The Kyoto Protocol envisages three market-based "flexible mechanisms": International Emissions Trading, Joint Implementation and the Clean Development Mechanism. These are to allow industrialised countries to meet their targets through trading emission allowances between themselves and gaining credits for emission-curbing projects abroad. Joint Implementation refers to projects in countries that, too, have emission targets, and the Clean Development Mechanism refers to projects in developing countries with no targets.

The rationale behind these three mechanisms is that greenhouse gas emissions are a global problem and that the place where reductions are achieved is of less importance. In this way, reductions can be made where costs are lowest, at least in the initial phase of combating climate change.

Detailed rules and supervisory structures have been set up to ensure that these mechanisms are not abused.

The Kyoto Protocol, sets a limit on total emissions by the world's major economies, the Annex I countries. These industrialised countries have emissions targets they must meet.

The Protocol allows countries, that have emissions units to spare (emissions permitted them but not "used")  to sell this excess capacity to countries that are over their targets. Countries not meeting their commitments will be able to "buy" compliance.

The limits on greenhouse-gas emissions set by the Kyoto Protocol are a way of assigning monetary value to the earth's shared atmosphere.

Under the Kyoto Protocol, Joint Implementation (JI) and the Clean Development Mechanism (CDM) will allow industrialised countries to achieve part of their emission reduction commitments by conducting emission-reducing projects abroad and counting the reductions achieved toward their own commitments. A condition for the issue of credits in respect of the reductions achieved is that the projects result in real, measurable and long-term climate change benefits.

Under Joint Implementation, industrialised countries (Annex I countries) may implement a project that reduces emissions (e.g. an energy efficiency scheme) in the territory of another Annex I country, and count the resulting Emission Reduction Units (ERUs) against its own target.

Under the Clean Development Mechanism, Annex I countries may implement projects in developing countries (non-Annex I countries) that reduce emissions and use the resulting Certified Emission Reductions (CERs) to help meet their own targets. The CDM also aims to help non-Annex I countries achieve sustainable development and contribute to the ultimate objective of the Convention.