Cap-and-Trade: The Glossary

You can’t navigate the new world of carbon trading unless you know the lingo. Here are some key terms.

AB 32
The Global Warming Solutions Act, passed by the California legislature and signed by Governor Arnold Schwarzenegger in 2006, is the authorizing legislation for cap and trade. It seeks to reduce total carbon emissions in the state to 1990 levels, by 2020. That's about 30% below where emissions would likely be absent substantial reduction efforts. A separate executive order requires a further 80% reduction by 2050.

The principle, often applied to carbon offsets, that a project should only be able to earn credits if the greenhouse gas emission reductions produced by the project exceed what would have happened in the absence of the carbon credit component. (Source: Point Carbon)

Under an emissions trading scheme, permits to emit can initially either be purchased by emitters or given to them for free. In California's program, 90% will be given away initially. The rest will be sold at auction in an initial market offering. (Source: Center for Climate Energy and Solutions)

Legally defined unit that entitles the holder to emit one metric ton of CO2-equivalent or another quantity of greenhouses gases. Also known as emission allowance or emission permit. (Source: Point Carbon)


The gaseous envelope surrounding the Earth. The dry atmosphere consists almost entirely of nitrogen (78.1% volume mixing ratio) and oxygen (20.9% volume mixing ratio), together with a number of trace gases, such as argon (0.93% volume mixing ratio), helium, radiatively active greenhouse gases such as carbon dioxide (0.035% volume mixing ratio) and ozone. In addition the atmosphere contains water vapor, whose amount is highly variable but typically 1% volume mixing ratio. The atmosphere also contains clouds and aerosols (particles). (Source: United States Environmental Protection Agency)

Common term used for the sale of allowances, as opposed to allocating them for free. California officials scheduled their first official auction for November 14, 2012. (Source: Point Carbon)

Base Year
Targets for reducing greenhouse gas emissions are often defined in relation to a base year. 1990 is the base year in California's program, as well as for most nations in the Kyoto Protocol. (Source: Center for Climate and Energy Solutions)

California Air Resources Board (ARB or CARB)
The regulatory agency charged with implementation of AB 32 and managing California’s cap-and-trade program.

California Environmental Protection Agency (CalEPA)
Parent agency of the Air Resources Board.

A flexible environmental regulation mechanism that sets an overall limit on the emission of a certain pollutant, but allows companies that can easily reduce emissions to sell credits to other companies for which such reduction would be difficult. The cap ensures that emissions will not exceed a desired amount. California’s program rolls out in two phases: power plants and large industrial facilities in 2013, expanding to distributors of oil, natural gas and transportation fuels in 2015. (Source: CSA)

Carbon Dioxide (CO2)
A naturally occurring gas, and also a by-product of burning fossil fuels and biomass, as well as land-use changes and other industrial processes. It is the principal human-caused greenhouse gas that affects the Earth's radiative balance, and the reference gas against which other greenhouse gases are measured and therefore has a Global Warming Potential of 1. (Source: United States Environmental Protection Agency)

Carbon Dioxide Equivalent (CO2e)
Measurement unit used to indicate the global warming potential (GWP) of greenhouse gases. Carbon dioxide is the reference gas against which other greenhouse gases are measured. (Source: Point Carbon)

Carbon Footprint
The total amount of greenhouse gases emitted into the atmosphere each year by a person, family, building, organization or company. A person's carbon footprint includes greenhouse gas emissions from fuel that an individual burns directly, such as by heating a home or riding in a car. It also includes greenhouse gases that come from producing the goods or services that the individual uses, including emissions from power plants that make electricity, factories that make products and landfills where trash gets sent. (Source: United States Environmental Protection Agency)

Climate Action Reserve (CAR)
Formerly the California Climate Action Registry, a non-profit voluntary and compliance registry for offsets. The Reserve is focused on developing standardized greenhouse gas reduction protocols, tracking offsets through a public database and serving as a project registry for voluntary as well as offsets eligible for compliance under AB 32. (Source: Point Carbon)

1) The act, specific to cap-and-trade schemes, of surrendering the required amount of allowances, or some combination of allowances and offsets, to cover an entity’s emissions. 2) Achievement by an entity in meeting its quantified emission limitation and reduction commitments under the applicable law or treaty. (Source: Point Carbon)

Covered Entity
Any organization subject to the cap & trade regulation. California’s program covers 360 businesses. The complete list is available as a PDF download from the CARB website.

