There's a new way to make money from renewable energy.

As if we weren't making a killing already, it's now possible to profit from the reduction of carbon emissions during the production of renewable energy.

It's a difficult system to understand. But it's as lucrative as it is complex.

It's also a very young system--at least in the US--and is just now starting to develop into a verifiable method for producing profits.

In the European Union, however, an established carbon trading system has been returning massive profits for quite some time, due, in part, to the creation of such a system by the Kyoto Protocol--which the White House chose not to be a part of.

As I wrote in a recent Energy and Capital article, it works like this: Each member state of the EU gets an annual emission allocation which is then divvied up among its worst emissions-producing companies.

The companies are then legally obliged to produce no more emissions than they are allowed. If a company comes in under target, it can sell its excess allowance as "carbon credits" to other firms that have overshot their targets. But if they exceed their target, they have to pay a penalty and then go to the market and buy credits to make up the difference.

Now the pure way to play this is to buy directly into the company that owns the exchange on which the carbon credits are traded. And that would've been a good idea--two and a half years ago, when the company, Climate Exchange Plc (LSE: CLE), was trading at $200. Now--7,300% later--the stock is up to $1,660.

I guess we missed the boat on that one. Especially since the US version, the Chicago Climate Exchange (CCX), which focuses on carbon and carbon credits, is owned by that very company. Bummer.

But don't fret--the Green Chip team has begun to uncover other opportunities in this emerging sector. At the forefront are companies that can prove they reduce carbon emissions as part of their other activities.

For example, a company that produces electricity via a clean renewable resource may not only sell the electricity, but also the carbon credits earned from not burning fossil fuels to do so--so long as the emission reductions are certified by an independent third party.

Of course, this arrangement would be much easier to understand and keep track of if a cap and trade system were implemented by the federal government. In fact, just capping the amount of emissions would do wonders.

And we may not be too far off. Major energy legislation put before Congress yesterday would require that 15 percent of the nation's electricity be produced by wind, biomass and other renewable energy sources by 2020.

Today, only 3% of our electricity is renewably produced. A 12% increase in the next twelve years would not only send renewables through the roof, but would create a pretty sweet carbon market as well.

Already the Chicago Climate Exchange has over 200 members. And though reducing emissions is not federally mandated, members of the exchange are legally obligated to do so by private contract.

Plus, there's some pretty big names on that list--Cargill, IBM, Intel and Safeway, to name a few.

Given the corporate momentum already behind reducing emissions and the pending legislation, we can hope this thing gets some legs.

The Green Chip team will keep you posted.

Until next time,

Nick