The second main way of trading carbon is through credits from projects that compensate for or "offset" emissions. The Kyoto protocol's Clean Development Mechanism (CDM), for example, allows developed countries to gain emissions credits for financing projects based in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

A Kyoto mechanism called Joint Implementation (JI), also involves project-based schemes whereby one country can receive emissions credits for financing projects that reduce emissions in another developed country. Compliance is critical.

Although useful in principle for facilitating technology transfer to developing countries, the CDM has been criticised as being a way for rich countries to avoid responsibility for reducing their own emissions (although "supplementarity" agreements exist to try and ensure CDM reductions are additional to those made domestically). Perversely, the desire to obtain funds via CDM could even prevent governments in developing countries putting in place legislation designed to reduce emissions, since policy-based, mandatory emission reductions are not seen as "additional" (and therefore eligible for CDM status). Other concerns include the type of projects that do and don't qualify; the degree of transparency and democratic participation; difficulties over monitoring and verification of projects, and the possibility that if and when developing countries do take on reduction targets, the "low-hanging fruit" of cheap options for emission reductions have all been used up for CDM projects, leaving them with only costly choices.
Under their Kyoto obligations, industrialised countries have 100 days after final annual assessments to pay for any shortfall - by buying credits or more allowances via emissions trading. Failure to do so leads to further penalties. In voluntary schemes, by contrast, this is not the case.

Trading, whether between companies or countries, only works if there is a sufficiently stringent overall cap on total emission rights, which is reduced over time. Creating a market does not, by itself, reduce emissions. Moreover, the benefits could be severely limited if trading is not comprehensive.
Carbon dioxide represents only part - albeit a crucial part; more than 70% - of all greenhouse gas emissions. Furthermore, the US, until this year the world's largest CO2 polluter, excluded itself by choosing not to ratify Kyoto. The country which has overtaken it as the biggest emitter, China, has no obligation to make reductions.

Even within trading schemes such as the ETS, whole sectors' emissions are excluded, such as those of transport, homes and the public sector. Although there are now plans to include emissions from aviation in the ETS, the proposals are flawed and it is feared that this is a diversion from effective action to actually stem the sector's emissions. This is worrying since aviation is the fastest-growing source of greenhouse gas emissions which could, if allowed to continue expanding unchecked, account for the EU's entire carbon budget by 2045. 

For trading to work it would have to become much broader - perhaps even embracing personal carbon allowances for individuals, some say. More and more scientists are saying that the carbon dioxide ceilings under the treaty are too high - perhaps far too high - to help avert serious climate change.