What Is the Emissions Trading Market?

The emissions trading market is a term for the market created by environmental initiatives to ensure that environmentally harmful emissions such as carbon dioxide are kept to a minimum. To accomplish this objective, which can be undertaken on a national or, as in the case of the Kyoko Protocol, international level, levels must be set for the acceptable amount of emissions in terms of environmental effect. Any parties participating in this type of program that go over the limits must buy permits from parties who have gone below the required amount and earned credits for their effort. In this way, an emissions trading market is created for these credits.

Environmental concerns often fly in the face of the production efforts of large corporations. These problems can often be played out on an international level as well, considering that large, developed countries, due to their enormous amount of consumption, are among the world's worst polluters. While regulations can be effective in curtailing such practices, they provide no incentive for those parties who are environmentally conscious save the fact that they won't be penalized. An emissions trading market gives financial motivation so that everyone involved can find best practices for conducting business in an environmentally responsible manner.

Setting up an emissions trading market requires some ruling body to set limits on the amount of potentially harmful emissions that a company or country may produce. This occurred on an international level with the Kyoto Protocol, which requires all adherents to stay within certain emissions limits. The total amount of acceptable emissions is then divided up into units.

Once this process is completed, it is up to parties involved in an emissions trading market to try and keep below the predetermined standards. If they do fall below the emissions limits, they will earn credits based on these practices. The parties that go over the limits must then buy credits for the right to do so. Since this is the case, parties with credits will sell them to the parties in need of them, thus creating a trading market.

As with any other financial market, an emissions trading market works according to the laws of supply and demand. If there is an excess amount of environmental offenders, those parties holding credits will find them to be valuable due to their scarcity. In this way, the countries and companies in the market that have developed emissions-friendly production techniques will be rewarded for their efforts. Those that go over the limit will also be financially motivated to improve their performance. When this occurs, the environment benefits in the long run.