Emissions trading is a market-based instrument towards reducing greenhouse gas (GHG) emissions outlined within the Kyoto Protocol. Through emissions trading, an Annex I Party may transfer Kyoto Protocol units to or acquired from another Annex I Party. Specific eligibility requirements must be met for an Annex I Party to participate in emissions trading.

In an emissions trading scheme an allowable overall level of pollution is established and allocated among firms in the form of permits. Firms that keep their emission levels below their allotted level may sell their surplus permits to other firms or use them to offset excess emissions in other parts of their operations. Article 17 of the Kyoto Protocol states that countries are allowed to trade with their ‘allowances’, i.e. if a country does not emit its assigned amount of emissions, it can trade them with a country, which has too high emissions. Thus “carbon” has become a new commodity traded in “carbon markets”.

This mechanism is seen by many as a good alternative to traditional command and control policies due to its flexibility . Emissions trading is considered effective because it is economically efficient, is specifically designed to deliver an environmental objective, and delivers a clear price signal.


Can auctioning rescue the EU ETS market?
Compared to earlier trading periods, Phase III of the EU ETS will see a marked reduction in the free allocation of emissions allowances to industrial installations, with a corresponding increase i... Read more
The new market in EU aviation allowances - trouble ahead?
Trading in the latest type of carbon credit, EU aviation allowances (EUAAs), has begun despite remaining doubts as to the viability of the new market, which have been exacerbated by diplomatic tur... Read more
The future of international emissions credits in the EU ETS
In the aftermath of the Durban conference analysts have been turning their attention to the continued role of Kyoto Protocol emissions credits in the EU ETS. To date this trading mechanism has pro... Read more
A step closer to saving the emissions market at Durban: encouraging outcomes on the AAU surplus and linkage
By Climatico Contributor: Sabina Manea The outcome of the UN conference in Durban has been more positive than initially indicated by the complexity of the negotiations. It is particularly lauda... Read more
Tackling emissions surplus and linkage harder than expected at Durban
By Climatico Contributor: Sabina Manea A week into the Durban conference, progress on the continued workability of the Kyoto Protocol emissions trading mechanism is slow. A number of parties to the n... Read more