Carbon trading is a mechanism that involves trading in carbon permits as a part of a initiative to reduce carbon emissions. Trading involves buying or selling of carbon permits in the open market. Firms are given certain allowance for carbon emissions into the atmosphere. When they exceed their legally permitted limit, these firms are bound to buy carbon permits from the market. The organizations that donít use their full quota can trade the excess quantity in the market. This provides a financial incentive to those organizations that are very keen on reducing their carbon emissions and thereby contributing to the reduction of greenhouse gases in the atmosphere.