Carbon markets are a tool for reducing greenhouse gas emissions through the trading of emission allowances or credits. The EU Emissions Trading System (ETS) is an example where a cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. Companies receive or buy emission allowances, which they can trade with one another as needed.
The carbon price that emerges from trading schemes provides an economic signal to polluters and incentivizes the reduction of emissions. It also generates revenue that can be reinvested into climate action or used to lower other taxes, known as a ‘double dividend.’
