what is carbon market

Emissions trading (also known as cap and trade) is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or carbon credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society

Under the Kyoto Protocol, there are two main trading devices. The first, the Clean Development Mechanism (CDM), allows Kyoto countries to offset their emissions by investing in clean technologies in developing countries or purchasing the resultant Certificates of Emission Reduction (CERs) from such projects. The second, called Joint Implementation (JI), allows industrialized countries to do essentially the same thing, only in other industrialized countries.