EU ETS Aviation Glossary


Aerodrome: A defined area on land or water, including buildings, installations and equipment, intended to be used either wholly or in part for the arrival, departure and surface movement of aircraft.

Air operator's certificate (AOC): All commercial air transport operators must have a certificate under Part I of Annex 6 to the Chicago Convention.

Altimedes: Leading consulting firm supporting the transport sector realise a much higher fuel efficiency and the aviation sector to develop optimal trading strategies in the EU Emissions Trading System.  

Auctioning:  5% of the EU Aviation Allowances (EUAAs), some 32 million per year, will be auctioned in 2012. From 2013, 31.6 million will be auctioned and 3% held in reserve for new entrants and fast growing operators. The Auctioning Regulation provides for allowances to be auctioned in the form of spot products, which means delivery within a maximum of five working days after the auction. Any aviation operator is eligible to apply for admission to bid in auctions.

Backwardation: A market is in backwardation when prices for futures with distant expiry dates are below prices for futures with closer expiry dates.

Banking of allowances: A mechanism whereby participants are able to exchange excess allowances or credits from one trading period for new allowances or credits for use in later trading periods.

Bid: An offer in an auction to acquire a given volume of allowances at a specified price.

Bidding window: The time period during which bids may be submitted.

Call option:  A contract between two parties to exchange an asset (e.g. CERs,  EUAs) at a specified exercise or striking price. In some cases the option can be exercised only on one particular day (known as a European option) or, on or before that day (American option). The call option gives the buyer the right, but not an obligation, to buy the asset at the striking price while the seller has the obligation to sell the asset at the exercise price if the buyer exercises the option. Option trading takes place on a number of exchanges.

Clearing: All processes preceding the opening of the bidding window, during the bidding window and following the closing of the bidding window until settlement, involving the management of any risks arising during that interval, including margining, netting, or novation, or any other services, carried out possibly by a clearing or settlement system;

Clearing system: One or more infrastructure connected to the auction platform that can provide clearing, margining, netting, management of collateral, settlement and delivery, and any other services, carried out by a central counterparty, accessed either directly or indirectly through members of the central counterparty who act as intermediaries between their clients and the central counterparty;

Commercial air transport operators: Commercial air transport operators must hold an air operator's certificate (AOC) under Part I of Annex 6 to the Chicago Convention. Operators without such a certificate are not “commercial air transport operators”

Contango: A market is in contango when prices for futures with distant expiry dates exceed prices for futures with closer expiry dates.

Central counterparty: An entity which interposes either directly between an auctioneer and a bidder or its successor in title, or between intermediaries representing them, that acts as the exclusive counterparty to each of them guaranteeing the payment of the auction proceeds to the auctioneer or an intermediary representing it or the delivery of the auctioned allowances to the bidder or an intermediary representing it.

Certified Emission Reduction (CER): The unit of the Kyoto Protocol’s Clean Development Mechanism (CDM), equivalent to 1 metric tonne of CO2 equivalent.

Clean Development Mechanism (CDM): Flexible mechanism under Article 12 of the Kyoto Protocol through which EU companies may finance greenhouse gas emission reduction or removal projects in developing countries and receive credits (CERs) for doing so. These credits may be used up to a certain limit for compliance purposes within the EU ETS.

Clearing house: A clearing house acts as guarantor of the transaction in case of default by either the buyer or seller. Moreover, clearing houses provide netting services that central counterparties do not provide such as daily margining services for futures transactions pending their maturity date. Clearing houses are better suited for payment and delivery in futures auctions which require the netting of such margins.

Clearing price: The price at which the quantity of allowances supplied in an individual auction is equal to the quantity demanded in that auction. All bidders who bid at more than the clearing price receive the allowances that they bid for.

Community independent transaction log (CITL): A log that records the issuance, transfer, cancellation, retirement and banking of allowances that take place in the EU ETS registry.

Default: The act of failing to meet an obligation, e.g. to pay for or deliver allowances.

Delivery date: The day on which allowances or credits must be delivered to the buyer.

Derivative: Futures and options contracts are called derivatives because while their value can diverge from the value of the underlying in the spot or cash market, the value of these contracts is nevertheless derived from the value of the underlying.

