The European Union Emission Trading Scheme is an example of an approach to dealing with greenhouse gas emissions. Caps are put on the amount of carbon (CO2) a polluter can emit. Credits are given to businesses that reduce their emissions. Credits can also be obtained through offset programs. Offset programs include projects like planting trees. Planting trees helps to offset carbon emissions. Some other examples of offset programs are generating power through wind, solar or hydro techniques.
Carbon credits obtained through the reduction of emissions or through offset programs can then be bought and sold on the open market. If a polluter exceeds their emissions cap, they have to buy carbon credits. The more companies pollute, the more demand is put on carbon credits. The greater the demand for carbon credits, the higher the price of carbon credits. The higher the price of carbon credits, the more expensive it becomes to pollute. Thus, there is a strong financial incentive for a business to clean up its act.
Over time, caps are reduced. As caps are reduced, the supply of carbon credits is reduced, again putting upward pressure on the price. The result is an overall reduction in emissions.