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Carbon Trading better known as Emissions Trading or ‘Cap and Trade is a market-oriented mechanism articulated to reduce greenhouse gas (GHG) emissions in commerce and industry by creating an economic incentive to attract the sensibility of GHG emitters.

Firstly, this Emissions Trading was defined as a flexible mechanism for the mitigation of global warming in Article 17 of the 1997 Kyoto Protocol. A national limit is set on GHG emissions for every participating country, which decreases year-on-year based on agreed targets.

The Governments of participating countries issue or auction carbon credits to companies in participating industries based on projected levels of emissions. The gainer in this market is those Companies that emit less than their quota can sell and potentially profit from their remaining credits, while those that emit more than their quota are required to buy credits to make up the deficit.

As credits are getting scarcer, so the price of carbon are going up as markets are regulated by free market forces. The Global idea of Kyoto Protocal is to allow companies to decide for themselves whether it is more economical to reduce emissions in actual terms, develop cleaner production technologies, or simply buy credits.