The controversial carbon emissions trading system implemented in Europe is showing signs of working, which could lead to success for the related exchange traded fund (ETF).

Emissions among industries covered by the E.U. system fell between 4-6% during 2008 compared with increases of roughly 1% in the two previous years, according to analysts. However, much of the falling numbers have to do with the economic slump and the fall in production, reports James Kanter for The New York Times. Even so, the decline shows that some businesses are becoming cleaner directly because of the system.

The European Commission said it would not comment on the figures before the end of May because the data was incomplete and would need to be carefully analyzed. Although the system is criticized, a significant number of power utilities had switched to relatively cleaner natural gas during the first half of 2008 because carbon trading had driven up the price of burning coal.

Meanwhile, the E.U. has said it would cut emissions by about 30% if developed countries, including the United States, took steps to reduce emissions that are roughly similar to European efforts. The EU makes up about 70% of the global carbon trading market.

Carbon trading aims to reduce pollution using a market-based approach of providing economic incentives to companies that reduce their emissions beyond their target. In this system, also referred to as cap and trade, a government or other regulatory authority sets a cap on the amount of pollutants that can be emitted and distributes allowances, or credits, that represent the right to emit a specific amount. Companies that do not meet the cap buy credits from companies that emit below their specified amounts. The group as a whole meet the set environmental goal at least cost to society.

• iPath Global Carbon ETN (GRN): down 18.1% year-to-date

Tags: Alternative Energy, ETNs, Green ETFs, GRN, Sector ETFs, Socially Responsible ETFs