UPDATE 2-Climate Exchange '08 volume surges, loss narrows

* Trading volumes across EU and U.S. more than double

* 2.5 mln pound pretax loss, 65 pct increase in revenues

* Analysts question whether market dominance will continue

(Adds details, CEO and analyst quotes)

LONDON, March 12 (Reuters) - British emissions exchange operator Climate Exchange Plc CLIE.L said on Thursday that trading volumes on its two main exchanges more than doubled in 2008 and its loss before tax narrowed to 2.5 million pounds.

Climate Exchange said its operating revenues rose by 67 percent to 22.7 million pounds ($31.4 million), while its cash balance dropped by 2 percent to 12.4 million pounds.

"In spite of financial market distress and a serious economic downturn, environmental markets continue to grow," the company said in a statement on Thursday. Climate Exchange owns and operates exchanges that trade credits for emissions including climate-warming carbon dioxide (CO2), sulphur dioxide (SOx) and nitrous oxide (NOx).

Its main exchanges are the London-based European Climate Exchange (ECX), which trades CO2 compliance permits under the European Union's Emissions Trading Scheme, and the Chicago Climate Exchange (CCX) and Chicago Climate Futures Exchange (CCFE), which trade both regulated and voluntary credits.

Annual volume on the ECX surged 170 percent to 2.81 billion tonnes, while average daily volume across both Chicago exchanges grew by 130 percent to a total 4,660 contracts.

European emissions permit prices <0#CFI:> are down more than 60 percent since hitting 2-year highs last July. Chicago voluntary CO2 credits <0#CCXCFIY:> have also fallen some 70 percent, dropping to around $2 from over $7 last June.

"We went through a time in 2007 and 2008 where in all markets there was irrational exuberance," Climate Exchange Chief Executive Neil Eckert told Reuters.

"If ever we've stress-tested the model it's been in the past 6 months, and so far so good."

Climate Exchange also has joint ventures or minority interests in Canada's Montreal Climate Exchange, China's Tianjin Climate Exchange, Australia's enVex and the India Climate Exchange Advisory Board.

The company said its loss before tax narrowed to 2.5 million pounds in 2008 compared to 8.3 million a year earlier. This equates to a loss of 4.26 pence per share, compared to a loss of 9.53 pence in 2007.

MARKET SHARE

Cash-strapped firms participating in the EU scheme began dumping their 2008 emissions permits in the second half to raise raise emergency funds.

As a result, exchange-traded spot selling surged, with France's BlueNext exchange capturing much of that new trade. Although Climate Exchange still holds the majority of market share in exchange-traded emissions contracts, analysts question the stability of their dominance as a result of this trend.

"We would expect volumes to be very high, but we need to see how that is shared amongst competitors," said Mirabaud Equity Analyst Gus Hochschild.

"The question remains as to what ECX's true volume growth is and what pattern emerges when you strip out all this selling."

Futures volumes have remained strong in March while spot volumes have slowed over February averages, suggesting that the market may have seen the bulk of emergency selling.

Nonetheless, Climate Exchange said it would launch its own spot-style contract on March 13.

Climate Exchange shares were slightly lower on Thursday, shedding 0.5 pence at 810 pence by 1130 GMT. ($1=.7226 Pound) (Reporting by Michael Szabo and Nina Chestney; Editing by Jon Loades-Carter)