Trading in carbon market may also be classified by the type of carbon emission reduction traded:

Project-based transactions:

Where the buyer purchases emission credits from a project that can credibly and verifiably demonstrate that it reduces GHG emissions compared with what would have happened otherwise. The most notable examples of such activities are under the CDM and the JI Framework under the Kyoto Protocol.

Allowance transactions:

Where the buyer purchases emission allowances created and allocated (or auctioned) by regulators under mandatory cap-and-trade regimes (e.g. Assigned Amount Units (AAUs) under the Kyoto Protocol, EUAs under the EU ETS)

How are greenhouse gases traded?

Carbon transactions are basically purchase contracts, whereby one party pays another party in exchange for a specified amount of GHG emission reductions (measured in tonnes of CO2 equivalent). However, like in other commodity markets, further transaction variations are available:

• Spot trades are the basic trades where the terms of a bid and offer are set on the trade date with delivery and payment occurring shortly thereafter
• Forward settlement trades defer delivery of reductions and payment to a future date, this date is specified at the time of trade
• As derivative products, Options are available in carbon trading. Call options guarantee the buyer the right to purchase reductions at a specified date at a specified price. Put options allow the seller to lock in the right to sell reductions at a set price