How is carbon traded?

There are two main ways to exchange carbon.
The first is what is called a cap-and-trade scheme whereby emissions are limited and can then be traded. Under Kyoto developed countries can trade between each other.
The European Trading Scheme (ETS) is a cap-and-trade scheme and the largest companies-based scheme around.
It is mandatory and includes 12,000 sites across the 25 European Union member states.
It came into force in 2005 and covers heavy industry and power generation, including non-European companies.
There are also voluntary cap-and-trade schemes.
The Chicago Climate Exchange (CCX) is such a scheme.
Interest in carbon trading at regional level is increasing in America, even though the US government has decided not to ratify Kyoto.
The UK also has its own voluntary scheme, for which companies cut their emissions in return for incentive payments.
The second main way of trading carbon is through credits from projects that compensate for or "offset" emissions.
The Kyoto protocol's Clean Development Mechanism (CDM), for example, allows developed countries to gain emissions credits for financing projects based in developing countries.
A Kyoto mechanism called Joint Implementation (JI), also involves project-based schemes whereby one country can receive emissions credits for financing projects that reduce emissions in another developed country.
Compliance is critical.
Under their Kyoto obligations, industrialised countries have 100 days after final annual assessments to pay for any shortfall - by buying credits or more allowances via emissions trading.
Failure to do so leads to further penalties.
In voluntary schemes, by contrast, this is not the case.


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