeping the world on its toes. One of the most important steps to curb global warming is the limitation of CO2 emissions and the trading of emission rights.

Climate change is irreversibly damaging our planet. Extreme weather events, drinking water shortages, world hunger and the extinction of animal and plant species are just some of the devastating consequences caused by global warming, and rapid action is needed. For example, with the 2015 Paris Climate Agreement, a goal was to cap the global temperature increase at 2 degrees Celsius.

Greenhouse gas emissions are the main cause of climate change, and in order to achieve the ambitious goal set in Paris, it is absolutely essential to reduce them substantially as soon as possible. The long-term goal is to achieve zero emissions in a time frame between 2045 and 2060.

Emissions rights: What are they?

CO2 emission rights, also called EUAs (European Union Allowances), are a tool with which to try to reduce emissions of CO2 or other greenhouse gases. They give companies the right to release one ton of CO2 or an equivalent greenhouse gas for each certificate they hold. In Europe, around half of all greenhouse gas emissions have to be regulated by means of such rights. Companies in energy-intensive sectors, such as energy companies, industrial metals, cement, and paper manufacturers are included and cannot emit CO2 or other greenhouse gases without having the necessary number of emission rights.

Cap and trade: emissions trading

Companies that exceed their emissions cap can purchase additional emission allowances. On the other hand, companies that are more climate-conscious and therefore do not need to use all of their emission allowances can sell those in excess. CO2 emissions therefore have a price. In the EU, the European Commission limits the total amount of emission rights by means of a cap which is reduced year by year. The system is called "cap and trade" and is designed to make a significant contribution to achieving the goals of the Paris Climate Agreement. This is because emissions trading is intended to motivate companies to invest in sustainable production processes. The more expensive the emission rights, the greater the incentive to make environmentally sustainable investments. However, if emission permits were to become too expensive, the EU companies involved would no longer be competitive compared to the global competitors not affected by these restrictions; therefore, there is concern that these companies may relocate to unregulated foreign countries. For this very reason, a certain number of emission allowances will be allocated for free, but all others will be traded. Furthermore, in order to ensure greater equality, in the future, the products of the companies not involved will be subject to an import tax. In the future, other measures aimed at the stability of this market will be implemented, so that it cannot be assumed with certainty that the planned annual limitation of allowances will necessarily lead to an increase in the price of emission rights. However, regulation through emission rights has not yet been extended to all "CO2 offenders". In fact, there are still sectors and companies that are excluded. As long as this remains the case, there will be no strong financial incentive to take measures to reduce CO2 emissions. In order to meet climate targets, however, these companies should be included as soon as possible.


Evolution of CO2 emission rights

In the past, the prices of CO2 emission rights were much lower than today - about 5 euros per certificate. Therefore, it was very cheap for large companies to buy these rights and, as a result, their efforts to keep emissions low were very modest.

The situation now is very different. Climate policy has been tightened considerably and allowances have been reduced more and more in order to meet the climate target. In December last year, the European Union set much more ambitious climate targets: greenhouse gas emissions will have to be reduced by 55 percent by 2030, instead of the previous 40 percent, again relative to 1990 figures. In addition, annual cap reductions are likely to be increased further.

CO2 emission rights have become considerably more expensive as a result, partly due to political interventions, and reached an all-time high of around 65 euros on October 5 this year. With higher prices, emission rights could finally lead to the achievement of the goal of making energy production via fossil fuels less cost-effective and thus incentivizing the use of alternative energy sources.


Emissions trading in the EU and Switzerland

Emissions trading in Switzerland and the EU is therefore showing some effect, but the potential remains great. Only last year, the Swiss and European emissions markets were merged. Supporters hope that other countries and regions of the world may decide to join.

The price of CO2 emission rights made accessible to investors

The price development of CO2 emission rights could create interesting investment opportunities for investors. In principle, it is possible to invest in emission rights by means of futures contracts traded regularly on the markets. In order to provide investors with access to this market, Vontobel offers various certificates on the ICE ECX EUA Future, which tracks the price development of CO2 emission rights.

The underlying asset: ICE ECX EUA Future

The ICE ECX EUA Future is a CO2 emission rights futures contract traded on the ICE Endex futures exchange, which belongs to the Intercontinental Exchange (ICE) and is based in the Netherlands. A feature of futures trading is the agreement to buy or sell an asset (in this case the CO2 emission right) at a certain price on a certain future date. This agreement allows buyers to lock in the price of emitting a certain amount of greenhouse gas (CO2) at a certain future date. Since contract expiration dates are set in advance on a monthly basis, if the position is to be maintained in the market, the position in the expiring futures contract must be regularly switched to a contract with a later expiration date.

Since a future is a forward transaction, the performance of the future may differ from the performance of the related CO2 emission rights to which the future relates. This is the case, for example, with futures traded on an exchange at a premium or at a discount to CO2 emission rights, due to certain market factors being valued differently in the futures market than in the spot market.


The products on the ICE ECX EUA Future are concrete examples of how "exotic" underlyings or markets can be made accessible through the use of structured products.

The new CO2 Tracker Certificate

Vontobel is expanding its range of products linked to the performance of the ICE ECX EUA Future with a Tracker Certificate, providing interested investors with an investment instrument to participate in the price development of CO2 emission rights. The Tracker Certificate enables investors - taking into account the management fee - to participate, in principle, in a linear manner in the price performance of the ICE ECX EUA Future. Investors can determine their investment horizon thanks to the unlimited duration of the Tracker Certificate (Open-End).

The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities.