Carbon markets are markets for the buying and selling of the right to emit gases harmful to the atmosphere, such as methane and carbon dioxide. International law sets the limit on the amount of carbon emissions one company may undertake, and a company or country that exceeds this must buy credits to emit more. The companies and countries that fall under the emissions limit can then sell their excess credits to those in need of credits. In that way, carbon markets provide an incentive for institutions to be environmentally sound.
The effect of so-called greenhouse gases like methane and carbon dioxide on the Earth's atmosphere has become an increasingly popular topic for environmentalists. As such, nations around the world have been looking for ways to keep industry giants from polluting the air with the emissions from factories, cars, and the like. A worldwide environmental conference held in Kyoto, Japan in 1997 gave rise to an international law that was enacted in 2005 that limits the amount of greenhouse emissions permissible from both companies and nations. This law gave rise to carbon markets.
Basically, carbon markets are set up so that those who conduct their business or operations in an environmentally friendly manner may profit from these practices. These institutions can sell off their rights to emit carbon-based gases if they fall below the predetermined limit, or cap, on emissions. From these caps comes the notion of cap-and-trade, which sets up the trading of emissions credits between companies and countries.
By contrast, those companies or nations that go above the restrictions placed on their emissions must pay for the right to put these pollutants into the air. These institutions act as the buyers in the carbon markets, buying the shares or credits from those companies that have spare credits to sell. The limits depend on the type of institution involved, be it a nation or a company, and the type of industry in which it partakes.
Basic supply and demand principles hold sway over carbon markets just as they do over other markets, which makes green business practices even more lucrative. If there are more institutions looking to buy credits than there those who have excess credits to sell, it means that those who have the excess credits can demand higher prices for the credits. In this way, carbon trading creates a huge emphasis on sound environmental practices, because those who don't comply will suffer financially as a result.