Carbon credit exchange is a tool that encourages companies to reduce greenhouse gas emissions by giving them credits that can be sold to those that do not need the emission reductions. The credit is based upon a verified reduction or avoidance of greenhouse gases, such as through the photosynthesis process in forestry, sequestration (underground storage), or other measures. The creation and sale of carbon credits is governed by laws in many countries. These laws provide for a variety of tax treatment and other issues that can affect the value of carbon credits.

The legal status of carbon credit exchange is still undetermined, but the prevailing trend appears to be toward the view that a carbon credit is an interest in real property. Some court cases have suggested this view, such as Roseland Plantation LLC v. United States Fish and Wildlife Service et al, where the court found that a “right to report, transfer, or sell” was part of the bundle of rights associated with property ownership, suggesting that a carbon credit is an interest in the land. Other case law in different jurisdictions also suggests that a carbon credit may be an interest in real property.

Despite the fact that it is not yet known what the legal status of carbon credits will be, a well-designed system of price incentives could help to limit global climate change by incentivizing private entities to invest money in measures to reduce greenhouse gas emissions. The two primary methods for implementing such an incentive are carbon taxes and cap-and-trade programs. A carbon tax directly establishes a dollar amount per ton of emissions, while cap-and-trade systems limit the total amount of emissions in a given year through a limited number of emissions allowances that can be traded on markets.

Cap-and-trade is a complex policy instrument that requires careful design to ensure that it meets national climate objectives. It will need to balance the need for stable prices in order to allow for long-term investments and ensure that the emissions trading market functions efficiently, with the ability to adapt to changes in technology and economic conditions.

Various types of carbon pricing systems have been proposed, including hybrid systems that combine elements of both a carbon tax and a cap-and-trade program. The key consideration in designing a new system is to understand the current power market structure and the impact of the carbon price on capacity expansion planning, dispatch decisions, and end-use prices, especially for electricity and heat.

It is important to keep in mind that carbon credit projects are likely to be negotiated under contracts with terms as long as 20 years. Because of this, it is vital for landowners to carefully consider the implications of these contracts, particularly with regard to their controlling law and dispute resolution. Additionally, if a project involves the capture of carbon dioxide or carbon dioxide oxide for purposes of a future carbon credit exchange, it is important to consider chain of title and ownership issues that may arise from the segregation of such assets into a separate carbon credit exchange from other assets on the same land.