The European Commission is proposing that trading on the carbon market should be governed by the revised Markets in Financial Instruments Directive (MiFID II), a set of new laws governing financial speculation.
The move comes amidst continued volatility in the $142 billion per year carbon market, most of which is traded in the EU, and follows a series of fraud cases in recent years.
The proposal to classify carbon as a financial instrument would bring the whole market - including “spot” and "derivatives" trades - under a single regulatory framework. These proposals were subject to significant corporate lobbying, as revealed in a report from Carbon Trade Watch and Corporate Europe observatory released last week.
A compilation of the new measures on emissions trading included in MiFID can be found here. I've also compiled a similar document in relation to the Market Abuse Directive.
Treating carbon as a financial instrument is a welcome recognition of the problems in this market, but it is no panacea. Emissions trading has not driven investments in cleaner energy and there is no sign of it meeting environmental goals, as the latest carbon price slump shows.
The inclusion of carbon in MiFID II leaves key exemptions in place, however. For example, MiFID does not cover trading on “own account” and so fails to capture speculation engaged in by energy companies, which are the largest players on the carbon market.
This issue is covered in more depth in
Letting the market play: corporate lobbying and the financial regulation of EU carbon trading