Most trading in emission allowances takes place on the "secondary market," where companies or private investors can purchase emission allowances from resellers and brokers.

The primary market for emission allowances is instead organized through an auction system.

Here's how it works:

1. First, the European Commission sets the annual emission cap.
2. The total annual cap is then divided into daily auction volumes spread throughout the year. In other words, the annual cap is divided into daily "batches." The full calendar is available on the website of the European Energy Exchange (EEX), which runs these auctions on behalf of the Commission. Auctions are held every working day between the second week of January and the second week of December.
3. The auction format itself is strictly regulated by EU legislation. It is a single-round, closed bidding process, and all winning participants receive emission allowances at the same final price. Although thousands of companies are covered by the EU ETS, and hundreds of financial institutions are active in the market, only around 30 players participate in the auctions. Typically, fewer than 15 bidders are successful on any given day.

The secondary market is where emission allowances are traded continuously. However, trading in emission allowances mainly takes place on the European Energy Exchange (EEX) and the Intercontinental Exchange (ICE). EEX is a subsidiary of Deutsche Börse, while ICE is part of the New York Stock Exchange (NYSE) group.

Although primary market auctions are held exclusively on EEX, most of the trading volume takes place on ICE, which accounts for around 80% of all transactions. In 2024, the average daily trading volume amounted to almost EUR 4 billion, divided between spot contracts (for immediate delivery) and derivatives, including futures and options. Over a full year, this corresponds to a trading volume of almost EUR 800 billion.

Emissions allowances are traded continuously on these markets. This means that during market opening hours, they can be bought and sold at any time, with prices constantly adjusted based on the balance between supply and demand. This ensures high liquidity, but also leads to volatility. As more players become active in the market and more businesses and companies are covered by the system, price volatility is expected to increase further.

The European Commission has gradually opened up the market to new players, particularly financial institutions. This has added liquidity, which has strengthened market functionality and meant that companies wishing to hedge against price risks over time now have access to more sophisticated transactions than simple buy and sell deals, such as futures. At the same time, the scope of industries and companies covered by the regulations has also been expanded.

Emissions trading currently includes the EU ETS (ETS1), ETS2, and CBAM.

• The EU ETS (ETS1) regulates trading in emission allowances for carbon dioxide emissions from manufacturing industries and facilities that produce electricity and heat, as well as aircraft operators and maritime operators (shipping companies).
• ETS2regulates trading in emission allowances for carbon dioxide emissions from the combustion of fuels in road transport, residential and commercial or public premises. It also covers parts of the energy, manufacturing and construction industries not already covered by ETS1.
• CBAM(Carbon Border Adjustment Mechanism) means that importers who bring certain goods into the EU from other countries must, from January 1, 2026, declare and purchase certificates for the greenhouse gas emissions associated with the goods. CBAM is administered by the Swedish Environmental Protection Agency.

The increased number of participants in the market meant that, from 2018 onwards, EU emission allowances were classified as financial instruments under MiFID II, the EU's financial market regulation. This enabled banks and investment funds to trade EUAs, either on their own behalf or on behalf of clients. Many brokers entered the market, making it easier for smaller companies to access the system.

These smaller companies often lacked the internal infrastructure or sufficient volumes to participate directly. At the same time, this increased market transparency and placed carbon markets under the supervision of ESMA, the European Securities and Markets Authority.