• Abatement cost: cost per tonne of CO2 at which emissions reductions would theoretically be preferable to buying EUAs and continuing emitting. The EUA price should broadly correspond to the cost of emissions abatement. In reality there will be thousands of abatement costs, corresponding to technology types, technology costs, technological advancements, that the market should point towards. 
• Auctions: EU Allowances (EUA) are sold to the market on behalf of EU Governments at auctions almost daily. Approximately half of EUAs distributed in 2023 are to be sold at auction. 
• Benchmarks: benchmarks are used to rank production made by the same process in order of efficiency. More efficient processes within the same benchmark result in a higher benchmark placing. Free allocation of EUAs is distributed according to an installation’s efficiency vs. the top 10% performers within the benchmark. The top 10% can receive all the EUAs they require, and those above the benchmark could receive a surplus. Benchmarks are next to be updated in 2026 according to expected improvements in efficiency. 
• The Carbon Leakage List (CLL). Carbon Leakage occurs if companies transfer their production from inside EU countries towards regions with less strict climate policies than the EU – driven by the costs related to climate policy. This can lead to an increase in the global level of emissions and can harm the EU’s economy. The CLL for the 2021-2030 period indicates which sectors are deemed to face the risk of carbon leakage. If sectors are on the CLL, they get a certain amount of free ETS allowances (which ultimately lowers their costs).
• Cap and trade: cap and trade markets apply a cap to emissions by issuing a limited yearly quantity of carbon allowances. If emissions and therefore demand for EUAs exceeds the number of allowances available, prices should increase until they hit a marginal abatement cost - at which decarbonisation would be cheaper than buying the allowance.  The market is meant to be efficient in that the cheapest or easiest emissions reductions should happen first, and should reach a price at which sufficient decarbonisation is incentivised to reduce allowance demand to be the same as supply. This can be compared to a carbon tax, which might be set at an arbitrary level that might not reflect the cost of emissions abatement. 
• CBAM: the Carbon Border Adjustment Mechanism will phase out free allocation of EUAs for covered sectors, replacing the free allocation with a border charge according to the EUA price and carbon intensity of imports from EU ETS participant states. EU importers will have to purchase and surrender CBAM certificates covering the emissions ‘embedded’ in the products they import and submit annual CBAM declarations. The certificates will mirror the EU's domestic EUAs price. Covered sectors include: hydrogen, iron, steel, aluminum, fertilizers, energy and cement. Certain upstream precursors, indirect emissions and downstreams products of these products are likely to be covered to some extent. Precursors example: Bauxite and alumina to manufacture aluminum. Downstreams products examples: screws and bolts (made from iron and steel).
• CHU:  Swiss emission allowances, equally valid for use in the EU ETS after the Swiss ETS and EU ETS linked in 2020. One CHU corresponds to one tonne of CO2. Allowances issued specifically for the Swiss aviation industry are called CHUAs. Like EUAAs, CHUAs can be used by any installation in the EU ETS or Swiss ETS for compliance. 
• Clean Spark Spread: represents the net revenue a generator makes from selling power, having bought gas and the required amount of EUAs to cover the emissions embedded in power generation. Clean corresponds to carbon allowance cost and spark to gas cost.
• Clean Dark Spread: represents the net revenue a generator makes from selling power, having bought the coal and the required amount of EUAs to cover the emissions embedded in the process. Clean corresponds to carbon allowance cost and dark to coal cost.
• Clean Brown Spread: represents the net revenue a generator makes from selling power, having bought the lignite and the required amount of EUAs to cover the emissions embedded in the process. Clean corresponds to carbon allowance cost and brown to lignite cost.
• The Cross-Sectoral Correction Factor (CSCF) under the EU ETS is applied to calculate free allocation of emissions allowances. 
• EUA: one EU Allowance or EUA corresponds to one tonne of CO2. Allowances issued specifically for the aviation industry are called EUAAs, but any EUA buyer may use EUAAs for their compliance.  
• EU ETS: EU Emissions Trading Scheme or System originating from the 1996 Kyoto Protocol. Covers approximately 45% of EU/EEA emissions, with aviators, heavy industry, power producers and from 2024 the maritime sector included. 
• Fit for 55: legislative package of the European Union, setting a 55% emissions reduction target vs. 1990 levels by 2030. Of this, the EU ETS will need to cut emissions to 63% of 2005 levels by 2030. Modifications to the EU ETS to achieve this target include a higher Linear Reduction Factor (from 2.2% less EUAs a year to 4.3%), one off removals of EUAs from the market, and the inclusion of the maritime sector in needing to buy EUAs. 
