Environmental Engineering Reference
In-Depth Information
Figure 12. Regression analysis for the EUA DEC 09 futures contract traded at ECX and the PHELIX
JAN 10 Yearly Base Load futures contract traded at EEX
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DESIGN CHALLENGES WITH
LARGE-SCALE AUCTIONING
Sensitivity of Secondary
Markets to Supply Shortages
The discussion of the architecture and some market
characteristics in the last preceding subsection
suggests that, in principle, the EU ETS is working
well. But the high levels of variability in returns,
trading volumes, and pricing relations also suggest
that the integrity and efficiency of the EU ETS
markets are still susceptible. Hence, secondary
markets functioning and integrity demand special
attention with regard to institutional design uncer-
tainty and arbitrary supply and demand constraints.
The event of auctioning of large volumes into
secondary markets in the third trading phase,
even if the most frequent daily allocation method
is implemented, represents a unique challenge
in terms of preserving integrity, credibility and
functioning of the overall EU ETS scheme. This
holds even more given the existence of pronounced
variability between energy markets as well as be-
tween spot and futures markets. In the following,
we will derive some high-level recommendations
to meet the institutional design challenges arising
with large-scale auctioning in the third trading
period of the EU ETS and its impact on secondary
market emissions trading.
The protection of market integrity deserves
particular emphasis. It would be detrimental to
the reputation the EU ETS has built up glob-
ally if the auctioning design would become a
potential source of massive dry-ups of liquidity
in emissions markets prior or during auctions or
if it would provide a leeway for potential market
manipulation and abuse. Both would have severe
impacts on the liquidity and immediacy in adjacent
power, gas and coal markets. The susceptibility
of emission derivatives markets to manipulation
and abuse caused by wrongly designed auction-
ing is best exemplified by a potential market
power manipulation also known as a cornering
or squeezing the market.
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In a squeeze a single market participant or col-
luding group of participants would accumulate a
long forward or futures position that is larger than
the amount of underlying emission allowances that
can be supplied at a fair price by those participants
holding short positions. As a consequence, the
supply curve of allowances available for delivery
slopes up dramatically and the holders of short
positions are forced to close-out futures positions
at premiums far above the competitive price; all