Early auctions: Auctions held prior to the relevant year in the trading period. An allowance which falls under the cap calculated e.g. for the year 2014 may be auctioned in 2012 or 2013.

Emission Reduction Unit (ERUs): The unit of the Kyoto Protocol Joint Implementation (JI) flexible mechanism, equivalent to 1 metric tonne of CO2 equivalent.

EU allowances (EUAs): The currency used in the EU ETS. One EUA can be surrendered with respect to 1 metric tonne of CO2 equivalent of verified emissions.

EU Aviation Allowances (aEUAs or EUAAs): The currency used in the EU ETS which can only be used with respect to emissions from aircraft operators. One EUAA can be surrendered with respect to 1 metric tonne CO2 equivalent of verified emissions.

European carbon market: The market encompassing all trading of EU allowances and other carbon currencies such as CERs and ERUs in Europe be it through exchanges or OTC including all associated activities.

Exchanges: Organised markets for the buying and selling of financial instruments and/or commodities.

Five-day futures: Allowances auctioned as financial instruments for delivery at an agreed date no later than the fifth trading day from the day of the auction.

Flight: One flight sector, that is a flight or one of a series of flights which commences at a parking place of the aircraft and terminates at a parking place of the aircraft.

Forwards: A transaction between two parties to exchange a fixed volume of allowances against fixed payment at a future date. It is a direct, 'over-the-counter' (OTC) trade between two counterparties conducted bilaterally or through a broker.

Futures: A standardised, exchange-traded transaction to buy or sell allowances or credits at a designated future point in time at a price agreed upon today by the buyer and seller.

Futures auctions: Auctions of allowances in accordance with standardised terms and conditions to be delivered at some future date. Payment is deferred until delivery although buyers and sellers are subject to a margining system in the interim.

Futures position: The holding of futures commitments by an exchange participant.

Great Circle Distance: is the shortest distance between any two points on the surface of a sphere measured along a path on the surface of the sphere

Hedge: Offset exposure to price risk. An electricity producer that, e.g. commits to supply electricity in two years time will have a need for the corresponding EUAs in two years. It may hedge the price risk in the carbon market by buying carbon futures that will guarantee the delivery of allowances at the time it needs them at a pre-determined price.

Hybrid approach: Where several auction processes are coordinated by one centralised clearing platform taking into account aggregate demand (all bids collected by the auctioneers) and aggregated supply (all EUAs auctioned by all auctioneers). So calculating the clearing price, resolving ties, managing the corresponding software and possibly collateral, payment and delivery would be carried out at a central level, whereas registering participants and collecting bids would be taken care of by several auction processes at a decentralised level

Initial margin call: The initial security payment made to an exchange's clearing house by the buyer and seller of futures in order to guarantee the eventual trade.

Intermediaries: Companies trading in EUAs or other products on behalf of, or in order to satisfy demand from others, in particular ETS operators.

Issuance date: The date by which freely allocated allowances are issued to ETS operators in a given year. The date by which Member States have to issue EU allowances is 28 February of each year.

Joint Implementation (JI): Flexible mechanism under Article 6 of the Kyoto Protocol through which EU companies may finance greenhouse gas emission reduction or removal projects in other developed countries and receive credits for doing so (ERUs). These credits may be used up to a certain limit for compliance purposes within the EU ETS.

Kyoto credits: Emission reduction credits generated by Clean Development Mechanism or Joint Implementation projects under the Kyoto Protocol.

Long position: The holder of the position owns a commodity or rights to a commodity under a financial instrument and will stand to profit if the price of that commodity rises.

Long-term certified emission reductions (lCERs): CERs issued in respect of afforestation or reforestation CDM project activities.

Lot size: Number of allowances associated with one unit of the auctioned product.

Margining system: A system designed to manage risks pertaining to futures. Under a margining system, the buyer and seller pay an initial margin call of 10% and daily variation margin calls in accordance with changes in the market price of the futures not covered by the 10% initial margin call until maturity of the futures. A margining system is managed by a clearing house.

Market maker: A person who holds himself out on the financial market on a continuous basis as being willing to deal on own account by buying and selling financial instruments against its proprietary capital at prices defined by him.

