Glossary

The carbon abatement cost is the cost of an intervention that will reduce greenhouse gas emissions by one tonne. It allows to measure the cost effectiveness of decarbonisation.

Article 6 of the Paris Agreement establishes a broad framework for governing cooperation between countries working jointly to meet their nationally determined contribution (NDC) targets. Linking ETSs internationally is one possible form of cooperation. Linking two ETSs can impact the emissions of the participating jurisdictions, as more emissions are reduced in the system with lower abatement costs. Countries may want to reflect these changes in emissions when accounting for their NDC targets.

Under the Paris Agreement, Article 6.2 allows countries to exchange emissions reductions and removals through bilateral agreements—country to country.

After nearly a decade of work, the COP29 decision (Baku, 2024) provides clarity on how countries will authorise the trading of carbon credits and how the registries that track them will operate.

Article 6.4 of the Paris Agreement established a new international carbon crediting mechanism. The Article 6.4 mechanism, also known as the Paris Agreement Crediting Mechanism, has a Supervisory Body tasked with developing and supervising the requirements and processes needed to operationalize the mechanism.

28 countries (25 EU Member States plus Iceland, Liechtenstein and Norway) auction their EU ETS allowances on the common auction platform selected through a joint procurement procedure. Currently, the common auctioning platform is the European Energy Exchange (EEX).

Germany, Poland and the UK (for what concerns Northern Ireland) have opted-out of the common auctioning platform. Germany has nominated EEX as their opt-out platform, while Poland and the UK are using EEX to auction their allowances until further notice.

A market-based approach to controlling pollution by providing economic incentives for achieving emissions reductions. The overall volume of greenhouse gases that can be emitted by the sectors covered by the EU Emissions Trading System (EU ETS) is limited by a ‘cap’ on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

The process of developing and strengthening the skills, instincts, abilities, processes and resources that organizations and communities adapt to new regulations.
It enables companies, organizations and authorities to develop competencies and skills that to be more effective and sustainable, enabling them address their challenges to reduce emissions.

The total amount of greenhouse gases produced directly and indirectly by human activities, expressed in equivalent tons of CO2.

This includes three types of emissions (scope 1- direct emissions, scope 2 – indirect GHG emissions associated with energy and scope 3 – other indirect emissions).

Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries.

Marketplaces which allow the cost-effective reduction of GHG emissions through allowing entities to obtain and cancel emission permits in the compliance market and offsets in the voluntary market. The funds for purchasing such permits and offsets are redirected towards green projects.

Carbon Border Adjustment Mechanism – CBAM
Designed in compliance with World Trade Organization (WTO) rules and other international obligations of the EU, the EU CBAM will force EU importers to buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM aims to help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.

Carbon Capture, Utilisation and Storage/Carbon Capture and Storage (CCUS/CCS)

• Under CCS, carbon emissions are captured and permanently stored, for example in underground geological storage sites.
• With CCUS, the carbon emissions are captured and then used for some other purpose, for example in an industrial process that requires CO2.

The Emission Trading System of the Swiss Confederation, as established by the Swiss Federal Act on the Reduction of CO2 Emissions of 23 December 2011. It has been linked to the EU ETS by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems of 5 November 2020.

An allowance to emit one tonne of carbon dioxide equivalent during a specified period, issued under the CH ETS.

An allowance to emit one tonne of carbon dioxide equivalent during a specified period, issued under the CH ETS to aircraft operators.

Reducing all GHG emissions to the point of zero while eliminating any remaining emissions through offsetting.

EU countries are committed to making the EU climate-neutral by 2050.

A carbon marketplace that is driven by national, regional, or international law stating that companies and governments must account for and reduce their greenhouse gas emissions.

In these markets, the regulated entities must obtain and surrender emissions permits (allowances) or offsets to meet predetermined regulatory targets.

CORSIA is the Carbon Offsetting and Reduction Scheme for International Aviation.
Aviation emissions from international flights have not been included in the international climate regime administered by UNFCCC. Instead, these emissions have been dealt with by the International Civil Aviation Organization (ICAO). Its members adopted a global market-based measure to tackle aviation emissions, whereby airlines and other aircraft operators will offset emissions to keep carbon neutral growth at 2020 level.

Emissions from sources that are owned or controlled by the reporting entity.

Emission Reduction (ER) is the measurable reduction of release of GHGs into the atmosphere from a specified activity, or over a specified area, and a specified period of time measured in a standardized unit of metric ton carbon dioxide equivalent.

An EUA is an allowance to emit one tonne of carbon dioxide equivalent during a specified period, issued under the EU ETS and valid for the purposes of meeting the requirements of the EU ETS Directive.

A compliance carbon market that works on the ‘cap and trade’ principle.

A cap is set on the total amount of certain greenhouse gases that can be emitted by the sectors covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, installations can find themselves in 2 scenarios

• Shortfall: When their emissions are not covered by the permits received for free from the Authorities. In this case they must go to the market to buy more emission permits.
• Surplus: When their emissions are covered by the permits received for free from the Authorities. In this case they can sell the surplus to another installation that is short.

