The Carbon Credit Market has rapidly grown in response to the "cap and trade" program set forth as an option for developed countries to meet their emissions reduction goals. There are two provisions in the Kyoto Protocol that give companies in developed countries an opportunity to obtain additional credits. One option is Joint Implementation program, where a company could go to another developed country and conduct some of its operations there. Joint Implementation aims to even out the emission of greenhouse gases geographically, rather than have areas of concentrated pollution. The other is Clean Development Mechanism, where a company could invest in a project in a developing country, where production costs are lower, but the allowance cap would not have been otherwise met without the invested capital. In this case, companies are expected to promote the types of technologies that are environmentally friendly. Through both programs the participating companies are eligible to receive Emission Reduction Units, which can be deducted from their overall emissions cap.

These systems have bred emissions reduction projects across the globe, whose credits trade on exchanges, where business purchase contracts to offset their emissions, or over-the-counter in the retail market to individuals seeking to offset thier carbon footprint.

Merrill Lynch has rolled out a set of indexes anticipating the growth of carbon emissions markets. Francisco Blanch, Merrill's head of global commodities research, says the indexes track the value of carbon emissions credits.
They are designed as investment vehicles, and the firm hopes to see them used in an ETF or exchange traded note. In the European Union, companies are given carbon credits that can be traded in a way similar to futures and options. Buying more allows for more carbon emissions, while selling off credits means a company must emit less. Other countries have also considered cap-and-trade markets. The base index is the MLCX Global CO2 Emissions Index. It tracks emissions under the European Union's emissions trading scheme and the Kyoto protocol. The MLCX Global CO2 index weights both schemes by their relevance in the global emissions markets.
Two more indexes track the European Union Allowance and Certified Emissions Reduction markets.

No central exchange exists, so the MLCX Global CO2 Emissions Index tracks only two sets of contracts. Blanch notes that as countries outside Europe adopt carbon emissions trading, the number of contracts will go up. Merrill isn't the first to take a stab at trading on carbon credits. XShares Advisors registered for an ETF called AirShares that also tracks carbon credits traded in Europe.
That ETF hasn't come to market yet, and a spokesman for XShares wasn't able to say when it would. It's another step in the appearance of green indexes and ETFs. Several already track alternative energy as well as environment-related stocks.

PowerShares has one of the larger ETFs of this kind: the $1.4 billion PowerShares WilderHill Clean Energy (NASDAQ:CLNE) PBW.

Most such ETFs performed strongly until the end of last year, then fell with the rest of the market.

Powershares WilderHill Clean Energy's price rose 60% during 2007 before falling back by 28% since New Year's.

Claymore and Van Eck have also launched environment-oriented ETFs.

Claymore S&P Global Water Index ETF CGW has grown to $340 million in assets since its launch in May.

Claymore's offering tracks companies that make water treatment chemicals, pumps, motors, plumbing equipment and meters.

Van Eck's entries in the field include Market Vectors Global Alternative Energy ETF GEX and Market Vectors Environmental Services EVX.