Carbon Trading is a scheme where firms (or countries) buy and sell carbon permits as part of a programme to reduce carbon emissions.
Usually firms are given a certain quote to pollute a certain amount. If they wish to pollute more than their allowance then they have to buy more permits.
If they pollute less than their quota they can sell their spare permits on the market. Thus there is an incentive to reduce pollution and find the most efficient way of dealing with pollution.
Over time governments can reduce pollution quotas to encourage greater efficiency
Examples of Carbon Trading
An early example of an emission trading system has been the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the U.S. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions were reduced by 50% from 1980 levels by 2007
The European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. It is one of the EU’s central policy instruments to meet their cap set in the Kyoto Protocol (Jones et al., 2007, p. 64)