Short answers, pulled from the story.
Carbon emission trading is a market-based approach to limiting greenhouse gas emissions by setting a total cap on emissions and issuing permits up to that cap. Companies that emit less than their allocation can sell surplus permits to those that need more, creating a financial incentive to reduce pollution at the lowest overall cost.
In 2023, the global carbon market reached a record value of 881 billion euros, approximately 949 billion US dollars. The European Union Emissions Trading System accounted for roughly 87% of that total market value.
Carbon emission trading began as a concept in 1992 when 160 countries agreed the UN Framework Convention on Climate Change in Rio de Janeiro. The Kyoto Protocol in 1997 formalized the first binding commitments, and the EU Emissions Trading System became one of the earliest major operational schemes.
Auctioning sells permits to the highest bidder, generating government revenue that can fund clean energy or cut other taxes. Grandfathering allocates permits for free based on a company's past emissions, which can produce windfall profits for polluters and create perverse incentives that discourage early emissions reductions.
Carbon leakage occurs when industries shift production to countries with weaker emissions regulations to avoid the cost of carbon permits. As of 2021, only about 22% of global greenhouse gas emissions were covered by carbon taxes or trading systems, leaving a large regulatory gap that increases leakage risk.
Critics argue that cap-and-trade schemes allow large polluters to continue emitting by purchasing credits, that carbon offsets have enabled fraud including artificial greenhouse gas production in China and India solely to generate credits, and that oversupply of permits leads to prices too low to change behavior. The EU ETS was also blamed by some for contributing to the 2021 global energy crisis.