Maturity date: The date when a futures expires. The maturity date of futures is the date where settlement and delivery of the allowances is foreseen.

MRV: Monitoring, reporting and verification of tonne-kilometre data and emissions

National Allocation Plans (NAPs): Member State plans with respect to the first or second trading periods determining the quantity of EU allowances to be issued by that Member State and the method of allocation, in particular with respect to free allocations to installations taking part in the EU ETS in that Member State.

New Entrants Reserve (NER): A quantity of allowances set aside with respect to allocations for free to new installations that are established during the course of a trading period.

Nominated bank account: A bank account designated by an auctioneer, a bidder or its successor in title for the receipt of payments.

Nominated holding account: One or more type of holding account for the purposes of participating in or conducting the auction process including the holding of allowances in escrow, pending their delivery.

Non-competitive bids: Bids for a fixed quantity without specifying a price. Participants submitting and winning such bids pay the clearing price.

Over-the-counter (OTC): Trading not mediated by an exchange but undertaken directly between the trading parties. OTC-trades are often facilitated by a broker.

Primary market: The primary market refers to auctions of EUAs and EUAAs. Primary issuance of allowances takes place in respect of free allocation (which is not a 'market') and in respect of auctioned allowances.

Put option  A contract between two parties to exchange an asset (e.g. CER,  EUA) at a specified exercise or striking price. In some cases the option can be exercised only on one particular day (known as a European option) or, on or before that day (American option). A put option gives the buyer  the right, but not an obligation, to sell the asset at the striking price while the seller has the obligation to buy the asset at the exercise price if the buyer exercises the option. Option trading takes place on a number of exchanges.

REDD: Reducing Emissions from Deforestation and Forest Degradation. The UN-REDD Programme is the United Nations Collaborative initiative on Reducing Emissions from Deforestation and forest Degradation (REDD) in developing countries.

Removal units (RMUs): issued by Annex B Parties on the basis of their land use, land-use change and forestry (LULUCF) activities.

Reserve price: The minimum price the seller will accept at auction.

Secondary market: The market in which carbon units (EU allowances, CERs or ERUs) are traded after they are initially offered in the primary market. In the secondary carbon market an traders transact with each other rather than with an issuing authority.

Settlement: Payment by a successful bidder, or its successor in title, or a central counterparty, or a settlement agent of the sum due for allowances to be delivered to that bidder or its successor in title, or a central counterparty, or a settlement agent, and delivery of the allowances to the successful bidder or its successor in title, or a central counterparty or a settlement agent.

Settlement date: The date on which a carbon trade is closed out through payment of the amount due.

Short position: The holder of the position owes obligations to deliver a commodity or financial instrument that it does not necessarily own at a future date at a pre-determined price. It stands to gain if the price of the commodity or financial instrument were to fall in the interim.

Single-round sealed-bid model: An auction design where bidders only have one time slot to submit bids which are submitted confidentially and opened simultaneously.

Spot futures: A futures trade with a maturity date only a few days after the contract date. Spot futures are regulated as financial instruments in the Markets in Financial Instruments Directive (MiFID), though in practice they have characteristics comparable to spot trades.

Spot: A transaction in which a commodity is bought or sold for immediate delivery or delivery in the very near future.

Spot auctions: Refer to auctions resulting in immediate or near immediate payment and delivery.

Spreads: The price difference between two defined assets.

Surrendering: The annual process whereby ETS operators submit EUAs to the appropriate national registry in order to comply with their obligations arising from emitting greenhouse gases. Verified emissions must be matched by an equal amount of allowances.

Surrendering date: The deadline for ETS operators to surrender allowances with respect to their emissions in a given year. This date is 30 April of the following year.

Temporary certified emission reductions (tCERs): CERs issued in respect of afforestation or reforestation CDM project activities.

Two-day spot: Allowances auctioned for delivery at an agreed date no later than the second trading day from the day of the auction

Trading period: EU allowances are valid for a specific multi-annual trading period. As from 2013 onwards, trading periods will last 8 years. The EU ETS does not have an annual 'vintage'. Sometimes, trading periods are also referred to as 'phases'.