A
Accumulation: the build up of a particular pollutant over time
Acid Rain: term applied to acid precipitation formed when emissions
of sulfur dioxide (SO2) and oxides of nitrogen (NOx)
react in the atmosphere with water and other compounds
Acid Rain Program: created under the Clean Air Act to reduce acid
rain; employs a cap and trade framework to achieve SO2 reductions
Acute Loading: a term that applies to the short-term build up of a
pollutant and which suggests that, in the short-term, significant amounts of a
pollutant can accumulate
Allowance: the term generally used to refer to the emission reduction
unit traded in emissions trading programs; in the Acid Rain Program this term
specifically means the limited authorization to emit one ton of SO2
during a given year.
Allowance Loan: transaction wherein an owner of allowances, the
lender, allows another party, the borrower, to use the allowances. The borrower
customarily promises to return the allowances after a specified period of time
with payment for their use, called interest. The allowances returned are not
necessarily the exact ones loaned, but are allowances of similar vintage years
Allowance Loan Rate: payment for the lending of allowances over a
specified period of time, calculated including the cost-of-carry charge
Allowance Tracking System (ATS): a computerized system administered
by EPA and used to track the allowances and allowance transactions by all
market participants
Allowance Transfer Form (ATF): official form used to report allowance
transfers to the ATS. The ATF lists the serial numbers of the allowances to be
transferred and includes the account information of both the transferor and the
transferee
Ask: the price a prospective seller is willing to accept (a.k.a.
"offer")
Average Weighted Price: calculation used to determine price taking
into account the quantity of allowances sold
B
Bear Market: prolonged period of falling allowance prices.
Bid: price a prospective buyer is willing to pay
Broker: person who acts as an intermediary between a buyer and a
seller, usually charging a commission
Bubble: a regulatory term which applies to the situation when a
company combines a number of its sources in order to control pollution in
aggregate; under a bubble facility operators are allowed to choose which
sources to control as long as the total amount of emissions from the combined
sources is less than the amount each source would have emitted under the
conventional requirement
Bull Market: prolonged rise in the price of allowances. Bull markets
usually last at least a few months and are characterized by high trading volume
C
Call Option: a contract that grants the right to buy, at a specified
price, a specific number of allowances by a certain date
Clean Air Act Amendments of 1990: reauthorization of the Clean Air
Act; passed by the U.S. Congress; strengthened ability of EPA to set and
enforce pollution control programs aimed at protecting human health and the
environment; included provisions for Acid Rain Program
Clearing Price: price at which a buyer and seller agree to transact a
trade
Collar/Zero-cost Collar: set of contracts used to hedge against the
risk of prices moving in both directions; involves purchasing a call option and
selling a put option. Option premiums in a collar that cancel each other out
are "zero-cost" collars
Confirmation Sheet: formal memorandum from a broker to a client
giving details of an allowance transaction
Cost-of-carry: out-of-pocket costs incurred while an allowance holder
retains allowances for future transfer
Counterparty: the party opposite the buyer or seller in a transaction
Credit Risk: the financial risk that an obligation will not be paid
and a loss will result
D
Deferred Swap: a trade of one allowance for another in order to
exchange the vintage years of the allowances; settlement occurs after more than
180 days
Demand-side: a term referring to the need (or demand) for power
generation among a utility's customers
Designated Representative: for a unit account, the individual who
represents the owners and operators of that unit and performs allowance
transfer requests and all correspondence with EPA concerning compliance with
the Acid Rain Program; for general accounts this refers to the person who is
authorized to transact allowances from each account
Dispatch: the ordered use of generation facilities by an electric
power utility including which units will operate, when they will operate, and
at what capacity
E
Exercise Date (or Expiration Date): last day on which an option can
be exercised
F
Forward Settlement: purchase or sale of a specific quantity of
allowances at the current or spot price, with delivery and settlement scheduled
for a specified future date
G
General Accounts: accounts in the SO2 or NOx
ATS's which were created after the initial allocation; general accounts can be
opened by any individual and they are not automatically adjusted for compliance
Global Climate Change: change in the earth's climate; caused by
increasing greenhouse gas (GHG) concentrations in the atmosphere; human
activities considered to be major new source of GHGs
Greenhouse Gases: variety of gases including carbon dioxide, methane,
and nitrous oxide; the buildup of these gases in the atmosphere prevents energy
from the sun to escape back out into space, creating the "greenhouse
effect"
Ground-level Ozone: the occurrence in the troposphere (at ground
level) of a gas that consists of 3 atoms of oxygen (03); formed
through a chemical reaction involving oxides of nitrogen (NOx),
volatile organic compounds (VOC), heat and light; At ground level, ozone is an
air pollutant that damages human health, vegetation, and many common materials
and is a key ingredient of urban smog.
