When 18th century chemists such as Antoine Lavoisier in France were exploring the nature of the newly discovered substance “fixed air”, they could not possibly have imagined that just over two centuries later there would be a market for buying and selling millions of tonnes a day of this colourless, odourless gas we now call carbon dioxide.

Two centuries after scientists showed that carbon dioxide was produced by burning fuel such as coal, however, rising levels of the gas in the Earth’s atmosphere are regarded as a serious threat, since they bring in their wake the threat of global warming.

In 1997 the countries of the world came together in Kyoto, Japan, and agreed on a programme to try to cut man-made emissions of carbon dioxide and other “greenhouse” gases, those which contribute to global warming. The “Kyoto protocol”, which came into action in 2005, included, among other schemes for reducing carbon dioxide production, something called emissions trading, otherwise known as cap and trade.

The idea was that governments would issue licences to companies, such as power generators and manufacturing firms, that emitted carbon dioxide, setting a cap on the amount of the gas they were allowed to produce. If those companies produced less than their permitted amount of CO2, they would be allowed to trade their surplus permits, selling them to CO2 emitters who were exceeding their permitted allowances.

If you have willing sellers and eager buyers, of course, you need a market place for them to meet. This is where the Paris-based organisation BlueNext  comes in. BlueNext, which was co-founded by the New York Stock Exchange, EuroNext and the French government-owned bank Caisse des Dépôts to deal in permits issued by the European Union’s Emission Trading System (ETS), now claims to be the world’s leading environmental trading exchange.

Either in their own right or through brokers, thousands of companies across Europe trade in “European Union Allowances”, where one EUA is equal to one ton of carbon allowance. Every day on the European spot market between two million and three million tonnes of CO2 a day are traded, while the futures market, which is dominated by over-the-counter traders, might see six to seven million tonnes of CO2 traded daily.

The chairman and CEO of BlueNext is Serge Harry, who previously worked for the NYSE subsidiary Euronext, joined BlueNext after 25 years in the financial industry because, he says,  “it’s a fantastic opportunity to tackle climate change issues through the cap-and-trade approach.” Although some environmentalists have been critical of cap-and-trade as a way of trying to reduce carbon emissions, Mr Harry insists that the system is working. “The ETS is clearly a success – it’s helped Europe achieve its goal to reduce its emissions. In 2007 in Europe cut emissions by 2.8 percent. Last year, helped a bit by the economic crisis we cut emissions by 3.5 percent.” The plan is, through the use of ETS “carbon credits” to cut carbon emissions in Europe by 6.5 per cent by 2012 and by 20 percent compared to 1990 by 2020. “The only way to deliver this through ETS is to have a carbon exchange through which you can exchange your credits,” Mr Harry says, and with 80 percent of the European spot market in carbon credits in its hands, BlueNext is that market.

The BlueNext team originally included people coming mainly from the commodity business and the energy business, “but we also have people experienced in traditional financial markets – I am one of them – we have people with an international background in marketing and communications, we have former brokers in the energy market, we have people coming from banking backgrounds who were in charge of market surveillance, and so on. We have a very complementary team here and it’s very motivating to lead this team,” Mr Harry says.

The exchange was set up for corporate players which were getting European allowances from the EC and had the capacity to trade their allowances – either they were long and had the capacity to sell or they were short and they had to buy.

“But rapidly we had financial players joining so today we have 100 active members, representing 3,000 corporate companies who in turn represent 11,000 plants across the 27 EU countries,” Mr Harry says.

“Very large companies, especially the big European power companies, are direct members because they already had trading desks for buying oil, gas, whatever, so when we started carbon trading, it was a natural move for these companies to extend their trading to carbon products. So from day one we had all the big names.

“Then you have the classical industrial companies who are also direct members, but they’re not traders so they choose to give a mandate to a broker to trade in their name. That is where we got financial players joining, banks and brokers and we have all the big names of the financial industry from New York, London, and so on, who are members of BlueNext now.”

BlueNext also trades other carbon products, notably what are called Certified Emission Reductions, or CERs, from “emission abatement” projects in developing countries, such as forestry planting to absorb CO2 from the atmosphere.  Mr Harry jokes that the difference between carbon trading and other sorts of commodity trading is that “the goal of our market is to reduce the assets you trade, which would be a bit contradictory compared to more traditional markets. On the other hand it’s a market where the assets are growing because of market internationalisation. But the way you trade is relatively similar to other markets in the sense that you have orders from buyers and sellers, you match those orders and you have to manage the clearing and the delivery mechanisms.

“Where it’s a bit different, is that we are trading assets in a market which only exists because of political decisions in Europe, which is not the case with other commodities. Second, it’s an international market, a fairly young market born in 2005, so you have not yet the same volumes compared to more mature markets.”

The ETS is designed to evolve by 2013 from the current system, where the large majority of carbon allowances are handed out free by the different EU states, to an auction mechanism, where countries will sell allowances to companies who need credits. It will be a big change in the market, Mr Harry says, but “the good point here is that to go through auctioning you need to have a price reference and this price signal will be given by BlueNext and the carbon market across Europe. Second, it will force Europe to use the proceeds they get from these auctions in green projects, renewable energy, creation of green jobs etc. It will be a very big change.”

BlueNext is planning to be involved in the auctions, as well as the price setting. “You need a company able to manage this auctioning process, to have the sophisticated algorithms to determine which of the offers you choose with different parameters and then you have to deliver the credits to the companies and to get the cash from them. That’s exactly what we manage, exactly the experience we have,” Mr Harry says.

It might have been expected, Mr Harry says, that every country in the EU would have had its own carbon exchange, just as every country has its own stock exchange. “The reality today is that you have two big rival players, BlueNext and the Chicago Climate Exchange. The Climate Exchange started its activities in the US and then extended their business into Europe as the European Climate Exchange and they have had great success with the Derivatives market, though we are the leading market for Spot.

“The second point is if you compare BlueNext with its main competitor we are a single entity, extending its business to other continents, and we have the control of the whole chain.

“To have NYSE Euronext as a founder and a shareholder is a key strength, because they know very well how to develop an exchange, and second they have a long-term view which means they are ready to help BlueNext invest in new products, new services, new technology, under their own brand, which is very important, because if you want new members to join you need to explain your capacity to provide what you say you are going to do. That’s exactly what we can do with NYSE and CDC.”

In June BlueNext announced a joint venture with China Beijing Environmental Exchange (CBEEX) to help the Chinese set up a carbon trading operation. “For both sides it was a natural move – CBEEX is the largest in China and they were looking for a worldwide partner with real credibility and from our side we wanted to expand into another big region,” Mr Harry says.

Ultimately Mr Harry’s aim is “for BlueNext to act as a single reference point for carbon pricing. One of our dreams is to achieve this single carbon price across the world. What makes a price difference from one system to another is not the asset itself, that’s the same in Houston or Paris, it’s all the regulatory package you put around your system. If you have the same mechanisms in another region of the world, but with different constraints, you will get a different price. CERs are already traded on BlueNext, and they are used not only by Europe but by Japan and some other countries.

The US will accept international offsets so it means that we have an international product – CERs – which are accepted all around the world, and we are the stock exchange on which you can trade the CERs. That’s the beginning of the future single price for carbon.”