Carbon pricing is a market-based mechanism that puts a price on carbon dioxide emissions, creating financial incentives for companies and countries to reduce their greenhouse gas emissions. This system includes carbon taxes (direct price on carbon) and cap-and-trade systems (emission trading schemes) where companies can buy and sell emission allowances.

In trading markets, carbon pricing has created new financial instruments such as carbon credits, emission allowances, and carbon futures contracts. These instruments allow companies to hedge their carbon exposure while providing investment opportunities for traders and speculators. Major carbon markets include the European Union Emissions Trading System (EU ETS) and various regional cap-and-trade programs.

Real-world example: A power company purchases carbon credits at $25 per ton to offset excess emissions, while a renewable energy developer sells carbon credits generated from wind farms to generate additional revenue.