Countries committed to the Kyoto Protocol mainly operate under three market-based mechanisms. Emission Trading or ET allows countries to sell their emission quota to other countries.
The Clean Development Mechanism or CDM allows a country to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction credits, which can also be counted toward meeting its Kyoto targets. Joint Implementation or JI is similar to CDM, with one difference - JI projects can only be hosted by developed countries with binding emission targets.
In China, the carbon trading mechanism first started with CDM in 2002. It evolved into a cap-and-trade system two years ago. Under the system, businesses within an industry may only pollute up to a certain level. Then they have to purchase permits for additional emissions, which can be traded with other companies. China launched its first carbon trading platform in Shenzhen this June.
Looking outside China, the European Union is currently the world’s largest carbon trading market, accounting for more than 70 percent of global volume. Latest numbers from 2011 show the EU’s daily trading volume reached 7.9 billion allowances, which was worth nearly 150 billion US dollars. However, it’s been reported that the European carbon market has been evaporating in recent years as permit prices fall, leaving companies with little incentive to invest in cleaner technologies.