Euronext to open carbon trading market as sales hit €25bn a year

NYSE Euronext will launch an international carbon trading market next year to position itself for an expected increase in emission credits trading as governments and industry step up efforts to cut pollution.

The company revealed little detail in a short statement announcing the new exchange, saying only that it hopes to launch it early next year. The revelation will be a blow for Climate Exchange, the AIM-listed company that operates the European Climate Exchange, where most of Europe's carbon credit exchange trading takes place. It is thought that NYSE Euronext will unveil the project in full in December at the United Nation's climate change conference in Bali.

The lack of a single, definitive market for the trading of all forms of carbon credit instruments – emissions allowances granted by governments, credits of individual companies or projects – is one of the nascent market's weaknesses and the initiative is expected to be welcomed by the industry.

Key to the exchange's success is the second phase of the European Emissions trading scheme, which begins next year. Under the system, the first phase of which began in 2005, the EU imposes pollution limits on countries and industries and allows heavier polluters to buy carbon dioxide emission credits from those who emit less than their quotas. In 2005, the first year of the ETS, ¿9bn (£6.3bn) worth of carbon credits were traded. According to research from Celent, a consultancy, that number will nearly triple to ¿25bn this year, and could reach ¿100bn by 2020.

For the second phase, the EU has more than doubled the fines for non-compliance with allowed emissions, and has issued tighter emission ceilings. The ETS will also include the aviation sector, with first all flights within the EU to be included in 2010, and then all flights to and from the region the following year.

The impending changes have already fomented increased trading of carbon emission futures. The market is still very new and has relatively few participants operating based on limited information. Indeed, about half of the carbon trading in Europe is done via bilateral, over-the-counter transactions, while the other half is done through an exchange, the part of the market which is dominated by Climate Exchange. There is also a smattering of smaller, regional exchanges.

Given that the carbon trading market is driven by rules imposed by government regulators, it is unclear how much the sector will grow. The successor agreement to the Kyoto Protocol, for example, must be negotiated by 2009, and it is unclear what form it will take. Axel Pierron, the author of Celent's recent report on the sector, said: "There is much uncertainty about the future of existing carbon emission reduction schemes. While most market participants are convinced that the market will still exist in the post-Kyoto era, it is impossible to know what the scope and emission reduction targets of the next schemes will be."

NYSE Euronext will be the majority shareholder in the carbon market, while the French state-owned bank Caisse des Dépôts et Consignations, or CDC, will be the other main partner. The two companies are also the primary backers of Powernext, a Paris-based exchange for electricity futures and spot carbon trading. The companies said the new market "will be backed by NYSE Euronext's international network and its know-how in managing securities markets and by the acknowledged expertise of Caisse des Dépôts."