The global carbon market is far busier this year than last, according to figures released this month. Around 1.2 gigatonnes of carbon — worth €15.8 billion (US$21.4 billion) — were traded worldwide in the first half of 2007, primarily on the European Union (EU) Emissions Trading Scheme, according to analysts at carbon-market consultants Point Carbon in Oslo, Norway. Last year saw a mere €22.5 billion change hands all year. But another Point Carbon analysis points out that the infant US market of ten northeastern states looks to be planning too many initial allowances.

Volume is up in the EU market, experts say, because traders are looking to the future. Trading on emissions allowances from the first, experimental, phase of the exchange collapsed in April 2006 and has never recovered. Most trading now is on allowances for the second phase, which begins on 1 January 2008 and runs to 2012. Currently, a credit bought on the open market for a tonne of emissions from the developing world through the Kyoto Protocol's Clean Development Mechanism costs less than buying the straightforward allowance to emit a tonne. As a result, many companies in the industrial world are selling off the maximum permissible percentage of their allowances and making up the difference with these 'certified emission reductions' (CERs). This lowers prices (see Nature 448, 401; doi:10.1038/448401b 2007) but increases volume. It has also led to a secondary market in buying and selling CERs. Another inducement to trade now is that companies can save allowances from the second phase for use in any year in the future, a feature called 'infinite banking'.

The increased activity is good for the health of the market, according to Guy Turner, director of New Carbon Finance in London. For one, it smooths out ups and downs in price, calming skittish investors. “It's the weight of numbers,” says Turner. “Things move much more sluggishly.” And, according to Endre Tvinnereim, senior analyst at Point Carbon, increased volume is good for the planet as well. “Increased activity increases the number of actors with a financial stake in a better environment,” he says.

Across the Atlantic, as the US Congress lurches towards passing a bill that would establish a carbon market in America, a few vanguard states have started their own. But analysts say that this scheme may face the same problem that crashed the European market. The value of phase I credits in the EU scheme fell to nearly nothing because there were far more credits floating around than companies needed.Point Carbon's analysis indicates that the US Regional Greenhouse Gas Initiative (RGGI), comprising ten states on the northeast coast, from Maine to Delaware, may be planning allowances for 13% more carbon than they need. Meanwhile, Arizona, California, New Mexico, Oregon, Washington, Utah and two Canadian provinces have agreed to develop a cap-and-trade scheme within the next 12 months.

Janet Peace, an economist at the Pew Center on Global Climate Change in Washington DC, points out that the number of credits in the RGGI had been set before the EU phase I crash. “RGGI had already put their model rule out there. I don't think you can blame them for the lesson that came later.” She also says that over-allocation will not necessarily spell doom for the nascent US market, which is to start trading in 2009. Many states will auction off their credits, some with a minimum bid, thus giving them some value from the off.

But there is a lesson for future schemes in the over-allocation crash and subsequent rebound in the EU, Peace says: “You need good data on which to hang your cap.”