Carbon trading is a system whereby a government sets a limit on the amount of carbon that can be emitted, and then divides this amount into units.
Indeed, the International Emissions Trading Association says that carbon trading has the potential to halve the cost of implementing national emissions targets, saving an estimated $250bn annually by 2030.
For example, one party could pay for another to construct a solar plant instead of a coal-fired power station.
Most developed nations are likely to be carbon credit purchasers, while most emerging markets will likely be carbon credit exporters.
For example, Brazil’s Ministry of the Environment claimed that the deal was a “Brazilian victory”, with the country set to become a significant exporter of carbon credits.
In addition, the deal will provide assistance to emerging markets through an adaptation fund.
These units are allocated to different groups, industries and businesses, and can then be traded like any commodity.
It also claims that it could facilitate the removal of around 5bn tonnes of carbon dioxide a year at no additional cost.