By now, practitioners in the renewable energy industry should have noticed the growing global market in emissions trading and carbon credits.

Often referred to as a carbon market or Emissions Trading Scheme (ETS), the scheme allows one party to reduce its greenhouse gas emissions and to sell the ensuing ‘environmental attributes’ to a second party which is not able to reduce its emissions, but which is required to do so under regulation. The objective is to reduce emissions by penalising carbon-intensive parties, thereby incentivising low-carbon behaviour around the globe, where changes are the most efficient and the most cost effective for mitigation.

When mandatory and voluntary markets are considered, officials estimate the annual value of emissions trading to be US$60 billion and growing rapidly. The non-compliance market is more difficult to gauge, as it may not include the certification of new facilities or adherence to industry norms, and can be as simple as a tree-planting scheme being used to provide a level of sequestration.

To date, most of the value of the global carbon market has comes from the capture and destruction of nitrous oxides (NO2) and hydrofluorocarbon (HFC-23) refrigerants, used in industrial operations. These waste gases have significantly higher environmental impacts than CO2, methane and other greenhouse gases covered under the Kyoto Protocol, and the cost to stem their release into the atmosphere is usually lower than many other options.

One recent report quotes the cost to eliminate a level of emissions at €1, while comparable reductions from a renewable energy or energy efficiency project could cost from €5–€15. The study – by New Energy Finance – estimates that projects to stem waste gases accounted for three-quarters of total credits traded last year. However that level is dropping and could decline to only one-quarter of the total value by 2012, when the first phase of the Kyoto Protocol expires.

The EU Emissions Trading Scheme (EU ETS) was the first cap-and-trade allowance program off the block and, in the past five years, has become the world's largest. It has already entered its second phase of operation, and most of the trading regimes being developed in Australia, New Zealand, as well as two in North America, are being designed to be compatible with it. This will foster growth, as the international market expands to meet the ever-growing demand for mitigation measures and low-carbon alternatives.

The EU ETS also recently connected with the carbon credit tracking system of the United Nations, which will provide a boost both to project developers and to carbon traders. Linking the EU's Community Independent Transaction Log and the UN's International Transaction Log will allow the import of Certified Emission Reductions (CERs) into the ETS, which now will accept all types of credits from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects.

European companies can convert JI/CDM credits into allowances to meet their obligations under the EU ETS, and all types of JI and CDM credits will be accepted except for nuclear reactors (excluded under the Marrakech Accords) and projects for carbon sinks (which are difficult to integrate with the ETS).

Global interest in renewables and clean energy solutions from carbon funds is stimulating a surge in green patents, according to Computer Patent Annuities.

The UK firm isolated and analysed 171 relevant families of business method patents granted since 1998, in order to track the effects of the 1997 Kyoto Protocol. Of those patent families, 54 were directly related to carbon trading tools, and 33 were related to forms of carbon administration. For carbon trading alone, the 6 patent families in 2000 had grown to 9 by 2002 and to 15 in 2006.

Carbon trading is fast eclipsing more established methods of emissions control, such as direct taxation or regulation, by creating a bona-fide marketplace for carbon credits, concludes Carbon Trading: Patently Set for Growth. The potential to access a stream of hard currency has spurred technology companies to develop clean energy tools or to fund relevant research, as well as encourage private innovation in low-carbon solutions.

The Chicago Climate Exchange holds the largest number of patents in carbon trading and, with its competitor firms such as CantorCO2e and Agcert, the sector is targeting opportunities in India, China and Brazil where carbon trading will increase as their domestic industries expand.

The USA has secured the highest number of clean energy patents, CPA notes, followed by Japan and Australia, despite US reluctance to ratify Kyoto. The report speculates that the American business sector is expressing strong, speculative interest in clean energy and carbon trading, and the independent development of clean energy shows high skill levels in clean energy innovation.

Although patent filings have surged since 2000, the report warns that they still are a nascent part of the overall economic picture. Carbon trading has gained a strong position in the financial market and large companies have started trading emissions, and the World Bank says an increase could also occur in trading volume as interest rises from banks, credit card issuers and private equity funds.

The impact of recent problems in the world's financial sector have yet to impact these trends, and it will be worth watching the appetite for carbon trading and the general transition to mitigation measures as credit becomes more difficult to obtain. China and other developing countries have set high ambitions for the introduction of renewable energies, while the EU and other fully industrialised nations continue to stay at the cutting edge of developments in renewables.

This column has tried to explore some trends in the carbon market, where developers of green power and green heat applications have an opening to gain market opportunity. Many early winners have been companies which install wind turbines or solar panels to meet renewable portfolio standards (RPS) or to take advantage of the Kyoto-approved Clean Development Mechanism, but growing environmental concerns and the demise of waste gas diversion projects (as noted above) bode well for renewable energies.

Time will tell if the numerous benefits of renewables will come to the fore in this growing carbon market, allowing the technologies and applications to take their full credit.