How would a carbon market function? | Explained

The story so far: COP29, the ongoing climate conference in Azerbaijan’s capital Baku, has given a fillip to the idea of using carbon markets to curb carbon emissions by approving standards that can help in the setting up of an international carbon market as soon as the coming year. Carbon markets in which the right to pollute is traded for a price can solve the problem by imposing a certain cost on firms for polluting the atmosphere, helping to curb emissions in the process. Large multinational corporations such as ExxonMobil and General Motors have advocated for carbon markets that allows free trading of carbon credits among firms at a price determined by market forces, that would allow these firms to purchase carbon credits from other firms, which don’t need them as much. Others may keep a strict cap on the supply of carbon credits but allow firms to cheat by allowing them to illegally emit carbon. They argue that politicians, who do not incur any personal economic cost when they legislate emission reductions, may restrict the supply of carbon credits more than what is really necessary, leading to slower economic growth.