The limit on the total number of allowances available ensures that they have a value.
By the compliance deadline, an installation must surrender enough allowances to cover fully its emissions, otherwise heavy fines are imposed.

A proportion of these allowances is provided for free to the obliged companies to ease their energy transition and to limit the risk of carbon leakage.

If an installation reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another installation that is short of allowances.

Trading brings flexibility that ensures emissions are cut where it costs least to do so. A robust carbon price also promotes investment in innovative, low-carbon technologies.

Energy Savings means an amount of saved energy determined by measuring and/or estimating consumption before and after implementation of an energy efficiency improvement measure, whilst ensuring normalization for external conditions that affect energy consumption.

As part of the 2023 revisions of the ETS Directive, a new emissions trading system named ETS2 was created, separate from the existing EU ETS. This new system will cover and address the CO2 emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS).

The ETS2 will become fully operational in 2027. Although it will be a ‘cap and trade’ system like the existing EU ETS, the ETS2 will cover emissions upstream. It will be fuel suppliers, rather than end consumers such as households or car users, that will be required to monitor and report their emissions. These entities will be regulated under the ETS2, which means they will be required to surrender sufficient allowances to cover their emissions. Regulated entities will purchase these allowances at auctions.

The ETS2 cap will be set to bring emissions down by 42% by 2030 compared to 2005 levels.

The Emission Trading System of the EU, as established by the EU ETS Directive (Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC). It is the world’s first major compliance system.

The European Green Deal is a package of policy initiatives adopted in 2019, which aims to set the EU on the path to a green transition, with the ultimate goal of reaching climate neutrality by 2050. It supports the transformation of the EU into a fair and prosperous society with a modern and competitive economy.

European Emission Allowance for Aviation (EUAA) is an allowance to emit one tonne of carbon dioxide equivalent during a specified period, issued under the EU ETS to aircraft operators and valid for the purposes of meeting the requirements of the EU ETS Directive

A company must be F-Gas Company Certified to handle fluorinated greenhouse gases (also known as ‘F-gases’) regulated by the EU. 3 types of certificates exist: quota, authorization and delegation.

The Fit for 55 package aims to translate the climate ambitions of the EU Green Deal into law. It includes a set of proposals to revise climate-, energy- and transport-related legislation and put in place new legislative initiatives to align EU laws with the EU’s climate goals.

Fluorinated gases (F-gases) are artificial gases that are used in a variety of industrial applications, mainly: Air conditioning, Heat pumps, Aerosol propellants, Fire extinguishing, Solvents, Blowing agents for foams. These gases have a high global warming potential and for this reason, authorities in several regions have set up schemes to progressively limit its presence in the market.

The French Offsetting Scheme, under Decree n° 2022-667, is a revolutionary strategy aimed at restraining the environmental impact of domestic flights in France. This initiative seeks carbon neutrality in the aviation sector by 2024, highlighting France’s commitment to sustainable development and environmental conservation. It requires airlines to progressively offset their greenhouse gas (GHG) emissions, setting a new standard for integrating environmental responsibility into aviation operations.

In the context of carbon auctions under emissions cap-and-trade systems, front-loading refers to the bringing forward of a volume of carbon allowances earmarked for future auctions, for example to increase supply in the short-term without changing the aggregate supply overall.

Any substance which upon combustion produces a usable amount of energy such as coal, or petrol.

This concept is referred to gases caused by different human activities (Industry, agriculture, buildings). These gases trap heat in the atmosphere and cause what is called the greenhouse gas effect. The main greenhouse gases present in the atmosphere are:

Carbon dioxide (CO2)
Methane (CH4)
Nitrous oxide (N2O)
Fluorinated gases

The Global Warming Potential (GWP) is a measure to compare the global warming impacts of different gases (GHG). Specifically, it is a measure of – how much energy the emissions of 1 ton of a gas will absorb over a given period of time

Hedgers hold CO2 allowances for future use, e.g. as an input in their production process and to reduce the company’s risk exposure. In the EU ETS, hedging of CO2 allowances by utilities is the main driver of scarcity and hence CO2 allowance prices.

Emissions that are a consequence of the activities of the reporting entity but occur at sources owned or controlled by another entity.

The EU ETS provides the revenues for the Innovation Fund from the monetisation of allowances. In practice, the Innovation Fund allowances from the EU ETS are being auctioned based on the agreed schedule and the revenues perceived are later used to provide support to highly innovative technologies and flagship projects within Europe that can bring about significant emission reductions.

Since 2013, there has been a cap on emissions from EU ETS compliant entities. The LRF is the rate at which the cap is reduced annually.
Following the 2023 revision of the ETS Directive, the EU ETS cap is set to bring emissions down by 62% by 2030 compared to 2005 levels. To achieve this, the reduction factor has been increased to 4.3% per year over the period 2024-2027 and to 4.4% per year from 2028.

