Definition of carbon market

A market that is created from the trading of carbon emission allowances to encourage or help countries and companies to limit their carbon dioxide (CO2) emissions.  This is also known as emissions or carbon trading.

Carbon emissions trading is a way of reducing greenhouse gases produced by polluters. E.g., in the EU, it operates on a cap and trade system where a limit (cap) is set on C02 emissions and permits are given to emitters to release a certain amount of CO2.  If a company exceeds its allowance, it has to purchase additional permits to cover the excess.  If a company does not exceed its limit, then it can sell their unused allowances. [1]

Please note that this system does not take account of the wider market in carbon under the Kyoto protocol, which operates differently. [2]

Example
In August 2012, the EU and Australia have agreed to link their carbon markets in a move that both sides hope will lay the foundation for a global trading system to reduce greenhouse gas emissions.

Brussels is trying to accelerate that process by opening talks with South Korea, China and the state of California – where carbon markets are in various states of development – about possible forms of collaboration.

News of the Australia link sparked a short-lived rally in EU carbon permits, with prices jumping nearly 4 per cent as some traders anticipated a fresh source of demand, but those gains later evaporated. Each permit gives factories, airlines and other holders the right to emit a tonne of carbon each year without penalty. [3]

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Interactive graphic: The UN’s carbon trading system in numbers

Australia to join EU carbon market

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