More than a dozen years since the trading of carbon emissions was first proposed, Europe's first exchanges are finally gearing up for business. At least six so far have stepped forward with emissions trading platforms, with possibly more to come, many of them potentially vying to lead a unified pan-European market.
One of the six, Amsterdam-based European Climate Exchange, says trades in the European CO market could be worth about €1.7bn a year. ECX's estimate is based on the assumption that of 2.2bn allowances issued to Europe's 12,000 registered "emitters" such as power stations and factories, about 5 per cent to 10 per cent will be traded.
A single allowance, permitting one tonne of CO emissions, was trading at €8.50 before Christmas on the over-the-counter market but this week has fallen to €6.85.
Over-the-counter trades are likely to retain at least half the volume even after exchanges get into full throttle.
ECX is owned by the Chicago Climate Exchange, which itself started trading emissions for US polluters a year ago - even though the US has not ratified the 1997 Kyoto Protocol that agreed the concept of emissions trading. ECX, although the one genuine newcomer to the European scene, will be using the International Petroleum Exchange in London as its platform. Trading of futures contracts starts next month.
Three others - Nord Pool, EEX and Powernext - are all established exchanges in the closely related power market.
Prices of emissions and prices of power are likely to be linked, given that burning carbon-based fuels in power stations is one of the main causes of CO emissions.
Yet power is a fragmented market in Europe because electricity cannot be easily stored or transported. It is possible that trading of emissions too will remain a regional business, suggesting there is room for several exchanges.
Atle Christiansen, an analyst at consultancy Point Carbon, said it was too early to say whether liquidity would be spread over too many platforms, nor whether the market would settle on being a spot market or a financial market of forward contracts.
In power, spot markets are used primarily by industrials, while futures markets are used by both industrials and by financial players. For emissions, banks and hedge funds are expected to enter the futures market, speculating on prices and in the process bringing additional liquidity.
Peter Koster, ECX chief executive, said: "Spot will be traded throughout Europe. But for derivatives, we believe London will be the market for Europe."
Of the exchanges, only ECX and Oslo-based Nord Pool, the Nordic power market that covers Norway, Sweden, Denmark and Finland, intend to offer spot and futures trading. However, Nord Pool will not initially be a direct competitor because it will only be offering forward contracts - which oblige the trader to actually deliver the asset traded, as opposed to futures, where the asset is not usually delivered.
Its forwards started trading on January 1 while its spot contract will start in March.
Leipzig-based EEX has yet to announce a start date for its spot trading. Like Nord Pool, it will offer clearing as well as trading. As Germany has 500m of Europe's 2.2bn allowances to trade, EEX is likely to be at an advantage in spot.
France has only 150m allowances but Jean-François Conil Lacoste, chief executive of Paris-based Powernext, puts emphasis on their speed of execution. "Transactions should validate in 15 minutes," he says. Caisse des Depots will act as custodian bank.
Two other names vying for spot business are Dutch group New Values with its trading platform Climex, and Spanish group Sendeco2.
Exchanges are quoting fees of 0.2 to 0.3 euro cents for each side of a trade. Assuming they get half the emissions market, 220m spot trades a year would only produce revenue of about €500,000. But futures trading volumes could be a multiple of spot.
Although forwards are already being traded, spot and futures cannot start until the national registries of the 25 European Union members are operating, expected from the end of next month.