Several papers by academics and various reports by financial analysts suggest that non-compliance traders, mostly investment funds and firms, are manipulating the EU ETS and causing EUA prices to rise. In response, the European Commission has mandated the European Securities and Markets Authority (ESMA) to investigate whether certain trading behaviours would require further regulatory actions (ESMA, 2021). The objective of this paper is (i) to analyse the participation of non-compliance traders in the EU ETS and their role in the financialisation of the scheme, and (ii) to contribute to the debate on price manipulation by the non-compliance sector in the EU ETS. Both our analysis of the EUA Commitments of Traders reports and our review of the main findings of the empirical papers on portfolio management with EUAs suggest that non-compliance traders mainly take short positions in the European carbon futures market in order to arbitrage the spot market. Only a small portion of the long positions are used by financial investors to diversify or hedge risks coming from financial markets. Therefore, in both situations, non-compliance traders would be acting as long-term liquidity providers rather than speculators.
