Carbon markets will play an important role in directing investment to support the achievement of long-term greenhouse gas ( GHG ) emissions goals. The effective design and use of market mechanisms to support GHG emissions reductions ensure that emissions abatement activities area chieved in the most cost-effective way.

The CDM, the main feature of the Kyoto Protocol, to be relied upon as an effective market-based mechanism, is perceived as a golden opportunity by all countries, developed and developing. It is an instrument for combating climate change, allowing emission-reduction projects in developing countries to earn certified emission reduction (CER) credits. Each CER is equivalent to one tonne of carbon dioxide.

CERs can be sold privately (voluntary primary market) or traded internationally in the secondary carbon emissions markets at the prevailing market price.

The voluntary carbon markets include all carbon trades that are not required by regulation., for example: the purchase of carbon credits by individuals or institutions at a retail level to offset their emissions; the purchase of credits directly from project developers for retirement or resale; and the donation to GHG reduction projects by corporations in exchange for credits.

In 2002, the UK government launched the UK ETS with a trading scheme that was the first cap-and-trade GHG emissions trading scheme in the world. The system ended in December, 2006, and final market reconciliation occurred in March 2007, five years after its launch.

In the secondary markets, trading of CERs enables industrialized countries to buy CERs to meet their reduction targets under the Kyoto Protocol. Transfer of CERs between trade parties is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission.

To drive large scale investments and financial flows to developing countries for significant global emissions reduction, investment barriers need to be resolved, present CDM need to be extended and streamlined or new mechanisms established, regional and national carbon markets need to be linked internationally.

Carbon emissions trading has been steadily picking up in recent years. In 2008, a milestone was reached with the linking of national trading registries through the international transaction log administered by UNFCCC.

There are active trading programs in several pollutants. For greenhouse gases the largest is the
European Union Emission Trading Scheme ( EU ETS). The EU ETS is the largest multi-national, greenhouse gas emissions trading scheme in the world.

The Chicago Climate Exchange (CCX) operates North America’s only cap and trade system for all six greenhouse gases, with global affiliates and projects worldwide. In 2003, US corporations were able to trade CERs on the Chicago Climate Exchange (CCX) under a voluntary scheme. In 2005, the European Climate Exchange (ECX) was launched by CCX, and is now the leading exchange operating in the European Union Emissions Trading Scheme. Other affiliations to the CCX are the Chicago Climate Futures Exchange, the Montreal Climate Exchange and the Tianjin Climate Exchange.

Upcoming are the California Climate Exchange, New York Climate Exchange, Northeast Climate Exchange and the India Climate Exchange.

In the United States there is a national market to reduce acid rain and sulphur dioxide; and several regional markets in nitrogen oxides too. Markets for other pollutants tend to be smaller and more localized.