H
Hedge: strategy used to offset investment risk. A perfect hedge is
one eliminating the possibility of future gain or loss
I
Immediate Settlement: conclusion of an allowance trade in which a
party pays for allowances within days of the confirmation of the transaction
Immediate Vintage Year Swap: an trade of one allowance for another in
order to exchange the vintage years of the allowances; settlement occurs within
days (or at least less than 180 days)
J
K
Kyoto Protocol: an agreement
under the UNFCC signed by 84 nations; establishes greenhouse gas targets
("budgets") and framework for implementation; the Protocol has been
agreed to and signed by the U.S.
and now awaits ratification by the U.S. Senate
L
Long: a market position in which a party records (or anticipates
recording) emissions less than its yearly emissions allocation, thus it has
surplus allowances
Long-term Forward purchase or sale of a specific quantity of
allowances, with delivery and settlement scheduled for a specified future date,
usually more than one year out
M
Market Maker: an individual or company that maintains firm bid and
offer prices in allowances by standing ready to buy or sell allowances at
market prices
N
National Ambient Air Quality Standards (NAAQS): health-based standards
for a variety of pollutants set by EPA that must be met by states across the country
Natural long: a party whose allowance allocation is greater than its
actual emissions
Natural short: a party whose allowance allocation is less than its
actual emissions
Nitrogen Oxides (NOx): gases produced during combustion of
fossil fuels in motor vehicles, power plants and industrial furnaces and other
sources; is a precursor to acid rain and ground-level ozone
NOx Budget Program: a NOx cap and
trade program adopted by 13 jurisdictions in the Northeast to address ozone
transport in that region
O
Offers: price at which someone who owns an allowance is willing to
sell (a.k.a. "Ask")
Option: a contractual right to buy or sell allowances at an
agreed price; the option buyer pays a premium for this right. If the option is
not exercised after a specified period it expires Option Premium: amount
per share paid by an option buyer to an option seller for the option Out-of-the-money
Call Option: term used to describe an call option whose strike price for an
allowance is higher than the current market value
Out-of-the-money Put Option: term used to describe a put option whose
strike price for an allowance is lower than the current market value
Over-the-counter Market: Market in which allowance transactions are
conducted through the direction interaction of counterparties rather than on
the floor of an exchange
Ozone Transport Assessment Group (OTAG): a multi-stakeholder
workgroup convened to address problems associated with the long-range transport
of ozone and its precursors; encompassed stakeholders in 37 jurisdictions
P
Put Option: a contract that grants the right to sell, at a specified
price, a specific number of allowances by a certain date
Power Pool: a situation where output from different power plants are
"pooled" together, scheduled according to increasing marginal cost,
technical and contractual characteristics (so-called must-runs), and dispatched
according to this "merit order" to meet demand
Q
R
Regional Clean Air Incentives Market (RECLAIM): initiated in
1993; a set of market initiatives designed address air pollution in the Greater
Los Angeles area of California;
includes cap and trade programs for NOx and SOx
Retire (Allowances): to remove a portion of allowances from the
market
S
Scrubbers: a pollution control technology utilized in power plants to
remove pollutants from plant emissions
Short: a market position in which a party records (or anticipates
recording) emissions in excess of its yearly emissions allocation, thus it has
a deficit of allowances
Short-term Forward: purchase or sale of a specific quantity of
allowances at the current or spot price, with delivery and settlement at a
specified future date, usually within one year
Smog: originally meaning a combination of smoke and fog, smog now
generally refers to air pollution; ground level ozone is a major constituent of
smog
SO2 Allowance Auction: provided for in the Clean Air Act,
the SO2 auction is held annually by the US EPA; the auctions
help to send the market an allowance price signal, as well as furnish utilities
with an additional avenue for purchasing needed allowances
South Coast Air Quality Management District (SCAQMD): the air
pollution control agency for the four-county region including Los
Angeles and Orange counties and
parts of Riverside and San Bernardino counties
Special Allowance Reserve: roughly 2.8 percent of the cap set aside
each year to supply the annual allowance auction
State Implementation Plan (SIP): the plan that each state must
develop and have approved by the US EPA which indicates how the state will
comply with the requirements in the Clean Air Act; each State's SIP is amended
as they address specific or new requirements such as the NOx
reductions required in the NOx SIP Call
Strangle: sale or purchase of a put option and a call option on the
same underlying instrument, with the same expiration, but at strike prices
equally out of the money.
Strike Price (or Exercise Price): price at which the allowance
underlying a call or put option can be purchased (call) or sold (put) over the
specified period.
Sulfur Dioxide (SO2): a gaseous pollutant which is
primarily released into the atmosphere when as a by-product of fossil fuel
combustion; the largest sources of SO2 tend to be power plants that
burn coal and oil to make electricity
Supply-side: a term referring to the generation (or supply) of power
by a utility
Swap: an exchange of one allowance for another to exchange the
vintage years of the allowances held in accounts
T
Time Weighting: an investment strategy in which allowance
purchases and sales are transacted over an extended period of time and in small
increments, thereby eliminating risk associated with highs and lows in the
market
Trader: anyone who buys or sells allowances with the intention of
making a profit
U
Unit Accounts: accounts in the SO2 or NOx ATS's
which hold allowances initially allocated to those sources required to
participate in either the acid rain or OTC NOx programs; EPA adjusts
these accounts for compliance each year
United Nations Framework Convention on Climate Change (UNFCC): a
treaty signed in 1992 by 165 countries and ratified by 160 countries (including
the U.S.);
took effect in March 1994; set a target of stabilizing greenhouse gas
concentrations in the atmosphere to a level that would prevent dangerous
anthropogenic interference with the climate system; established a framework for
agreeing to specific actions
V
Vintage Year: represents the first year in which the allowance
can be used for compliance
W
X
Y
Z