• Free allocation: industrial installations and aviators receive EUAs for free. The amount is determined by product-related GHG emission benchmarks, referred to above as Benchmarks. Free allocation of EUAs is given to installations operating under benchmarks that are on the Carbon Leakage List. Those not deemed at risk of carbon leakage will see their free allocation of EUAs gradually phased out. Aviators will see their free allocation phased out from 2026. 
• Fuel switching: the cost of switching from one source of energy to another. This can be calculated by comparing power prices with fuel costs and carbon costs - the cheaper source of energy generates and hedging activity can be expected to adjust to reflect the carbon intensity of planned power generation - resulting in an increase or decrease to demand for EUAs. Fuel switch could be from coal to gas, gas to renewables, or coal to renewables, for instance. A switch to a more carbon intensive electricity source is reverse fuel switch. 
• Gas storage: in the winter energy crisis of 2022, EU gas storage levels are instrumental to EUA prices in that strong supply provides a foundation for heating and industrial production - and therefore EUA demand. Strong imports of natural gas, low gas consumption and full gas storage should be supportive for EUA prices, to the extent that global gas markets remain tight, preventing a sustained return to fuel switching to natural gas over coal. 
• Innovation Fund: world's largest funding programme for the commercial demonstration of innovative low-carbon technologies, with funds raised from specially earmarked EUA auctions. €38 billion is expected to be raised through the EU ETS from 2020 to 2030.
• Installation: A stationary technical nit where one or more activities under the scope of the ETS and any other directly associated activities, which have a technical connection with the activities carried out on that site and which could have an effect on emissions and pollution
• Linear Reduction Factor: the LRF determines the speed at which the emissions cap is reduced. The LRF is currently set at 2.2%. but will increase to 4.3% following the implementation of the Fit for 55% package in 2024, and then reach 4.4% after 2027. The overall cap on emissions stands at around 1.2 billion EUAs in 2023. 
• Marginal Abatement Cost Curve: the Marginal Abatement Cost Curve measures and compares the financial cost and abatement benefit of different technologies per tonne of CO2 - giving some idea of the levels EUAs must reach, at this stage out to 2030, to incentivise adoption of lower emissions technologies. The curve refers to the expectation that the cheapest forms of abatement will come first, and over time abatement costs will increase as the cheaper emissions reductions are completed. 
• Market Stability Reserve: one of the most important things to understand about the EU ETS, the Market Stability Reserve looks at past cumulative EUA supply (referred to as Total Number of Allowances in Circulation or TNAC) minus EUAs canceled or submitted for compliance. It cuts the size of next years’ EUA auctions by 24% of the TNAC, if the TNAC is over 833 million EUAs. The MSR ensures that supply of EUAs does not drastically exceed demand for any extended period of time. Therefore the market stays tight even where emissions fluctuate widely between years, and EUA prices reflect carbon abatement costs. 
• Energy sector hedging: position taken in the market in terms of EUA buying and selling activity by utilities intended to match power generation with purchases. The underlying costs of fuels - gas, coal and lignite - determine the cost effectiveness of different types of fossil fuel generation, and EUA hedging activity is determined by the emissions intensity of that power generation. See also Fuel switching. 
• REPowerEU: the European Commission's plan to end reliance on Russian fossil fuels before 2030 in response to the 2022 Russian invasion of Ukraine. As part of the package, the goal is to raise €20 billion by front-loading the sale of allowances due to be auctioned later in the 2020s.
• Total Number of Allowances in Circulation (TNAC): the cumulative build-up of EUAs since 2008. Historical supply of EUAs - historical EUA demand - canceled EUAs = TNAC. Crucial statistic for calculations of Market Stability Reserve market withdrawals. 
