New global warming initiatives are based on the premise that trading can achieve significant emission reductions at a cost far below what would have been realized under a command-and-control policy.

Today the Chicago Climate Exchange is active in the European ETS through ECX, a fully owned subsidiary of CCX. ECX offered the first quoted and cleared product for European carbon, with financially guaranteed contracts by LCH.Clearnet in London. ECX began trading futures on the International Petroleum Exchange (now called ICE Futures) in April 2005, believing its product was a natural for the energy market. On its first day, it traded 108,000 metric tons of carbon dioxide. Ten weeks later, that figure hit 1 million tons per day. Within four months, the ECX established itself as the leading exchange-traded product in the field, with a volume of more than 150 million metric tons. With average daily volumes of 1 million metric tons of CO2, and more than 85 percent of the market share among active exchanges, ECX futures have become the premier products for trading in Europe. Members active in ICE Futures include most of the leading European and U.S. banks and some of the world’s most prestigious industrial concerns.

CARBON EMISSIONS INVESTMENT FUNDS Trading Emissions Assets: $265 million Headquarters: London (incorporated on the Isle of Man)Activity: The core of its portfolios is a long position in carbon assets (credits). The company also does some trading and invests in other emissions assets. Natsource Assets: $550 million Headquarters: New York Activity: Natsource’s Greenhouse Gas Credit Aggregation Pool (GG-CAP) is the world’s first private-sector mechanism that will purchase and manage delivery of a large pool of greenhouse gas emission reduction credits, which buyers can use to comply with emission reduction requirements. Climate Change Capital Assets: $150 million Headquarters: London Activity: Invests in emission reduction projects around the world. Also trades in the EU Emissions Trading Scheme (EU-ETS). CDC/IXIS Assets: $130 million Headquarters: Paris Activity: CDC/IXIS’ European Carbon Fund buys and sells emissions credits. It helps EU industries manage their long-term exposure to emissions reduction constraints.

Despite the apparent disparity between these markets, the contours of a global marketplace are beginning to emerge. Markets naturally form independently, coalescing and harmonizing at a later stage. Historically, the evolution of the cotton market in the 19th century is one example; local trading hubs developed around Liverpool, New Orleans and Mumbai with varied standards and practices, and ultimately became consolidated. Many international arrangements have also followed this pattern: The EU is a recent example, having developed from coal and steel agreements in the 1950s to the monetary union in 2000. While emissions trading prices in Europe are $30 per ton, they trade for approximately $2 per ton on the Chicago-based CCX. This disparity exists because European market is mandatory and based on one gas, while the U.S. exchange is voluntary and trades multiple types of gases. If a global system operated under one set of rules, prices would likely converge.

The growing activity in this arena has provoked a surge of interest from public and private investors, as evidenced by the growth of funds, hedge funds and proprietary trading desks specializing in emissions trading. More than 20 targeted funds have raised more than $2 billion to invest in projects or new technologies that generate carbon credits as an investment strategy. Moreover, firms directly involved in originating environmental credits, such as AgCert, Econergy and EcoSecurities, have seen successful public offerings in recent months.

Emissions trading is still in its infancy, and challenges remain. We have proven some things, but we still have a long way to go. The world faces some massive environmental problems that will take decades for us to learn how to manage. With that in mind, many analysts believe that the current global emissions market is merely the start of what could be the biggest financial market in the world. I am as excited about this development as I was when we were involved with the birth of financial futures in the 1970s.

Richard L. Sandor is chairman and CEO of the Chicago Climate Exchange. He has been lauded as "the father" of the multitrillion-dollar interest-rate futures markets now traded worldwide.