Glossary

Any doubts about a term?

We’re here to help you explore the carbon allowance world.

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Abatement

The reduction of carbon emissions released by the combustion of a primary resource.

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Abatement cost

The cost of introduction of a technology that reduces the volumes of greenhouse gas emissions for industrial activity or power production.

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Additionality

A characteristic of a Voluntary Carbon Markets Credit. The underlying projects could not exist without the funding from the carbon credit. In other words, the projects wouldn’t be viable in their own right, all other things equal (regulations, government funding, other policies…). If credits are awarded to activities that would have happened anyways, the process becomes meaningless.

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Auction

A competitive process in which goods or services are offered to potential buyers. Pre-determined mechanisms allow for the final allocation and the decision of the price level. This is the mechanism used by EU regulators to release EUAs in the primary market.

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Auditing

A characteristic of a Voluntary Carbon Markets Credit. Independent assurances that statements made about offset emission reductions are true and correct.

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Banking an Asset

To hold or store an asset for future use or transactions. EUAs can be banked, meaning that they can be purchased in a certain year and used for compliance reasons at a later time.

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Bearish

A term used in financial markets to describe a negative outlook on the price of a particular asset or market.

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Bullish

A term used in financial markets to describe a positive outlook on the price of a particular asset or market.

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Carbon

Shortcut for “carbon dioxide and its equivalents”. CO2-eq is the metric used to compare emissions from various greenhouse gasses (GHG) on the basis of their global warming potential (GWP), by converting all gasses to the equivalent amount of carbon dioxide for a given global warming potential.

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Carbon Border Adjustment Mechanism (CBAM)

An EU policy addressing carbon leakage by imposing tariffs on certain imported goods to ensure they meet similar carbon pricing standards as those within the bloc.

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Carbon Credit

A tradable good that certifies that a certain amount of GHG emissions was avoided or removed. By buying a carbon credit, a company or individual finances the project reduction or removal project and compensates - or offsets - their own emissions.

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Carbon Neutrality

Achieving a balance between the amount of greenhouse gasses emitted and removed from the atmosphere, resulting in a net-zero carbon footprint. The European Union will achieve net-zero emissions by 2050.

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Carbon Offsetting

The practice of compensating for carbon dioxide emissions by funding projects that reduce, avoid, or remove an equivalent amount of emissions elsewhere.

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Carbon Pricing

A policy mechanism that places a cost on carbon emissions to incentivize individuals and businesses to reduce their greenhouse gas emissions.

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Carbon leakage

The phenomenon where industries relocate their operations to regions with less stringent emissions regulations, potentially increasing global emissions.

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Clean Energy

Energy produced from renewable or low-carbon sources, such as solar, wind, hydroelectric, and nuclear power, contributing to reduced greenhouse gas emissions and air pollution.

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Clean dark spread

The difference between the market price of electricity and the cost of generating electricity from coal, often used to assess the profitability of coal-fired power plants.

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Clean spark spread

The difference between the market price of electricity and the cost of generating electricity from natural gas, used to evaluate the profitability of natural gas-fired power plants.

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Climate Change Adaptation

Efforts to adjust to the impacts of climate change, including developing resilient infrastructure, implementing disaster preparedness measures, and enhancing agricultural practices.

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Climate Finance

Financial resources allocated to projects, programs, and policies aimed at addressing climate change mitigation and adaptation efforts.

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Commitment of Traders Report

A weekly report published by regulatory agencies, providing data on the positions held by different categories of traders in futures markets.

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Compliance Carbon Markets

The trading unit is the carbon allowance, which represents the right to draw 1 ton of carbon from a capped carbon budget. In compliance markets, a regulatory entity fixes a certain amount (the cap) of allowed emissions for the year (the budget), and industrial polluters need to purchase allowances equivalent to their emissions. There are only as many allowances as the budget allows: the supply is capped. It is a regulated market in the sense that buyers have an obligation to hold allowances in equivalence to their emissions. Allowances are standard units issued by the regulatory body.

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Corporate Social Responsibility (CSR)

The commitment of businesses to operate ethically and contribute to sustainable development goals, encompassing environmental stewardship, social responsibility, and ethical business practices.

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Council of the European Union

The institution of the European Union where ministers from the member states meet to adopt laws and coordinate policies. It shares legislative and budgetary powers with the European Parliament.

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ESMA (European Securities and Markets Authority)

An independent EU authority that contributes to safeguarding the stability of the European Union's financial system by enhancing investor protection and promoting stable and orderly financial markets.

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ETS Cap

The yearly limit set on the total amount of greenhouse gas emissions that can be produced by entities covered by the Emissions Trading System. The limit is reduced every year at a predetermined rate, currently at 4.3%.

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EU ETS

Created in 2005, the oldest and largest Cap and Trade system worldwide. It covers around 11 000 installations and has achieved a CO2 reduction from covered sectors of around 40%.

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EU ETS 2

A new form of cap-and-trade system that will cover emissions from building constructions and road transportations in the EU from 2027 on.

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EU ETS Sectors

The main coverage sectors by the EU ETS are power generation, energy-intensive industries, manufacturing, and aircraft operators. It is to be extended to maritime and road transportation, as well as international flights.

