What are Carbon Markets?

Jim B.
Jim B.
Carbon markets are intended to limit air pollution from sources like factories.
Carbon markets are intended to limit air pollution from sources like factories.

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.

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Discussion Comments


I don't know too much about carbon markets. I have just read this article.

Are all countries and all industries in those countries automatically in the market? Or is it just those countries that went to the Kyoto meeting and signed the agreement?

How do they punish countries who don't want to participate?


I think the carbon trading market system is really interesting because it's a global system and has many countries participating. I'm also interested in how this market would be monitored or regulated.

Just think about it. All of the countries participating are developed countries and I think all developed countries produce a lot of emission because of the number of cars, industries and so forth. I'm sure these countries are also trying to protect their industries while telling them to reduce their emissions.

I just think that this system seems very similar to how the United Nations works. In the UN, several countries dominate and help make most of the decisions. The big countries in the carbon markets might do the same thing.


I'm shocked to know that there isn't a set price for emission credits. Even if there is no maximum limit to the price of credit, there must be a minimum right?

Companies would only be willing to reduce emissions if the cost of doing so is less than buying credits. Otherwise they would just buy those extra credits, of course if they are available.

Now I understand better why it's called a carbon market, it really is a market. Is there a downside to having this system run on such profit based interest though?

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    • Carbon markets are intended to limit air pollution from sources like factories.
      Carbon markets are intended to limit air pollution from sources like factories.