In order to look better on paper, companies offset their pollution by supporting carbon reduction . . . → Read More: How You Can Benefit from Companies that Pollute]]> There’s only so much many companies can do to reduce pollution. A steel smelter can scrub all it wants, and it’s still going to produce pollution. There’s no way around it. Pollution is an inevitable byproduct for many industries.

In order to look better on paper, companies offset their pollution by supporting carbon reduction elsewhere, purchasing credits from carbon reducers to offset their own carbon production.

In many cases, in order for the polluter to keep polluting at the same rate it always has, it buys credits from some random farmer who keeps doing the same thing he’s always done. So there’s been no real change in the level of overall carbon output.

In the future, however, carbon credits may rise in price to the point that farmers and others have an incentive to reduce carbon emissions further in order to sell more credits. Also, regulation may force carbon reducers to prove they’ve done something to earn the right to sell credits.

Believe it or not, there is actually an active futures market for these credits, and it’s blowing up. By mid April, trading volume on the Chicago Climate Exchange had already surpassed total trading volume for all of 2007! Since the beginning of the year, the contract price has risen from under $2.50 to nearly $7.50 then fell back to a current price* of $$3.90. It’s a hot but volatile market.

Besides trading in the futures markets, there are several ways one may be able to get in on this market. Chicago Climate Exchange is owned by Climate Exchange PLC (CLE) which trades on the London exchange. A couple of relatively new ETFs (exchange traded funds) are available as well: PowerShares WilderHill Progressive Energy Portfolio (PUW) and PowerShares Cleantech Portfolio (PZD). And XShares Advisers has an agreement with Chicago Climate Exchange to develop other ETFs.

*Editor’s Note: As of July 29.