Can carbon trading markets really work?

The outcome some want to see from the climate change talks in Copenhagen, is a broadening of the market which trades in carbon dioxide or CO2 emissions.

It's called the European Emissions Trading Scheme, and it was set up to enable Europe to meet its targets for cutting greenhouse gases under the Kyoto Protocol. The USA, China, Japan and Australia are considering similar schemes.

Steel plants, power plants, cement-makers and other big industries are included, and there's an overall cap on carbon emissions under the scheme. Emissions from aviation and shipping will be added soon.

The system is known as cap and trade. Governments set the limits or caps, on how much carbon dioxide companies can emit. If firms go above these, they must buy permits to do so. If they go under the limit, they can sell permits they don't need.

Does it work?

Some expect the carbon trading market to be worth three trillion dollars a year by 2020.But can it be effective?

The purpose of trading carbon is to set a high-ish price for using fossil fuels that encourages firms to adopt green technologies that would otherwise be too expensive.

But so far the price of carbon allowances has remained volatile and low, which hardly sends the right price signal.

First broadcast on Business Daily