Carbon Trading: Driving Global Efforts in Emission Reduction and Sustainability
Carbon trading, also known as emissions trading, is a market-based policy tool designed to reduce greenhouse gas emissions cost-effectively. It operates on the "cap-and-trade" principle: a regulating authority (like a government or international body) sets an overall cap on total emissions for a specific period and creates a limited number of tradable emission allowances (each typically representing one tonne of CO₂ equivalent). Regulated entities (like power plants or factories) must surrender enough allowances to cover their actual emissions. Companies that reduce their emissions below their allowance allocation can sell their surplus allowances to those who find it more expensive to cut their own emissions, creating a financial incentive for the most cost-efficient reductions across the economy. The two major types of markets are compliance markets (mandated by law, like the EU ETS) and voluntary carbon markets (where companies and individuals buy credits to offset emissions voluntarily).