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Carbon emissions trading is a form of emissions trading that specifically targets carbon dioxide (calculated in tons of carbon dioxide equivalent  or tCO2e. It currently constitutes the bulk of emissions trading.

This form of permit trading is a common method countries utilize in order to meet their obligations specified by the Kyoto Protocol, namely the reduction of carbon emissions in an attempt to reduce or mitigate future climate change.

Under Carbon trading, a country or a polluter having more emissions of carbon is able to purchase the right to emit more and the country or entity having fewer emissions sells the right to emit carbon to other countries or entities. The countries or polluting entities emitting more carbon thereby satisfy their carbon emission requirements, and the trading market results in the most cost-effective carbon reduction methods being exploited first. For any given expenditure on carbon reduction, the market mechanism will result in the greatest reduction. 

Carbon trading, sometimes called emissions trading, is a market-based tool to limit GHG. The carbon market trades emissions under cap and trade schemes or with credits that pay for or offset GHG reductions.

Cap-and-trade schemes are the most popular way to regulate carbon dioxide (CO2) and other emissions. The scheme's governing body begins by setting a cap on allowable emissions. It then distributes or auctions off emissions allowances that total the cap. Member firms that do not have enough allowances to cover their emissions must either make reductions or buy another firm's spare credits. Members with extra allowances can sell them or bank them for future use. Cap-and-trade schemes can be either mandatory or voluntary.

A successful cap-and-trade scheme relies on a strict but feasible cap that decreases emissions over time. If the cap is set too high, an excess of emissions will enter the atmosphere and the scheme will have no effect on the environment. A high cap can also drive down the value of allowances, causing losses in firms that have reduced their emissions and banked credits. If the cap is set too low, allowances are scarce and overpriced. Some cap and trade schemes have safety valves to keep the value of allowances within a certain range. If the price of allowances gets too high, the scheme's governing body will release additional credits to stabilize the price. The price of allowances is usually a function of supply and demand.

Credits are similar to carbon offsets, except that they're often used in conjun­ction with cap-and-trade schemes. Firms that wish to reduce below target may fund preapproved emissions reduction projects at other sites or even in other countries.