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Key EU ETS definitions

Below is a list of key terms to know when reading about the EU ETS.

 

Fuel switching: refers to a change from a more carbon intensive fuel type to a less carbon intensive fuel type. Typically this is used in the context of power production, where the economics of burning natural gas to make electricity can be compared with the economics of coal, which typically emits about double the CO2 of natural gas - therefore fuel switching can affect EUA demand and therefore the EUA price. Fuel switch from fossil fuels to renewables is also possible. Reverse fuel switch suggests a move to a more carbon intensive fuel type. 

Clean Dark Spread: a measure of profitability of a coal fired power plant. Clean refers to the EUA, dark refers to the coal and the spread refers to the profit between these costs and the power price. Typically if a Clean Dark Spread is better than a Clean Spark Spread, coal fired power should be favoured over natural gas, resulting in higher EUA demand. 

Clean Spark Spread: a measure of profitability of a gas fired power plant. Clean refers to the EUA, spark refers to the gas, and the spread the profit between these costs and the power price. 

Abatement cost: cost per tonne of CO2 at which technology reducing emissions becomes favoured over emitting - the EUA price should reflect this cost. 

EUA: EU Allowance, digital certificate corresponding to one tonne of CO2, issued in limited supply by the European Union. 

Market Stability Reserve: regulates EUA supply, looking at cumulative oversupply for the year past and cutting this by 24%. Applies to auctions on an August to August basis, cutting or increasing supply of EUAs.

Linear Reduction Factor: yearly cut to EUA supply, set at 4.3% per year until 2028 when it increases to 4.4% per year. 

Settlement Price: a daily calculated reference price, based on the volume weighted average of trading between 5:05 and 5:15 p.m. CET. 

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