The Market Stability Reserve is an automatic adjustment mechanism that alters auction volumes when the Total Number of Allowances in Circulation (TNAC) – a measure of allowance surplus – is above or below predefined triggers. The MSR, as now established in the EU, aims to maintain a certain supply-demand balance to keep the carbon price signal at levels necessary to achieve the EU decarbonization target.

The fundamentals of your decarbonization pathway. Taking action on climate change starts with knowing your climate impact. Measuring your carbon footprint is essential to identify emissions’ hotspots and take the right actions to reduce your impact as much as you can. The residual emissions that are impossible to eliminate should be offsetted through projects that also life-changing benefits to
vulnerable communities and help conserve local ecosystems.

Measurement, Reporting, and Verification (MRV) refers to the multi-step process to measure the amount of greenhouse gas (GHG) emissions reduced by a specific mitigation activity, such as reducing emissions from deforestation and forest degradation, over a period of time and report these findings to an accredited third party. The third party then verifies the report so that the results can be certified and carbon credits can be issued.

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU is a legal act of the European Union that sets forth a harmonised legal framework for the provision of investment services and activities within the Member States of the European Economic Area. Its main objectives are to improve the financial markets’ competitiveness by creating a single market for investment services and activities, increase transparency of the financial markets amd ensure high degree of investor protection.
Allowances (EUAs, EUAAs) are considered financial instruments under MiFID II and hence fall under its scope. However, the directive provides for exceptions, thus not all entities trading in allowances require authorisation (MiFID license).

The Modernisation Fund is a programme from the European Union to support 13 Member States to meet energy targets by helping to modernise energy systems and improve energy efficiency. It is financed by revenues from the auctioning of emission allowances under the EU ETS.

Established in 2018 for the 2021-2030 period, it aims to help the beneficiary Member States achieve their climate targets and the objectives of the European Green Deal.

The beneficiary Member States are Bulgaria, Czechia, Estonia, Greece, Croatia, Latvia, Lithuania, Hungary, Poland, Portugal, Romania, Slovenia and Slovakia.

Climate action plans submitted by countries outlining their targets for reducing greenhouse gas emissions and adapting to climate impacts.

The German Emissions Trading System (in German: Nationales Emissionshandelssystem, or nEHS) is an adjacent system to the EU ETS. It covers heating and transport sectors in Germany. The obligation to surrender emission certificates lies on the distributors of fuels. They are obliged to purchase and submit 1 National emission certificate for each 1 CO2 tonne emitted.

Net zero emissions refers to achieving an overall balance between greenhouse gas emissions produced and greenhouse gas emissions taken out of the atmosphere to reduce global warming. The impact of residual emissions of greenhouse gases that are not possible to eliminate should neutralized by permanently removing an equivalent amount of atmospheric carbon dioxide.

Offsetting is when an organisation compensates its greenhouse gas emissions by purchasing carbon credits to finance emission reductions or carbon removals elsewhere. A carbon offset is an electronic certificate that represents the reduction or avoidance of one metric ton of greenhouse gas (GHG) emissions, typically carbon dioxide equivalent (CO2e), that has been achieved by a project or activity in another location or sector. Carbon offsets are generated by projects that reduce or remove GHG emissions, such as renewable energy, energy efficiency or forestry projects that sequester carbon. The purpose of carbon offsets is to create a financial incentive for emissions reduction and to support the transition to a low-carbon economy, while allowing purchasing companies or individuals to offset their own emissions.

Carbon offsets are also referred to as carbon credits.

The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at the UN Climate Change Conference (COP21) in 2015. Its overarching goal is to hold “the increase in the global average temperature to well below 2°C above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.”

In May 2022, EU institutions adopted the REPowerEU Plan as a way to reduce Europe’s dependence on Russian fossil fuels and mitigate the volatility in prices driven by the energy crisis. REPowerEU is partly financed through the EU ETS revenues (grants worth €20 billion were allocated to the Member States through the Innovation Fund and the sale of Emissions Trading System (ETS) allowances).

Sustainable aviation fuels (SAF) are defined as renewable or waste-derived aviation fuels that meets sustainability criteria. CORSIA includes methodologies that allow aircraft operators to reduce its offsetting requirements through the use of SAF and Lower Carbon Aviation Fuels.

The TNAC indicator plays an important role in the functioning of the Market Stability Reserve (MSR) of the EU ETS. It determines whether allowances are withdrawn to or released from the MSR.

The TTF (Title Transfer Facility) is the main reference for market for virtual gas trading in Europe.

The Emission Trading System of the United Kingdom, as established by the Greenhouse Gas Emissions Trading Scheme Order 2020.

The voluntary carbon marketplace encompasses all transactions of carbon offsets that are not purchased with the intention to surrender into a regulated carbon market.

It does include certificates (offsets) that are purchased with the intent to retire and meet carbon neutral or other environmental claims and also to re-sell. Participating entities are not obliged to meet any targets related to their emissions, they act on a voluntary basis. Offsets are purchased voluntarily from projects that are either avoidance/removal carbon projects.