The trading of CO2 and other GHG emissions has existed for many years. The GHG emissions market is developing rapidly and analysts forecast that by 2010 the overall market could be worth upwards of US $10 billion a year.
 The largest market by far is the EU Emissions Trading Scheme (EU ETS) which began in January 2005. The EU ETS encompasses 11,500 industrial installations across sectors that include oil refining, power generation, pulp and paper manufacturing and cement production. All European Union companies in certain energy-intensive sectors is required to monitor and comply with allocated emission quotas.
Each EU country is nationally allocated a certain amount of CO2 emissions and that country then allocates emission allowances to companies in the relevant industry sectors. The companies must yearly surrender sufficient emissions allowances and carbon credits to equate to the amount of CO2 units that they have emitted in that year. Any overages can be offset by purchases of emissions allowances or credits on the open market. If the companies don't submit sufficient emission allowances or credits they will be fined.
Under the set provisions of the EU ETS, CERs can be traded and used fully interchangeably with emissions allowances, hence the price of emissions allowances is a proxy for the market value of CERs. In the first eight months of trading, EU allowance prices rose from around €8 per ton to a peak of €30 per ton before settling back to around €22 per ton by the end of August. Traded volumes averaged 8.5 million tons a month.
Outside the EU ETS there are a number of other carbon emission trading schemes, including programs in countries that have not signed up to the Kyoto Protocol. For example, in both the US and Australia, certain individual state governments are introducing legislation that places binding constraints on GHG emissions, despite the lack of action at a national level.
Emissions trading is a way of introducing flexibility into a system where participants have to meet emissions targets. These participants may be countries (as in the case of the Kyoto Protocol), or companies (as in the case of a domestic emissions trading scheme). Participants can buy units to cover any emissions above their targets, or sell units if they reduce their emissions below their targets. The presence of a market for these units creates a value for emissions reductions which stimulates investment in the most cost-effective areas. Emissions trading leads to a reduction in compliance costs compared to meeting the same target through domestic/internal means only.
The Clean Development Mechanism (CDM) of the Kyoto Protocol allows projects in developing countries to generate emission credits if they result in emission levels lower than would otherwise be the case; these credits can be marketed and eventually counted against a developed country's emission obligation. The IEA provides analysis on the effectiveness of the different emissions trading scheme options, both at international and domestic level.
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