Street Clears the Air

By buying up the excess allowances, a polluting company can avoid being hit with a fine or a sanction.

But the goal is that the pollution limits eventually will force all companies to reduce carbon dioxide emissions.

"There is definitely building momentum in corporations and in general for increased action on global warming," says William Marcus, the head of business development at Calyon Financial, a Chicago-based global futures brokerage.

U.S. companies, he says, are "putting into place their own internal practices, trading and educational programs in preparation for the day of mandated limits."

To be sure, the business of carbon trading is still in its infancy.

So far this year, more than 9.3 million metric tons of carbon dioxide equivalent, or 93,000 contracts, have been traded, the Chicago Climate Exchange says.

That's minuscule compared with the daily record set earlier this month on the New York Mercantile Exchange, during which 411,265 energy futures contracts were traded.

And carbon trading also has experienced some growing pains.

Earlier this year, the price for carbon fell in Europe after a panel questioned the effectiveness of the European Union's emission trading scheme. The panel said the number of carbon permits issued by countries to clean-burning businesses exceeded the demand from polluters.

"It's a new market,'' says Richard Sandor, the chairman and CEO of the Chicago Climate Exchange, which has 225 members. "The volume and turnover is significantly less than in Europe, but the breadth of members is significantly wider."

The big commitment by Morgan Stanley to carbon trading is an indication that Wall Street increasingly sees it as an area for real growth.

Simply put, investors and investment banks have recognized the potential to make profits through carbon trading.