Those practices or processes that result in the conversion of forested lands for non-forest uses. Deforestation contributes to increasing carbon dioxide concentrations for two reasons: 1) the burning or decomposition of the wood releases carbon dioxide; and 2) trees that once removed carbon dioxide from the atmosphere in the process of photosynthesis are no longer present. (Source: United States Environmental Protection Agency)

Emissions Cap
A mandated restraint in a scheduled timeframe that puts a “ceiling” on the total amount of anthropogenic greenhouse gas emissions that can be released into the atmosphere. This can be measured as gross emissions or as net emissions (emissions minus gases that are sequestered). California's cap will increase in 2015, when its cap-and-trade program expands to include more sources, then will decline about 3% each year until 2020, when the cap is expected to be 15% below the 2012 level.
(Source: Center for Climate and Energy Solutions)

Fluorinated Gases
A group of greenhouse gases regulated under California’s cap-and-trade program. Hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride are synthetic, powerful greenhouse gases that are emitted from a variety of industrial processes. Fluorinated gases are sometimes used as substitutes for stratospheric ozone-depleting substances (e.g., chlorofluorocarbons, hydrochlorofluorocarbons and halons). These gases are typically emitted in smaller quantities, but because they are potent greenhouse gases, they are sometimes referred to as High Global Warming Potential gases ("High-GWP gases").

Fossil Fuel
A general term for organic materials formed from decayed plants and animals that have been converted to crude oil, coal, natural gas or heavy oils by exposure to heat and pressure in the earth's crust over hundreds of millions of years. (Source: United States Environmental Protection Agency)

Greenhouse Effect
The insulating effect of atmospheric greenhouse gases (e.g., water vapor, carbon dioxide, methane, etc.) that keeps the Earth's temperature about 60“F warmer than it would be otherwise. (Source: Center for Climate and Energy Solutions)

Greenhouse Gas
Greenhouse gases (GHGs) are trace gases that control energy flows in the Earth's atmosphere by absorbing infrared radiation. Some GHGs occur naturally in the atmosphere, while others result from human activities. Those recognized by the U.S. EPA include: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and "fluorinated gases." CO2 is the most important GHG released by human activities. (Source: Point Carbon)

Term applied to businesses that leave the state rather than submit to cap-and-trade regulation. Sometimes called "carbon leakage" because emissions of the relocated industry are no longer regulated by the home state.

Low-Carbon Fuel Standard (LCFS)
The LCFS requires fuel providers to ensure that the mix of fuel they sell in the market meets, on average, a declining target for greenhouse gas emissions measured in grams of carbon dioxide equivalent per unit of fuel energy sold. California's LCFS mandates a 10% reduction in the carbon intensity of fuel production and use within California, by 2020. (Source: Point Carbon)

Methane (CH4)
CH4 is among the greenhouse gases recognized by the U.S. EPA. Atmospheric CH4 is produced by natural processes but there are also substantial emissions from human activities such as landfills, livestock and livestock wastes, natural gas and petroleum systems, coal mines, rice fields and wastewater treatment. CH4 has a relatively short atmospheric lifetime of approximately 10 years, but its 100-year GWP is currently estimated to be approximately 23 times that of CO2. (Source: Center for Climate and Energy Solutions)

Nitrous Oxide (N2O)
N2O is among the greenhouse gases recognized by the U.S. EPA. N2O is produced by natural processes but there are also substantial emissions from human activities such as agriculture and fossil fuel combustion. The atmospheric lifetime of N2O is approximately 100 years, and its 100-year GWP is currently estimated to be 296 times that of CO2. (Source: Center for Climate and Energy Solutions)

Emission reduction credits from project-based activities that can be used to meet compliance or corporate objectives as a supplement or alternative to reducing one’s own emissions. In a cap-and-trade scheme, offsets may be used instead of allowances, sometimes up to a limit. California allows the use of offsets to satisfy up to 8% of a company's compliance requirement. Initially four types of offset programs were allowed: expansion of forests and urban forests, methane capture on farms and ranches and reduction of ozone-depleting substances. (Source: Point Carbon)

Prop 23
An unsuccessful statewide ballot measure in 2011, largely financed by oil and gas interests, that sought to suspend California's regulations under AB 32.

Regional Greenhouse Gas Initiative (RGGI)
A regional cap-and-trade system that currently includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. The District of Columbia, Pennsylvania, the Eastern Canadian Provinces and New Brunswick are observers in the process. RGGI covers CO2 emissions from electric power plants in the region, and requires a 10% reduction in these emissions by 2018. The first three-year compliance period started in January 2009. In 2011, the states commenced a review process in order to determine whether to tighten the emissions cap so that emitters would be incentivized to reduce internal emissions further. The review process should be completed in 2013. (Source: Point Carbon)

Water Vapor (H2O)
Water vapor is the primary gas responsible for the greenhouse effect. It is believed that increases in temperature caused by anthropogenic (human-caused) emissions of greenhouse gases will increase the amount of water vapor in the atmosphere, resulting in additional warming. (Source: Center for Climate and Energy Solutions)


Western Climate Initiative (WCI)
Regional initiative launched in February 2007 by states and provinces, mostly along the western rim of the United States, Canada and Mexico. WCI is a collaboration of independent jurisdictions working together to identify, evaluate and implement emissions trading policies to tackle climate change at a regional level. Nominally, WCI partners are: California, Quebec, Manitoba, British Columbia and Ontario, but only California and Quebec have passed regulations which aim to reduce greenhouse gas emissions. (Source info: Point Carbon)