China is embracing carbon trading and it will change things forever. Indeed, China is likely to become a dominant player.

First, let it be said that a carbon trading system in China is still in its infancy, especially given that it's financial system is still evolving. But as reported here , China already owns one third of the world's total quota for sellable carbon and this number is set to increase to 41% by 2012. That's puts it in a very strong position.

A McKinsey report says China has reduced the amount of carbon dioxide and other greenhouse gases that it produces for every unit of GDP by 4.9% each year on average over the past 15 years, compared with just 1.7% in the United States and 2.7% in Germany. China is also building the world's biggest solar plant.

But according to this report, the big difference with the Chinese carbon trading system is the question of caps. While the US Congress has moved to reduce emissions, China will not tolerate that approach because it is committed to economic development. The Chinese system will instead seek to create financial incentives for companies to embrace renewable energy. In other words, it seeks to limit emission by providing companies with incentives, and some of that money will no doubt come from non-Chinese investors trying to get a toe-hold in that market.

Given the size of the Chinese market, and the opportunities for companies to invest in the world's fastest growing economy, it might just actually work. As Bryan Walsh at Time Magazine says, it could see China overtaking the US in the race to develop clean energy.