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EU Transaction Log

A centralized electronic system used to track and record transactions related to the trading of emission allowances under the EU ETS.

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EUA Primary Market

Where the European Commission initially allocates or auctions emission allowances. The amounts of EUAs released in the economy follow the cap and are reduced according to the predetermined LRF.

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EUA Secondary Market

Where participants can buy and sell emission allowances among themselves, providing flexibility and liquidity to meet compliance obligations or for speculative purposes. After the creation of Homaio’s trading platform, currently individual investors can also access the EU ETS market.

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EUA Surrendering

“Returning” or subletting an equivalent amount of EUAs to regulators at the end of the compliance cycle, in order to match the released CO2 volumes by an installation covered by the scheme.

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Emissions Trading Scheme

A market-based mechanism designed to reduce greenhouse gas emissions. Under this scheme, a cap is set on the total amount of emissions that can be released by covered entities, such as industries or power plants. Emission allowances are issued, each representing the right to emit a specific amount of greenhouse gasses. By creating a market for emission allowances, the ETS incentivizes emission reductions while providing flexibility for businesses to find the most cost-effective ways to comply with emissions targets.

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European Carbon Allowance (EUA)

A financial asset that corresponds to the emission of 1 tonne of CO2 under an Emissions Trading Scheme. EUAs are quotas that are surrendered by covered installations by the European Union Emissions Trading System.

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European Commission

The executive branch of the European Union responsible for proposing legislation, implementing decisions, and managing the day-to-day business of the EU.

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European Council

The institution of the European Union where the heads of state or government of EU member states meet to set the EU's political agenda and provide impetus for its development.

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European Parliament

The directly elected legislative body of the European Union, representing EU citizens and participating in the legislative process alongside the Council of the European Union.

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Exchange platform

An electronic or physical marketplace that facilitates the buying and selling of various assets.

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Fit for 55

A European Union legislative package aimed at reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, covering various sectors to achieve the European climate goals.

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Fuel Switching

The practice of replacing one type of fuel with another to achieve cost savings or reduce environmental impact (such as switching from using coal to gas for electricity generation).

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Fungible Asset

Interchangeable and identical in value and quality over time and space with other assets of the same type. EUAs are a fungible asset.

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Futures contract

A contractual agreement to buy or sell a commodity or financial instrument at a predetermined price on a specified future date.

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Gas storage

Facilities used for storing natural gas to balance supply and demand, ensuring energy security and stability of gas prices. The gas storage levels indicate whether there is more demand or supply in gas markets, thus influencing the price levels.

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Greenhouse Gasses (GHG)

Gasses in the atmosphere, such as carbon dioxide and methane, that trap heat from the sun, contributing to the greenhouse effect and global warming.

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Inflation

The persistent increase in the general price level of goods and services over time, resulting in a decrease in the purchasing power of money.

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Innovation Fund

A European Union fund aimed at supporting innovative projects and technologies that contribute to the reduction of greenhouse gas emissions. It uses funds from the sale of EUAs through auctions.

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Linear Reduction Factor (LRF)

The annual rate by which the cap on greenhouse gas emissions declines - it is predetermined by the EU and currently stands at 4.3%.

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Long-term investing

An investment strategy focused on holding assets for an extended period (typically years or decades) aiming to achieve gradual goals such as wealth accumulation.

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Market Design

The framework and rules that govern the operation and organization of a market, influencing how assets are bought, sold, and traded.

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Market Stability Reserve (MSR)

Mechanism designed to enhance the stability of the European Union Emissions Trading System (EU ETS) by adjusting the supply of emission allowances based on market conditions, helping to manage oversupply and undersupply issues.

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Markets

A way in which the price of an asset, good, or service is freely determined by the forces of demand and supply. (Market mechanisms are more complex than taxes, harder to implement and control, but they are also much more efficient, sector agnostic, and fair.)

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Modernization Fund

A fund established under the EU ETS to support investments in modernizing energy systems and improving energy efficiency, particularly in lower-income EU member states. It uses funds from the sale of EUAs through auctions.

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Option contract

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specific time frame.

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RepowerEU

A European policy aimed at restoring the bloc’s energy independence from Russian imports through enhancing renewable energy usage. This program made regulators temporarily increase the EUA volumes introduced in the market in 2023 and 2024.

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SRRI (Synthetic Risk and Reward Indicator)

A numerical measure used to assess the risk and potential returns of investment products, required for disclosure under EU financial regulations.

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Scope 1 emissions

Direct greenhouse gas emissions from sources within an organization's control, such as emissions from combustion processes or industrial activities.

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Scope 2 emissions

Indirect greenhouse gas emissions resulting from the generation of purchased electricity, heat, or steam consumed by an organization.

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Scope 3 emissions

Indirect greenhouse gas emissions that occur as a result of an organization's activities but are not directly owned or controlled by it, including emissions from its supply chain, transportation, and use of products.

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TTF gas

The Title Transfer Facility, a virtual trading point for natural gas in the Netherlands, used as a benchmark for European gas prices.

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Total Number of Allowances in circulation (TNAC)

The number of allowances that have been issued by regulators and are left in the market after the surrendering of allowances for compliance reasons. It follows the formula TNAC = SUPPLY - VERIFIED EMISSIONS.

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