~By Abhishek Kumar  Introduction Carbon Trading represents a market-oriented mechanism for mitigating climate change, facilitating the exchange of carbon credits to control greenhouse gas emissions. Initially introduced under the Kyoto Protocol, it has become a central instrument in international climate policy, enabling countries and organizations to achieve emission reduction targets with greater efficiency (Tietenberg, 2006). It’s key models include cap-and-trade and carbon offset programs, which incentivize emission reductions through market mechanisms (Ellerman et al., 2014). With the Paris Agreement, carbon markets have expanded, supporting global decarbonization efforts and promoting cost-effective pathways to a low-carbon economy (UNFCCC, 2015; Sterner, 2003; World Bank, 2020). Carbon Trading Concept Carbon Trading, also known as emissions trading, is a market-based approach to reducing greenhouse gas (GHG) emissions. It allows countries or organizations with high emissions to buy “carbon credits” from those with low emissions, aiming to limit overall emissions in line with climate goals. This system was popularized under the Kyoto Protocol and is now also integral to the Paris Agreement’s framework. Mechanics of Carbon Trading: The fundamental concept of carbon trading lies in creating a cap-and-trade system. Regulators set a cap on total emissions, and entities are given or can purchase allowances representing the right to emit a specific amount of CO₂. Those who reduce their emissions below their allowance can sell excess credits, incentivizing low-emission practices. Over time, the cap is lowered, which is designed to gradually reduce emissions across the board (World Bank, 2021). Carbon Markets are generally divided into two main types: 1. Compliance Markets: Market Created through regulatory policies like the European Union Emissions Trading System (EU ETS), these markets require participation from industries with high emissions, such as energy and manufacturing sectors. 2. Voluntary Markets: These markets are driven by companies or individuals seeking to lower their carbon footprint beyond legal requirements. Voluntary markets have been expanding as organizations commit to climate goals to showcase their dedication to environmental sustainability. Benefits and Criticisms: Carbon trading incentivizes emission reductions, enables cost-effective achievement of climate goals, and fosters investment in cleaner technologies. However, it faces criticism for potentially allowing wealthy companies or nations to avoid genuine reductions by purchasing offsets, sometimes resulting in insufficient action toward lowering actual emissions (UNFCCC, 2022). Overview of Kyoto Protocol: The Kyoto Protocol, adopted in 1997 and entered into force in 2005, was the first significant international treaty aiming to combat climate change by reducing greenhouse gas (GHG) emissions. It established legally binding targets for industrialized nations (also known as Annex I countries) to reduce their emissions by an average of 5% below 1990 levels over the commitment period from 2008 to 2012 (UNFCCC, 1998). Mechanisms of the Kyoto Protocol: The Kyoto Protocol introduced several innovative mechanisms to assist countries in meeting their emission reduction targets: 1. Emission Trading: Allowed countries with surplus emission allowances to sell these to countries that exceeded their targets, forming the foundation for the carbon trading market. 2. Clean Development Mechanism (CDM): Enabled developed countries to invest in emission reduction projects in developing nations, earning certified emission reductions (CERs) that counted toward their targets. 3. Joint Implementation (JI): Allowed industrialized countries to earn emission reduction units (ERUs) by investing in projects that reduced emissions in other industrialized countries. These mechanisms provided flexibility and cost-effective solutions, encouraging international cooperation on climate action (World Bank, 2021). Second Commitment Period and Limitations: In 2012, the Doha Amendment established a second commitment period (2013–2020) with revised targets, although this amendment faced ratification challenges, limiting its global influence. Moreover, critics noted that the protocol lacked enforcement mechanisms and exempted developing nations, resulting in some major emitters not being bound by reductions (Grubb et al., 2020). Transition to the Paris Agreement: The Kyoto Protocol paved the way for the Paris Agreement in 2015, which expanded the scope to include commitments from all countries, not just industrialized nations. The Paris Agreement’s flexible structure addressed some limitations of the Kyoto Protocol, making it more inclusive and globally focused on long-term climate targets. Technologies Used in Carbon Trading Market 1. Blockchain Technology is increasingly being adopted in carbon trading to enhance transparency, efficiency, and security. By providing a decentralized ledger system, blockchain enables verifiable and tamper-proof tracking of carbon credits, reducing the risks of fraud and double-counting and allowing a seamless transfer of credits between buyers and sellers ( Treiblmaier & Beck, 2019). Key Benefits of Blockchain in Carbon Trading: • Transparency and Traceability: Blockchain creates an immutable record of transactions, ensuring each carbon credit’s origin, ownership, and transfer history are transparent. This addresses common issues in carbon markets, such as double-counting credits, by ensuring that each credit is unique and only transferred once (Broek et al., 2019). • Efficiency and Cost Reduction: Traditional carbon credit verification and trading processes can be time-consuming and costly. Blockchain streamlines this by enabling peer-to-peer transactions without intermediaries, reducing both administrative costs and transaction times. • Enhanced Trust and Credibility: With blockchain’s decentralized nature, each participant in the network has access to the same information, which builds trust among stakeholders, including companies, governments, and non-governmental organizations (NGOs). Blockchain also makes it easier to integrate carbon markets with corporate sustainability goals, improving the reliability of claims about carbon neutrality or reduction efforts (Radhakrishnan et al., 2020). • Smart Contracts for Automation: Blockchain supports the use of smart contracts, self-executing contracts with terms directly written into code. In carbon trading, smart contracts can automatically validate, settle, and enforce carbon credit trades when pre-defined conditions are met, simplifying processes like compliance verification (Loh et al., 2021). Emerging Use Cases and Platforms: Several blockchain-based carbon trading platforms have emerged, including IBM’s Carbon Credit Management System and initiatives like Veridium and Climate trade. These platforms aim to create more accessible, transparent, and reliable carbon markets, potentially reaching broader participation by both large corporations and individual investors. Challenges and Future Prospects: Despite its benefits, blockchain in carbon trading faces challenges such as scalability, regulatory uncertainty, and energy consumption in blockchain networks. However, ongoing research and technological advancements may address