  A growing number of contributions in the literature have identified a puzzle
in the European carbon allowance (EUA) market. Specifically, a persistent
cost-of-carry spread (C-spread) over the risk-free rate has been observed. We
are the first to explain the anomalous C-spread with the credit spread of the
corporates involved in the emission trading scheme. We obtain statistical
evidence that the C-spread is cointegrated with both this credit spread and the
risk-free interest rate. This finding has a relevant policy implication: the
most effective solution to solve the market anomaly is including the EUA in the
list of European Central Bank eligible collateral for refinancing operations.
This change in the ECB monetary policy operations would greatly benefit the
carbon market and the EU green transition.
