Introduction

Carbon trading is an economic trading instrument similar to securities or commodities in a marketplace. In other words, carbon dioxide generation is given an economic value allowing companies or nations to trade it. Entities or nations that buy carbon credit are effectively buying the rights to burn fossil fuels that emit carbon dioxide and, conversely, an entity selling carbon is giving up its rights to burn fossil fuel. The value of the carbon therefore is based on the ability of an entity owning the carbon to store it or to prevent it from being released into the atmosphere.

A carbon trading market thus created facilitates the buying and selling of the rights to emit greenhouse gases. The industrialized nations for which reducing emissions is difficult could, under the guideline of carbon trade, buy the emission rights from another nation whose industries do not produce as much of these gases.

The carbon trade came about in response to the Kyoto Protocol, signed in Kyoto, Japan, by some 180 countries in December 1997. The Kyoto Protocol members consist of 38 industrialized countries that jointly established guidelines to reduce their greenhouse gas emissions between the years 2008 and 2012 to levels 5.2% lower than those of 1990.