**Financial Firms Drive Majority of EU Carbon Market Activity in 2025**
The European Securities and Markets Authority (ESMA), the regulatory body overseeing financial markets within the European Union, has released its third annual market report on European carbon markets, revealing significant insights into the dynamics of this sector. The report underscores the pivotal role that financial intermediaries play in the functioning of the EU carbon market, particularly in 2025.
According to ESMA's findings, financial institutions, including investment firms and credit institutions, were instrumental in facilitating market operations, accounting for approximately 62 percent of the total trading volumes in the carbon market throughout 2025. These financial entities provide essential liquidity and serve as counterparties to non-financial firms that are obligated to comply with emissions regulations. By enabling compliance-obligated companies to access emission allowances, these intermediaries help manage price risks effectively.
The total value of the EU carbon market reached an impressive €777 billion in 2025, a notable increase attributed to robust trading activity and rising market prices. The report highlights that the annual average price of EU emission allowances rose by 13 percent compared to 2024, reflecting the growing demand and market engagement.
However, the market landscape shifted dramatically in early 2026, as prices experienced a significant decline of 29 percent over a three-month period. This downturn coincided with a peak in market volatility, which reached its highest level in two years. ESMA attributes this volatility to varying expectations surrounding future rules for the EU Emission Trading System (ETS), fluctuations in energy costs, and broader macroeconomic conditions.
Despite these challenges, ESMA maintains that the carbon market remains resilient, with no major concerns identified regarding market integrity or transparency. The authority noted that auction revenues grew by 11 percent during the reporting period, despite a slight decrease in the total volume of allowances offered at auction.
Looking ahead, ESMA has expressed concerns regarding the slow adoption of Legal Entity Identifiers (LEIs) within the Union Registry. These unique codes are essential for tracking and identifying parties involved in financial transactions, and the regulator recommends making LEIs mandatory for all trading accounts. This requirement is also suggested to extend to the forthcoming ETS2 system, which is anticipated to further enhance the efficiency and transparency of carbon market operations.
As the EU continues to navigate the complexities of carbon trading and emissions regulations, the insights provided by ESMA's report will be crucial for stakeholders aiming to understand the evolving landscape of carbon markets and the role of financial intermediaries in driving market activity.