Glossary:Carbon market

A greenhouse gas trading system that enables monetization of emissions reductions and/or strong performance relative to other market participants. Participants may buy or sell units of GHG emissions in order to operate within the limits outlined by the agreement governing a particular market. Australia, China, the European Union and others have launched carbon markets as a potential tool to encourage emissions reduction. They work by capping the CO2 emissions any given project can release, and then letting companies and other entities buy and sell rights to those emissions. That means polluters who exceed their cap must pay for additional emissions rights, also known as carbon offset credits, while those who take action to lower their emissions can sell surplus credits. Some companies have turned carbon trading into a business by sponsoring climate-friendly activities — such as forest protection and renewable energy installations — to proactively produce carbon offset credits. But attempts to implement carbon markets also highlight their limitations: Many existing carbon-trading schemes are voluntary, emissions reduction benefits can be hard to verify, and past fraud raises questions about the credibility of carbon offset projects.