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Tucked away in a corner of cantor Fitzgerald's London offices, beyond the sea of bond traders, four people are trying to help save the planet — and turn a nice profit along the way. They are the European staff of CO2e, a top player in the emerging global market in greenhouse-gas emissions. Owned by Cantor, the global financial- services firm, and its Japanese junior partner Mitsui & Co., CO2e's goal is to help mitigate the effects of global warming by buying and selling carbon dioxide emissions allowances. Each allowance unit gives its holder the right to emit one metric ton of CO2.

An inquiry pops up on a CO2e computer screen from a potential customer in India. Nicola Steen, CO2e's vice president and transaction specialist, is pleased. "It doesn't matter where in the world that you reduce a metric ton of carbon dioxide," she says. "If you can reduce emissions from what they otherwise would have been, that's a good thing."

Such deals are the heart of the "cap and trade" system for greenhouse-gas emissions that forms a pillar of the Kyoto accord on climate change, which goes into effect this week. Under the scheme, the total emissions of developed nations are limited, or "capped" at a fixed level, and each nation assigns a number of CO2 allowances to its major carbon-emitting sectors; companies that have unused allowances (as a result, for example, of antipollution improvements) may sell their excess allowances to companies that need them. Theoretically, the wisdom of the marketplace will lower the cost of reducing harmful gases. Letting participants buy or sell emissions allowances at a price determined through supply and demand means that more costly measures need not be implemented. As a kind of test run, 21 of the 25 European Union nations have been participating in a carbon emissions trading scheme (ets) since the beginning of this year. The ambitious goal for the E.U., which ratified the Kyoto Protocol in 2002, is to reduce greenhouse-gas production by 8% from 1990 levels by 2012.

There is today almost no mainstream disagreement about the reality of global warming or the urgent need for the world to reduce emissions. And the ets is an important step in doing so — yet the high-minded principles behind the scheme have so far been bogged down by technical limitations and legal wrangling. The European Commission is involved in a legal battle with Germany, which wants the right to revise its national emissions allocation plan in the future, and with Britain, which wants to increase the allotted emissions in a plan approved last year. Green groups contend that European governments have bowed to industry pressure by distributing too many emissions permits.

"The national allocation plans have been far too generous in allotting emissions rights to companies," says Oliver Rapf, a climate-change expert with the environmental organization wwf. If that charge is true, it's not just bad for the environment; it will also distort the market.

Indeed, Rapf predicts that "there will be little trading in the next three years and the price will be minimal ... Buyers will be scarce in the first few years." So far, fewer than 20 companies have been trading regularly, says CO2e managing director Steve Drummond. "Emissions trading is just getting under way," says Shell's chairman Ron Oxburgh, whose company has been experimenting with schemes since 2000. "But in three or four years it may be very significant."

Getting there will be tough. It's not yet clear that the E.U. has a reliable way to keep track of who emits how much CO2. And a crucial E.U.-wide electronic registration system hasn't yet taken effect. Getting the registries up and running, which may happen by early March, will allow a spot market in emissions, in which traded CO2 allowances can change hands immediately. Currently, trading is only in forward contracts, tailored between buyers and sellers for delivery at a future date. Given the stumbling blocks, the fledgling emissions market has yet to achieve much. More than 1 million emissions allowances — each equivalent to one metric ton of CO2 — change hands each week in electronic trading alone, Drummond says. (CO2 is considered the biggest atmosphere offender, but methane, nitrous oxide and three other gases also are due to be traded according to their CO2 equivalents.) Conducted in "clips" of 5,000 metric tons, the typical trade is 10,000 to 20,000 tons. That weekly volume represents about $10 million — a tiny market.

Even so, brokers — there are 11 brokerages involved in various aspects of the market — are optimistic. The price of a metric ton of CO2 has plunged since the ets scheme began officially on Jan. 1 — to less than €7 from the informal "gray-market" figure of €13 at the start of 2004 — but has inched upward again, closing at €7.23 last Friday. The trading system is designed to limit greenhouse gases to specified targets while minimizing compliance costs — and fining offenders, starting at €40 per ton in April. So if the price is very low, says Drummond, it could be argued that the targets should have been higher. Still, he adds, the system is in its formative phases and as it grows, so will the price. As in other markets, the brokers earn their money through transaction fees paid by buyers, sellers or both, depending on contract terms.

The E.U.'s system has implications well beyond Europe's borders. Under the provisions of the Kyoto pact, industrialized countries can receive emissions credits if they pay for projects that reduce or avoid emissions in poorer nations or other industrialized countries. For example, West European nations could build clean-energy facilities in Russia or its former satellites.

But the rules complicate any such plans. Because the Kyoto protocol requires reductions from a baseline of 1990 emissions, some rapidly modernizing countries, such as the Czech Republic, may have already surpassed their Kyoto targets. Yet the ets has its own goals, capped closer to today's actual emissions. The Czech Ministry of Industry and Trade says the country needs at least 100 million E.U. allowances if it is to sustain its gdp growth rate of about 4% from this year to 2007. Too few allowances could stifle growth in the new E.U. states, while too many would not motivate investment in cleaner technologies. Meanwhile, some larger countries are dragging their feet. Italy, Poland, Greece and the Czech Republic have submitted national plans that still await European Commission approval.

The E.C. acknowledges a range of concerns, including worries that allocations are too generous, but remains undeterred. "The important thing is to get the scheme up and running," says Peter Vis, an E.C. supervisor of the ETS. "Then we can make improvements." Traders, too, are undeterred. Out on the trading floors, says CO2e's Steen, new market entrants are picking their moments, "and people respond well to having the opportunity to make money." The environment, meanwhile, doesn't care about the price.

• Maryann Bird | London
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