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The terms carbon trading and carbon credits are used in debates about global warming everywhere, but not everyone understands what these terms mean. Carbon trading is a system whereby greenhouse gas emissions are limited under the Kyoto Protocol, and these limits are then allotted across the global market in such a way as to promote lower emissions or decrease release of carbon dioxide and other greenhouse gases.

Governments and industrial units in several countries are permitted a certain number of carbon credits, giving them the right to release a limited quantity of carbon dioxide and other greenhouse gases into the atmosphere. One carbon credit amounts to the release of one ton of carbon dioxide. This implies that low-emission industrial units can sell carbon credits to high-emission corporations, thereby creating a cap on the greenhouse gas emissions in the world.

The best thing about this system is that companies and industrial units responsible for polluting the environment have to pay for their excesses in the form of purchase of carbon credits from the global market. However, both entities selling and purchasing the credits can be found in the carbon credits global market. Therefore the economy as a whole does not lose out at all, while companies with environment friendly processes make higher profits. This makes organizations shift away from the carbon-intensive methods of manufacturing, and so the emission levels fall.

Free trade of carbon credits on world exchanges allows greener energy and process usage of a company to be incentivised and capitalized, whether the organization is a small one or a big one. Trade in carbon credits fetches instant and considerable advantages for organizations with low emissions. Moreover, as the whole idea has also been extended to countries, there would always be encouragement to decrease emissions from the national governments to local businesses, which is a huge advantage as many governments are many times blamed for absence of initiative on environment.

However, there are a few people who advocate alternative schemes like carbon tax, which rather than incentivising the greener companies, will penalize those who have extra emissions. There is much speculation over the efficacy of such systems.

So far carbon trading has been most successful as a method and within a short span has been able to successfully address the problem of high carbon emissions. The carbon trading business has witnessed considerable growth in the last few years, and this proves beyond doubt that the system is effective.

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