FAQs - Carbon Markets & Indices
The following frequently asked questions provide a guide to carbon terminology and ICE’s carbon products.
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What is a cap and trade program? ↘
What is the difference between a cap and trade program and a carbon tax? ↘
What’s the difference between a carbon allowance and a carbon offset? ↘
Are there different programs and standards for carbon offsets? ↘
What is the European Union Emissions Trading System?↘
What is an ICE European Union Allowance futures contract (EUA)? ↘
What is an ICE Certified Emission Reduction futures contract (CER)? ↘
What is the California Cap and Trade Program? ↘
What is an ICE California Carbon Allowance futures contract (CCA)? ↘
What is an ICE California Carbon Offset futures contract (CCO)? ↘
What is the Regional Greenhouse Gas Initiative? ↘
What is an ICE Regional Greenhouse Gas Initiative Futures Contract (RGGI)? ↘
What is a cap and trade program?
A cap and trade program is a market-based mechanism that governments or regulatory bodies use to reduce carbon dioxide and other greenhouse gases from entering the atmosphere. A cap and trade program is designed to set a geographic limit on the amount of carbon dioxide that can be emitted into the atmosphere by specific sectors of the economy. This limit declines on an annual basis, with the intention of reducing the overall amount of carbon dioxide emitted. Companies and other entities that are obliged to comply within a specific cap and trade program must either reduce their emissions below their allowable annual limit or use additional carbon allowances which at least equal their emissions above their annual limit to comply with the program. Physical carbon allowances can be purchased through centrally organized auctions or from other companies who have more than they need for compliance. Futures contracts of a carbon allowances can be bought and sold on a commodities exchange. Trading in carbon allowances also results in a transparent price of carbon emissions. This price signal incentivizes investments in clean and renewable technologies.
What is a carbon allowance?
A carbon allowance (also known as a carbon credit) is a government-issued permit, allowing a company or entity to emit a specific quantity of carbon dioxide equivalent into the atmosphere. Carbon allowances are issued in accordance with specific cap and trade program rules and can be traded between companies. Allowances are issued and transferred between different entities within specially designed carbon registries.
What is the difference between a cap and trade program and a carbon tax
A cap and trade program sets a limit on the allowable emissions each year, but the price of allowances can vary based on the market dynamics of supply and demand. A carbon tax does not directly regulate the amount of emissions which can be released; rather, by increasing the cost base of carbon-emitting activities, attempts to disincentivize companies from such activities.
What’s the difference between a carbon allowance and a carbon offset?
A carbon allowance is a permit to emit, while a carbon offset is a certificate awarded for a proactive initiative which reduces or removes emissions. A simple example of a carbon offset is planting a tree. Carbon offsets can be used for voluntary carbon reduction commitments and for compliance within a cap and trade program. Each cap and trade program has unique rules regarding what qualifies as a carbon offset and what amount can be used for compliance.
Are there different programs and standards for carbon offsets?
Yes, different organizations throughout the world have developed unique carbon offset programs. Within each program, carbon offset projects are qualified and carbon offsets are issued based on a specific set of criteria. Cap and trade programs identify which offset standards qualify for compliance, as well as create their own criteria. Major carbon offset programs found throughout the world include the American Carbon Registry, Climate Action Reserve, Verified Carbon Standard, The Gold Standard and the Clean Development Mechanism amongst others. Companies and other entities voluntarily choosing to reduce their emissions by purchasing carbon offsets must decide which carbon offset program(s) they would like to support.
What is the European Union Emissions Trading System?
The European Union Emissions Trading System (EU ETS) is the largest cap and trade program in the world and covers roughly 45% of the greenhouse gas emissions from the European Union. This program was put in place in 2005 and covers emissions from heavy industry, the power sector, and airlines within the EU. The program includes all EU member countries, as well as Iceland, Liechtenstein and Norway. For more information, please visit the European Commission website.
What is an ICE European Union Allowance futures contract (EUA)?
An ICE European Union Allowance futures contract is a futures contract for allowances issued by the European Union Emissions Trading System. It is a physically delivered product whereby contracts held to expiry result in physical delivery of EUA allowances within the Union Registry. For more information, please visit the European Commission website.
What is an ICE Certified Emission Reduction futures contract (CER)?
An ICE Certified Emission Reduction futures contract is a futures contract for a carbon offset unit issued by the Clean Development Mechanism pursuant to Article 12 of the Kyoto Protocol, and can be used to a certain extent for compliance obligations under the EU ETS. It is a physically delivered product whereby contracts held to expiry result in physical delivery of CER units within the Union Registry. For more information, visit the Union Registry overview from the European Commission.
What is the California Cap and Trade Program?
The California Cap and Trade Program is the first multi-sector cap and trade program in North America and is administered by the Western Climate Initiative (WCI) and regulated by the California Air Resources Board. This program began in 2013 with the state of California and has since expanded by linking with the province of Quebec to cover emissions from both jurisdictions. Allowances issued from both jurisdictions can be used interchangeably for compliance. The cap and trade program covers roughly 85% of the combined emissions from California and Quebec’s economies including large electric power plants, large industrial plants, and fuel distributors among other areas. For more information, visit the Cap-and-Trade program overview from the California Air Resources Board.
What is an ICE California Carbon Allowance futures contract (CCA)?
An ICE California Carbon Allowance futures contract is a futures contract for allowances issued by the California Cap and Trade Program. It is a physically delivered product whereby contracts held to expiry result in physical delivery of CCA allowances within the Compliance Instrument Tracking System Service (CITSS) registry. For more information, visit the California Carbon Allowance Vintage 2020 Future contract details.
What is an ICE California Carbon Offset futures contract (CCO)?
An ICE California Carbon Offset futures contract is a futures contract for ARB offset credits issued by the California Air Resources Board that can be used to a certain extent for compliance obligations under the California Cap and Trade Program. It is a physically delivered product whereby contracts held to expiry result in physical delivery of California carbon offsets beyond the risk of invalidation within the Compliance Instrument Tracking System Service (CITSS) registry. For more information, visit the ICE California Carbon Offset Futures product details.
What is the Regional Greenhouse Gas Initiative?
The Regional Greenhouse Gas Initiative (RGGI) is a multi-state cap and trade program which was established in 2009. This program covers carbon dioxide emissions from the power sector and includes the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. Each participating state has its own emissions cap, which limits emissions from electric power plants. Similar to the California program, allowances issued by each state can be used interchangeably for compliance. For more information, visit The Regional Greenhouse Gas Initiative.
What is an ICE Regional Greenhouse Gas Initiative Futures Contract (RGGI)?
An ICE Regional Greenhouse Gas Initiative futures contract is a futures contract for allowances issued by the RGGI cap and trade program. It is a physically delivered contract whereby contracts held to expiry result in physical delivery of RGGI allowances within the RGGI CO2 Allowance Tracking System (RGGI-COATS) registry. For more information, visit the Regional Greenhouse Gas Initiative Vintage 2020 Future contract details.
What is the ICE Global Carbon Index?
The ICE Global Carbon Futures Index is made up of pricing from the three most actively traded carbon markets in the world: the European Union Emissions Trading Scheme (EU ETS), the California Cap and Trade Program, and the Regional Greenhouse Gas Initiative (RGGI). Together these markets represent some of the largest regional economies in the world, and the secondary futures market for those programs, which trade on ICE’s futures markets, make up the majority of volume in all carbon-based futures contracts. For more information, visit the ICE Global Carbon Futures Family Index.
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