What is Carbon Trading?

Carbon trading is a market-based instrument that targets the reduction of carbon dioxide in an attempt to mitigate climate change. It works by setting an overall limit/cap on the amount of carbon emissions that are allowed to be emitted from significant sources of carbon. Governments issue permits with associated limits of carbon emissions and these permits are given to companies. Companies can trade their excess permits on the carbon market for cash or if they are not able to operate within the limits, they have to buy extra permits from other permit holders.