• Weather’s impact on EU ETS: EUA prices can be influenced by the energy sector’s emissions hedging activity. This often comes in response to changes in weather - low wind and cold weather, for example, means more fossil fuel burn and more EUA demand. In summer with the cumulative impact of climate change, we could see heatwaves prompting air conditioning demand in parts of Europe, warm rivers affecting nuclear generation, varying levels of hydroelectric capacity - bullish factors that may start to come to the fore based on summer 2022. ‍
• EU Transaction Log: online database at https://ec.europa.eu/clima/ets/oha.do‍
• Union Registry: online platform through which EU ETS holding accounts are administered by national governments. EU Registry Accounts can be requested and logged into via this portal. Request our guide to opening an EU Registry Account here.‍
• EU Registry Account: account that holds EUAs. Compliance registry accounts have functionality to allow submission of EUAs for compliance. Apply for one with your national administrator or contact us for our guide. ‍
• Compliance Deadline: EUAs must match emissions within a calendar year, and be submitted to the authorities by 30 April of the following year. This deadline is rumoured to be moved to September 2024 for 2023 emissions. ‍
• TTF Gas: benchmark European gas contract. Fluctuations in the price of natural gas can impact EUA prices as cheaper gas fired power displaces coal fired power, and vice versa (fuel switching). ‍
• API2 Coal: benchmark European coal contract. Fluctuations in the price of coal relative to natural gas can impact EUA prices as gas fired power becomes relatively cheaper or more expensive than coal fired power - changing the emissions intensity of power generation and therefore EUA demand in the EU. ‍
• German Power: Given the size of Germany’s economy, interconnectedness with neighbouring countries and still large share of emissions intensive coal fired power, German power prices are a good benchmark to follow along with TTF Gas and API2 Coal when analyzing EUA price developments.‍
• German coal phaseout: Germany will phase out coal out to 2038. This has relevance to the EU ETS as phaseout of German coal would cut significant EUA demand. The German government wishes to cancel EUAs corresponding to the loss in demand, thereby ensuring no change to demand, but there is some tension as some people in government would prefer to sell the EUAs rather than cancel them.‍
• Market access (how to get): as a fully regulated counterparty, AFS must perform KYC checks on the companies we trade with. Click here for our list of required documents or email compliance@afsgroup.nl. Following KYC checks, you will be able to place orders by phone or email or through our platform. ‍
• Spot: In finance, a spot contract is a contract to buy or sell a commodity or security for immediate settlement, at the “market” price. ‍
• ICE Commitment of Traders (CoT): A weekly report published by ICE showing the concentration of open interest held by the largest financial institutions (traders, funds, asset managers, banks) in the EUA market. Useful for understanding how speculators are viewing the market, but data is delayed by a week, and therefore is always out of date. ‍
• ESMA (European Securities and Markets Authority) promotes the fair and orderly functioning of financial markets, safeguards the integrity of the EU Single Market by setting high standards of conduct and ensuring transparency to support efficient markets and investor confidence.‍
• The European Commission is the EU’s politically independent executive arm. Its role is to promote the general interest of the EU by proposing and enforcing legislation as well as by implementing policies and the EU budget. It is alone responsible for drawing up proposals for new European legislation, and it implements the decision of the European Parliament and the Council of the EU.‍
• The European Council brings together EU leaders to set the EU's political agenda. It represents the highest level of political cooperation between EU countries. Its role is to define the general political direction and priorities of the EU.‍
• The European Parliament: one of two legislative bodies of the European Union. The Parliament is comprised of Members of European Parliament who are directly elected by EU member state voters every 5 years. The Parliament holds legislative, supervisory and budgetary responsibilities and is formed of 705 MEPs.  Within Parliament, political committees like the Environment Committee have significant influence on legislation affecting the EU ETS. ‍
• Cap on emissions sets the limit, or “cap” on emissions permitted across a given industry or economy. The cap is defined by the number of EUAs issued or sold by EU member states over the course of a year. The cap on emissions drops by 2.2% a year in phase 3 of the EU ETS, and will drop by 4.3% a year until 2027 and 4.4% a year after 2027 once the Fit for 55 legislative package is fully ratified by the European Council.  ‍
• December contract - benchmark EUA contract, has the most liquidity

Trading terminology

• Bearish: price of an asset will decrease
• Bullish: price of an asset will increase
• ‍Option: an option is a contract which conveys to its owner the right but not the obligation to buy or sell a specific quantity of an underlying asset, at a specified strike price on or before a specified date. EUA options are ‘European style’ Options, meaning that the option will be automatically exercised on the expiry date provided that option is in the money.
• ‍Forward: In finance, a forward contract is a non standardized contract between two parties to buy or sell an asset at a specified future time at a price, agreed on at the time of conclusion of the contract.  ‍
• Future: In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future. As a financial instrument, it is traded on an exchange and is often the most liquid.