Carbon market exchanges ripe for consolidation

By Chris Wills and Michael Szabo - Analysis

LONDON (Reuters) - A cut-throat battle is emerging to dominate trade in permits to emit greenhouse gases, which could grow to rival the $3 trillion oil trade, with dominant exchanges eventually expected in Europe, the U.S. and Asia.

Emissions exchanges are the hubs of a growing, $60 billion carbon market, where companies buy and sell permits to emit harmful greenhouse gases like carbon dioxide, and are expected to consolidate as a global market emerges, analysts say.

London will remain the world's carbon trading capital in 2012, when the Kyoto Protocol's first commitment period ends, according to a Reuters survey of emissions traders and analysts.

There are currently more than 10 exchanges worldwide trading carbon emissions, and with several more expected to launch futures or spot contracts this year, traders say the market is fragmented and expect consolidation by 2012.

"Inevitably some will fall by the wayside and others will get taken out," said Jim Benson, an emissions trader at BP (BP.L). "I think (by 2012) there is likely to be one dominant exchange in the U.S. and one in Europe."

So which exchanges will dominate?

European Climate Exchange (CLIE.L), the largest emissions exchange in the world, will continue to maintain its dominance in Europe with partner IntercontinentalExchange (ICE) (ICE.N). The ECX currently transacts around 85 percent of European exchange-traded volume.

Newcomer the Green Exchange, launched earlier this year by the world's largest energy futures market, New York-based NYMEX NMX.N, is favored to capture the lion's share of U.S. carbon trading volumes.

"We'll have NYMEX in New York, ECX/ICE in London, and maybe something in Asia," Laurent Segalen, a managing director at Lehman Brothers LEH.N, told Reuters.

CAPITAL TRANSFER?

London has been the global carbon capital since 2005, the first year of the European Union's flagship emissions trading scheme, and the vast majority polled don't see other financial centers like New York or Tokyo challenging it soon.

"We have the brokers, the traders and the main exchange is already right here," said Louis Redshaw, head of environmental markets for London-based Barclays Capital (BARC.L). "We've also got the lawyers, accountants."

Several rival exchanges in other EU countries have tried to seize London and ECX's crown by launching their own emissions trading, but so far none have been successful.

European power exchanges including Germany's EEX and Norway's Nord Pool have launched EU Allowance (EUA) futures, though trading volumes remain comparatively small.

"It's not looking good in terms of global dominance (for the smaller exchanges). They might survive but I'm not sure they'll increase their current market share," added Segalen.