Since 2005, the European Union (EU) has been running the world’s largest experiment in emissions trading, a climate measure that attempts to put a price on carbon. Under the EU’s Emissions Trading System (ETS), polluters must cover their carbon emissions by purchasing allowances, whose value is set on an open market. The idea is that the market does not adequately punish or reward firms for externalities, such as the environmental effects of production, on its own. Under ETS, if a business wants to pollute, the requirement to buy allowances hurts its bottom line; if it becomes greener, it can sell its allowances for a profit. By gradually decreasing the supply of credits, the EU hopes to drive up their price, incentivizing firms to clean up their act.

Yet the ETS has been easily manipulated by market actors. Scammers pocketed €5 billion off phony value-added tax reimbursements through the system early on, with Europol estimating that up to 90% of ETS transactions were fraudulent in some countries. For a decade, a loophole made it lucrative for non-EU firms to needlessly emit greenhouse gases just to eliminate them, claiming credits under the international Kyoto Protocol that could be sold on the European market. And European companies can still seize windfall profits by immediately dumping the allowances that the EU distributes for free each year, which are often in excess of their needs. These shady tactics cut against the market’s aims. At various points, sellers have pushed prices so low that they no longer discourage emissions enough to hit the EU’s decarbonization goals: in 2007, the price of carbon actually went to zero. Meanwhile the ETS has managed to reduce the EU’s total emissions by less than 2% a year.

But it’s not only grifters who are distorting the ETS market. After EU reforms increased prices and volatility in 2017, the number of hedge funds and investment banks trading European carbon allowances more than tripled. One financial analyst described the ETS as offering “wonderful volatility plays,” and recent estimates suggest that the majority of the market’s daily activity comes from speculators, many of whom are US-based traders.