Carbon Markets Glossary
Welcome to the Grey Epoch’s Carbon Markets Glossary. We provide clear, expert definitions of key emissions trading and environmental market terms to help you navigate this complex landscape with confidence.
California Carbon Allowances (CCAs)
CCAs are tradable compliance instruments under California's Cap-and-Trade Program, one of the most comprehensive subnational carbon markets globally. Each CCA grants the holder the right to emit one metric ton of CO₂e. California’s program has helped reduce emissions by over 15% since 2013, with revenues funding green projects worth billions⁸.
Cap-and-Trade System
A cap-and-trade system is a market-based approach to controlling greenhouse gas emissions. Regulators set a cap on total emissions and issue a limited number of allowances. Companies can trade allowances among themselves, creating financial incentives to reduce emissions cost-effectively. Those that emit less than their allowance can sell the surplus, while those that exceed their allowance must buy additional units.
Carbon Credit
A carbon credit represents a verified emission reduction or removal of one metric ton of CO₂ equivalent achieved by an environmentally positive project. Carbon credits enable compliance or voluntary offsetting, driving finance towards sustainable initiatives globally.
Carbon Leakage
Carbon leakage occurs when companies transfer production to regions with laxer emission constraints, potentially increasing global emissions. The EU ETS includes mechanisms to prevent leakage, like free allocation of allowances to vulnerable industries.
Carbon Pricing
Carbon pricing assigns a cost to emitting greenhouse gases, creating an economic incentive for reduction. Carbon prices in the EU ETS averaged around €65 per tonne in 2024, reflecting increasing ambition in climate policy¹².
CBAM (Carbon Border Adjustment Mechanism)
CBAM is a proposed EU policy to impose tariffs on imported goods based on their carbon content, aiming to prevent carbon leakage and level the playing field with EU producers under the ETS.
Compliance Market
The compliance market refers to regulated emission trading systems, like the EU ETS, UK ETS, or California’s Cap-and-Trade, where participation is mandated by law for covered entities. These markets facilitate cost-effective emissions reductions within legal frameworks.
ETS2 is a new emissions trading scheme introduced by the 2023 EU ETS Directive revision, effective from 2027. It specifically targets emissions from fuel used in heating buildings and road transport. Covering circa 40% of EU CO₂ emissions that were previously unregulated by ETS1, ETS2 shifts compliance responsibility to fuel suppliers, expanding Europe’s carbon pricing reach³.
EU ETS (European Union Emissions Trading System)
The EU ETS is the largest international carbon market, launched in 2005, covering over 11,000 power stations and industrial plants across 31 countries. It limits emissions of greenhouse gases by capping total carbon output and allowing trading of emissions allowances (EUAs). Billions of tonnes of CO₂ have been regulated through the system since inception, making it critical to Europe’s climate goals¹²³.
EUA (EU Allowance)
An EUA is a tradable permit under the EU ETS representing the right to emit one metric ton of CO₂ equivalent. Surrendering EUAs is mandatory for regulated entities to cover their verified emissions. In 2024, Grey Epoch traded over 1.4 billion EUA products, reinforcing our position as the world’s second-largest ETS trader¹².
Forward Purchase
A forward purchase agreement locks in the price and quantity of allowances or carbon credits for future delivery, enabling companies to hedge against price fluctuations and secure budget certainty for meeting compliance obligations.
A Guarantee of Origin certifies that 1 megawatt-hour of electricity has been generated from renewable sources. GOs are central to European renewable energy markets, promoting transparency and consumer trust by verifying clean energy usage, essential for reducing Scope 2 emissions under corporate sustainability frameworks³.
Hedging
Hedging involves using strategies, such as forward procurement and price caps, to manage the risk of unfavorable price movements in emissions allowances markets.
ICAO CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation)
Created by the International Civil Aviation Organisation in 2016, CORSIA is the first global market-based mechanism to reduce international aviation emissions. Participating airlines voluntarily offset CO₂ emissions above 2020 levels by buying carbon credits. Aviation accounted for 2-3% of global CO₂ emissions in 2023, making CORSIA pivotal to sustainable flight⁶.
Market Stability Reserve (MSR)
The MSR is an EU ETS mechanism designed to improve market resilience by adjusting allowance supply to mitigate extreme price volatility. It works by temporarily removing surplus allowances from the market and releasing them only if prices spike. Since its introduction in 2019, the MSR has reduced the total allowance oversupply by over 2 billion tonnes¹².
Offset Projects
Common offset projects include reforestation, renewable energy (solar, wind, hydro), methane capture from landfills, and energy efficiency initiatives. High-quality projects are validated by standards such as Verra’s Verified Carbon Standard, Gold Standard, and American Carbon Registry.
Registry Account
An entity’s registry account holds and tracks emission allowances or carbon credits. For example, in the EU ETS, companies must have a Union Registry account to surrender allowances and trade EUA products.
Scope 1, 2, and 3 Emissions
Scope 1: Direct emissions from owned or controlled sources.
Scope 2: Indirect emissions from the generation of purchased electricity, steam, heating, and cooling.
Scope 3: All other indirect emissions occurring in the value chain (e.g., supplier activities, product use).
Understanding scopes is vital for emissions reporting and carbon market participation.
Spot Trading
Spot trading involves the immediate purchase or sale of emissions allowances or credits with near-instant delivery, allowing market participants to respond flexibly to short-term price movements and compliance timelines.
Swiss ETS (Swiss Emissiosn Trading System)
The Swiss Emissions Trading System (Swiss ETS) is Switzerland’s cap-and-trade carbon market, covering energy-intensive industries. It sets a limit on total emissions and allows companies to trade emission allowances to meet compliance targets.
Since 2020, the Swiss ETS has been linked with the EU ETS, enabling mutual recognition of allowances and aligning carbon prices across both markets. This connection supports a consistent approach to emissions reduction and cost management in Europe.
UK ETS (United Kingdom Emissions Trading Scheme)
Launched in 2021 after Brexit, the UK ETS mirrors many features of the EU ETS but now operates independently with a tighter emissions cap aligned to the UK's net-zero goals by 2050. It regulates power generation, industry, and aviation within the UK, trading UK Allowances (UKAs) to enable market-based carbon compliance⁵.
The VCM allows businesses to offset greenhouse gas emissions on a voluntary basis by purchasing verified carbon credits from projects like reforestation, renewable energy, and methane capture. In 2024, the voluntary market reached a record value of over $2 billion, rapidly growing as companies push beyond regulatory requirements for net-zero commitments⁷.
If you have questions about these terms or would like to learn how Grey Epoch can help your business navigate the carbon markets, then reach out.
References:
ERCST, 2025 State of the EU ETS Report, May 2025 — https://ercst.org/wp-content/uploads/2025/05/20250520-2025-State-of-the-EU-ETS-Report-Final.pdf
ERCST, 2025 State of the EU ETS Report Summary — https://ercst.org/2025-state-of-the-eu-ets-report/
European Commission, About the EU ETS, 2023 – https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/about-eu-ets_en
ICAP Carbon Action, EU ETS Overview — https://icapcarbonaction.com/en/ets/eu-emissions-trading-system-eu-ets
UK Government, UK ETS Installations Data 2025 — https://www.gov.uk/government/publications/participating-in-the-uk-ets/uk-ets-installations-hospitals-small-emitters-and-ultra-small-emitters-baseline-data-collection-1-april-30-june-2025
ICAO CORSIA official site and climate reports 2024
Voluntary Carbon Market industry reports 2024 (e.g., Ecosystem Marketplace)
California Air Resources Board 2025 reports
