The carbon market is a process which allows high GHG emitters to purchase the environmental attributes from a low-carbon technology, in order to comply with mandatory mitigation regulations, or to voluntarily demonstrate their support for reducing the use of carbon fuels. The usual sellers include tree plantations and windfarms, while common buyers range from coal-fired electricity generating facilities to oil refining operations.

Trading in carbon emissions is a simple process. An emitting facility is told that it cannot release more than X tonnes per year (currently, the market covers CO₂ emissions more than any other GHG pollutant), and the owners must stay below this level. This can be achieved for example by implementing energy efficiency improvements; installing on-site solar panels or other low-carbon energy sources; through the payment of a penalty; or through the purchase of a “carbon credit” from a new low-emission facility that qualifies under relatively straightforward criteria.

The most vocal opposition to emissions trading comes from those who view the process as a commercial licence to pollute, although the cost of purchasing a credit on the open market will increase the price attractiveness of low-carbon options such as renewables. However, some argue that emitters should be forced to reduce their GHG levels directly rather than be allowed to purchase credits from another facility and, thereby effectively continue to pollute at their original levels.

Another concern is that the jobs to install and maintain a low-carbon facility are often created at a distant site, which is not a strong selling point for politicians who prefer not to export employment. Some jurisdictions restrict emissions trading to domestic buyers and sellers, in order to avoid an international transfer of investment, or to steer clear of potentially questionable facilities in regions where the quality of eligibility and enforcement may be lower.

Other people also note that the trading of emissions is analogous to the concept of leasing versus buying, and that credits must be purchased each year (forever?) while those monies could/should be invested as early as possible in on-site improvements which will yield a longer-term, but ultimately higher, return on investment.

Integral to the concept of a carbon market is the belief that climate change is a global issue, and that reducing GHG levels in Australia or Africa will be just as beneficial to the world environment as the same level of emissions which are reduced in Europe or America.

Unlike the use of trading to address more regional pollution problems (such as the successful agreement in North America to allow trading in NOx and SOx emission credits to alleviate acid rain precipitation), climate change is viewed as a challenge that must be addressed by all nations.

This global perspective makes emissions trading well suited to most green power technologies, where the energy output (and resulting GHG reductions) are easily quantified and traded in the marketplace. While many companies might be physically unable to install wind turbines or solar panels on their property, any firm can finance the installation of a low-carbon facility where there is a strong wind regime or high solar insolation and, thereby, optimise the value of that investment. Physical siting where energy resources are maximum will ensure that the new green facility will be a cost-effective option and, usually, result in maximum GHG mitigation.

To date, most emission credits have been traded through the world's first system – the EU's Emissions Trading Scheme (ETS). Launched in 2005, the EU ETS recently commenced its second phase of operation that will run until the end of 2012, in order to coincide with the first commitment phase of the Kyoto Protocol.

The ETS is the cornerstone of the EU strategy for climate change and is being refined to allow credits from new renewable energy projects in developing countries. It is also expected to be compatible with the Regional Greenhouse Gas Initiative and Western Climate Initiative (and other emerging schemes) to ensure that the carbon market is truly global. This will, in turn, maximise the efficiency of the process.

And while wind, hydro and landfill gas facilities provide a major source of tradeable carbon credits, there is a growing awareness of the ability of green heat options to provide similar value. However, these thermal technologies are more difficult to quantify and verify, which makes their participation in trading markets more difficult to facilitate.

One downside for renewable energy facilities which want to compete in the carbon market, is that often there are lower-hanging fruit which are more cost-competitive. Tree planting schemes (carbon sinks) are a common low-cost option for buyers, while energy efficiency and HFC (hydrofluorocarbon) reductions can also be a more attractive purchase than renewable energies. This will become less of a drawback as the market expands and purchasers become more sophisticated, and as the lowest-cost options are depleted.

The evolving dynamic of climate change and energy security, as well as the common expectation that a technological “silver bullet” will evolve within a short period of time to slow the transition of carbon fuel sources, also serves to dissuade some companies from making the requisite investment in low-carbon or renewable energy facilities. Instead some prefer to take a wait-and-see attitude that offers more flexibility for their corporate bottom line.

Last year, the value of emissions trading was estimated to be in the range of US$70 billion, and the market is expected to grow rapidly as new regional schemes evolve the concept into a truly global opportunity. Its popularity as a market mechanism (as opposed to a carbon tax or other form of Government control) will accelerate the presence of a global carbon market, as well as the opportunities for renewable energy developers and low-carbon facilities.