Carbon markets are the markets that result from the buying and selling of emission allowances (emissions trading) and reduction credits in order to limit companies and countries in the amount of greenhouse gases (GHG) that they produce. They are also known as cap-and-trade markets, as they place a limit on the amount of GHGs that the participants are allowed to produce. If the country or company produces more GHGs than their allotted amount, they must purchase more credits in order to cover its emissions levels. If they produce less than their allotted amount, they are able to sell their excess credits in the carbon market.
The Kyoto Protocol helped to develop carbon markets into one of the fastest growing commodities markets today, by helping to set the framework for mandatory emissions reduction schemes. Currently, the most active carbon markets are in Europe, such as the the European Climate Exchange.
The GHGs that are traded in carbon markets include:
- Carbon Dioxide (CO2)
- Methane (CH4)
- Nitrous Oxide (N2O)
- Sulfur Hexafluoride (SF6)
- Perfluorocarbons (PFCs)
- Hydrofluorocarbons (HFCs)