Zoë Chafe and Hilary French, in "Improving Carbon Markets", offer this succinct description of the current carbon market:

In sum, carbon trading can be described as either allowance-based (under a cap-and-trade scheme) or project-based, and it can be part of a compliance market (such as the EU-ETS) or a voluntary transaction. ~ p. 93

When implementing a cap-and-trade scheme there are two critical considerations:

1. What industries will be capped?
2. Will the emission permits be given to these industries based upon current levels of emissions (with deminishing permits over time), or should the permits be auctioned off to the emitting industries? In the European Union they have been largely been granted based upon historical emission levels, whereas the Regional Greenhouse Gas Initiative, which represents Northeast and MidAtlantic U.S. states, are opting for 100 percent auctions.

It would be a mistake to characterize the carbon market as being "mature" at this point as there are market dynamics for the UE Emission Contracts that makes the stock market plunge of the recent weeks look like a walk in the park. I'm referring to the precipitous drop in EU Emission Contract prices from a peak of $34 in May 2007 to $0 by early 2008. This incident is now referred to as "December 2007 contracts". Although the big drop happened in December it had been in free-fall since May 2007 with a huge initial drop, small rebound for a few months, then free-fall again. One of the events that is offerred to explain this drop is the announcement that more permits were allocated through the EU National Allocation Plan.

Nevertheless, the carbon market will grow rapidly in the next few years as the EU goes into the 2008-2012 phase of their Koyoto committment. This is when the pedal needs to hit the metal in terms of reducing CO2 emissions. The EU-ETS is the biggest carbon trading market in 2008 and will likely continue to be as a result of their committment to the mechanisms of the Koyoto protocol.