Carbon trading has the potential to become a hot market, making now a good time for the launch of exchange traded funds (ETFs) and indexes that have the potential to give investors access.

Sue Asci for Investment News reports that the market has the potential to become a $1 trillion one in a little more than a decade. What’s for sale are carbon credits, which are allotted to big companies that produce carbon dioxide.

Companies can buy credits or “allowances” to pollute more. As emissions standards get more strict around the world, credits are going to be in high demand. Already in Europe, trading in the EU made up 70% of the $60 billion global carbon trading market.

Dow Jones has launched a global emissions index series that could someday be backed by ETFs. In conjunction with Chicago Climate Exchange, Dow Jones Indexes will launch the Dow Jones/CCX European Carbon Index as well as the Dow Jones/CCX Certified Emissions Reduction (CER) Index. They are to serve as the benchmarks for participating companies seeking exposure to the European Union Emissions Trading Scheme and the Kyoto Protocol Clean Development Mechanism (CDM).

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.

Currently, the only exchange traded note (ETN) giving investors the opportunity to gain access to the carbon trading market is the iPath Global Carbon (GRN), which launched on July 8.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.