Carbon credits are a financial instrument that represents the reduction or removal of one metric ton of carbon dioxide (or equivalent greenhouse gases) from the atmosphere. They are used in carbon trading systems to incentivise companies or individuals to reduce their carbon emissions. By investing in projects that reduce emissions, such as renewable energy or reforestation, these entities can earn carbon credits. These credits can then be sold or traded to other entities that need to offset or compensate for their own emissions, thus promoting the overall reduction of greenhouse gases.

Emissions trading, also known as cap and trade, is a market-based approach to controlling pollution. It involves setting a limit or cap on the total amount of emissions allowed, which is then divided into permits or allowances. These permits can be bought, sold, or traded among companies. If a company exceeds its allocated emissions, it must buy additional permits from those with a surplus. This system incentivizes companies to reduce their emissions and rewards those who do so by allowing them to sell their excess permits.

Carbon offsets are a way for individuals, organizations, or companies to compensate for their greenhouse gas emissions by supporting projects that reduce or remove carbon dioxide from the atmosphere. These projects can include renewable energy initiatives, forest conservation, or methane capture from landfills. By purchasing carbon offsets, the emissions produced by an entity can be balanced out by the emissions reductions achieved through these projects. This allows individuals or organizations to take responsibility for their carbon footprint and contribute to global efforts to combat climate change.

Carbon leakage refers to the phenomenon where companies or industries relocate their operations to regions with less stringent carbon regulations, resulting in an increase in global greenhouse gas emissions. This occurs when businesses face higher costs due to carbon pricing or emission reduction requirements in their home country, prompting them to move to countries with weaker environmental regulations. As a result, emissions may simply shift from one region to another, undermining the effectiveness of climate policies and potentially leading to a net increase in global emissions.

The United Nations Framework Convention on Climate Change (UNFCCC) is an international treaty aimed at addressing climate change. It was adopted in 1992 and brings together countries to work towards stabilizing greenhouse gas concentrations in the atmosphere. The treaty establishes the Conference of the Parties (COP) as the main decision-making authority. COP meetings assess progress and negotiate binding obligations, such as the Paris Agreement. The UNFCCC plays a crucial role in uniting countries and addressing the issue of climate change on a global scale.

The Kyoto Protocol is an international treaty that imposes binding commitments on developed countries to reduce greenhouse gas emissions. It operates under the principle of "common but differentiated responsibility and respective capabilities." The Protocol includes flexible market-based mechanisms like international emissions trading, clean development mechanism (CDM), and joint implementation (JI). These mechanisms allow countries to trade emission permits, invest in emission reduction projects in other countries, and collaborate on emission reduction projects with other developed countries.

The Paris Agreement is a legally binding global treaty on climate change. It aims to limit global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit the increase to 1.5°C. Parties to the agreement submit Nationally Determined Contributions (NDCs), outlining their climate action plans. The agreement emphasizes adaptation, financial support, and transparency. It moves away from the strict differentiation between developed and developing countries, allowing countries to determine their own mitigation and adaptation actions.

Article 6.2 of the Paris Agreement allows countries to engage in the trade of emission reduction credits called Internationally Transferred Mitigation Outcomes (ITMOs). ITMOs can be sold by one country to another, helping the buyer meet their own emissions targets while supporting sustainable development. However, the process of negotiating bilateral agreements for ITMO trading can be time-consuming, so widespread trading may take some time to materialise.

Article 6.4 of the Paris Agreement establishes a new global carbon market overseen by a UN entity, the "Supervisory Body." Projects implemented in a country must be approved by both the country and the Supervisory Body to issue UN-recognized credits called A6.4ERs. These credits can be purchased by countries, companies, or individuals. Article 6.4 resembles the Clean Development Mechanism (CDM) under the Kyoto Protocol, and discussions are ongoing for a transition of CDM projects into Article 6.4.

The UN's REDD+ framework aims to reduce emissions from deforestation and forest degradation in developing countries. It also includes activities for sustainable forest management and conservation to protect the climate. REDD+ provides technical and financial support for forest management efforts and gives credit to projects that reduce emissions from deforestation or enhance carbon removal through forest management. The Paris Agreement recognizes and encourages the implementation of the existing REDD+ mechanism.

Carbon markets are systems that enable companies, organisations, and governments to buy and sell carbon credits for the purposes of reducing or offsetting their carbon emissions. There are two types of carbon markets that trade in carbon credits: compliance markets (also known as regulated carbon schemes, which are mandatory) and voluntary carbon markets (VCMs). 

Compliance markets trade in carbon credits that are issued under mandatory schemes. These schemes require by law that participants meet certain carbon reduction targets through the purchase of carbon credits. Examples of compliance markets include the EU Emissions Trading Scheme (EU ETS), the UK Emissions Trading Scheme (UK ETS), and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

Voluntary carbon markets (VCMs) trade in carbon credits that are generated by activities that are not approved or regulated under specific legal mechanisms but are often certified and verified to an independent standard. VCMs allow companies, organisations, and governments to offset their carbon emissions on a voluntary basis. Two examples of VCMs in the UK include the Woodland Carbon Code (WCC) and Peatland Code.