CDM is an arrangement under the Kyoto Protocol, an international accord under the United Nations Framework Convention on Climate Change, to reduce greenhouse gases by means of a 'Cap and Trade' system for carbon emissions.

The Mechanism reduces net global greenhouse gas emissions at significantly lower international cost by allowing developed countries and companies within those countries to fund emissions reduction projects in developing countries where costs are less prohibitive than in industrialized countries.

Carbon credits assign a monetary value to emitting a unit of carbon dioxide or the global warming equivalent of any of 5 other greenhouse gasses, thereby creating a commodity to something that was previously an externality. Emissions thus become an internal cost of business activities and are included on the balance sheet along with raw materials and other liabilities or assets.

Each metric tonne of carbon dioxide emission is equivalent to a Certified Emission Reduction (CER); CERs can be sold privately or in the international market at internationally traded market prices.

Companies thus have the option of either implementing internal emission reducing programmes, or buying CERs to cover themselves if they do not meet their emissions reduction requirements.