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Last Updated: Friday, 1 June 2007, 15:13 GMT 16:13 UK
What is 'emissions trading'?

Smoking chimneys
Will squeezing the companies really work?

Emissions trading is a way of reducing emissions. The aim is to put a price on emissions so that companies have an incentive to reduce them - in a similar way to when companies try to reduce water consumption to cut water bills.

The EU's scheme is called the European Emissions Trading Scheme (ETC).

There is a cap on the total amount of pollution companies across Europe are allowed to emit.

The cap is divided between countries, which in turn give credits to individual companies, allowing them to produce a certain amount of pollution.

If companies emit more, they have to buy credits - if they produce less they can sell their spare quota.

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City skylines can be almost unrecognisable

The aim is for companies to find the cheapest way of reducing emissions amongst themselves, by allowing one which can cut its emissions very cheaply to sell their credits to someone who can not.

Income from the credits should balance the cost of cutting emissions.

Reducing over time

The theory is that the total emissions cap is reduced over time, and so companies have to cut their emissions more and more.

As that happens, the price of spare pollution credits will rise, making it steadily more cost-efficient to cut pollution rather than buy more credits.

Not a total solution?

Smoking chimneys
Is carbon trading a realistic answer?

Critics complain that carbon trading does not have good enough accounting - how can we be sure that the reported reductions have been made?

They are also concerned that companies producing little pollution have less incentive to reduce their pollution further than they would with a tax-based system.

The European scheme (ETS) has faced criticism because of the way some countries gave their own companies over-generous permit allocations in its first phase, limiting how far they needed to reduce their pollution.

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