The carbon trading concept came out of the necessity to decrease greenhouse gas emissions, and has become increasingly popular throughout the world in the last few years. Carbon trading is basically a trade in carbon credits in which each credit allows the owner to release one tonne of carbon dioxide and other greenhouse gases into the atmosphere, and it is the basic trading principle governing the cap-and-trade system as devised in the Kyoto Protocol.

The Kyoto protocol has fixed a limit on how much discharge can be permitted globally, which is later converted into carbon credits, and each operator receives a particular number of these credits. Companies that have extra credits due to their adherence to greener alternatives can sell credits to companies that will fall into the high-emission segment for going above their authorized limits. High-emission operators are discouraged for their high emissions by this monetary compensation for polluting the atmosphere.

So far carbon trading has been an effective system, with market responses indicating that several large companies throughout the globe are supporting this emission-lowering system. This is because such inter-company transactions help in their short-term and medium-term planning.

If the statistics of the World Bank’s Carbon Finance Unit are to be considered, then carbon trading is growing at a great rate with each passing year. The years 2003 and 2004 witnessed a trading increase of 41% in the market, while the increase in the following cycle has been an incredible 240%. The carbon finance market, based in London, has also seen stupendous growth, which clearly indicates that the exchange of carbon credits has turned out to be a profitable business for many organizations. Despite being outside the Kyoto Protocol list of countries, many states and industries in the US have approved of the carbon credits scheme and have incorporated it in their business. Further, the EU, which has its own carbon trading market, has also been very active in this global trading market.

However, there are some groups who have criticised this system. As one of the goals of carbon trading is to promote the development of more eco-friendly, low-emission technologies, the exponential increase in carbon trading is a cause of concern as it indicates that companies are choosing to spend more on the buying of carbon credits instead of investing in more eco-friendly technologies. Therefore some groups are apprehensive of the long-term benefits of carbon trading, and some experts ave suggested the imposition of carbon tax to be paid by errant organizations as a better solution to greenhouse gas emissions.

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