Dec. 12 (Bloomberg) -- The New York Mercantile Exchange, the world's largest energy market, will partner with banks including JPMorgan Chase & Co. and Morgan Stanley to open an exchange for trading carbon-emission credits.

Contracts at The Green Exchange will begin trading in the first quarter of 2008. It will focus on European and international markets for carbon credits, as well as allowances for two U.S. air pollutants, sodium oxide and nitric oxide, Nymex said in a statement today. Nymex Holdings Inc. and its partners will seek to take business from the Chicago Climate Exchange.

Global trade in emissions credits tripled to $30 billion last year. The market, fostered by restrictions on carbon emissions from power plants and refineries, could reach about $100 billion by 2020, Lehman Brothers Holdings Inc. said in a Sept. 20 report.

``We're going to be competitive in the U.S. and Europe,'' Nymex Chairman Richard Schaeffer said. He will serve as chief executive officer of the exchange until the board of directors appoints a full-time chief executive, said Nymex spokesman Keil Decker.

The Chicago Climate Exchange is owned by the U.K.-based Climate Exchange Plc, which also owns the European Climate Exchange, the world's biggest greenhouse gas-trading system. It traded its 1 billionth contract for the year yesterday. Each represents 1 metric ton of carbon dioxide allowances. Permits for 2008 have gained 23 percent in value this year as the European Commission has curbed grants of the tradable securities for the five years through 2012.

New Competitor

The Green Exchange was developed with utilities, environmental brokers and investment banks to create contracts acceptable to users of the marketplace, Schaeffer said in an interview. The contracts will trade on the CME Group Inc.'s Globex electronic platform, the venue that has listed Nymex's contracts since last year. It will apply for U.S. Commodity Futures Trading Commission certification with its trades cleared by Nymex, according to the statement.

``This is part of the growing trend of putting in place the infrastructure of emissions trading in the U.S.,'' said Abyd Karmali, managing director at Merrill Lynch & Co., a partner in the venture.

Other banks and partners in the exchange include Tudor Investment Corp., and Evolution Markets Inc.

Government efforts to slow the growth of greenhouse gases blamed for global warming are expanding markets for carbon credits. Carbon dioxide emissions are responsible for rising temperatures, more intense storms and coastal flooding, according to a series of reports this year from the United NationsIntergovernmental Panel on Climate Change.

European Precedent

In Europe a cap-and-trade system is used to help meet emissions targets. Under cap-and-trade, polluters must obtain a permit for every metric ton of carbon dioxide they release into the atmosphere.

JPMorgan is currently an active trader in the regulated European and voluntary U.S. market, said Blythe Masters, head of global commodities at the bank. Morgan Stanley and Barclays PLC are also active.

``One of the great challenges of the voluntary market at a minimum is there are no standards'' concerning ``what is a good contract and what is a bad contract,'' Masters said. ``What the Nymex seeks to do is establish an exchange that addresses a number of these issues. It's necessary and we're strongly in support of it,'' she said. The goal is to create contracts that are used by industry participants that become established so that U.S. regulators can use them as a model when crafting legislation, Masters said.

Congressional Debate

Congress is debating a proposal that would use cap-and- trade to control U.S. greenhouse gases. The Regional Greenhouse Gas Initiative or RGGI, a group of 10 Northeast and Mid Atlantic states, plans to launch a cap-and-trade program in 2009.

While the current outlook in Congress on carbon regulation is hard to discern, ``it's our hope regulation will become binding by 2012, Masters said. ``I think it's a question of when and not if.''

Existing bourses, such as the Chicago Climate Exchange, treat over-the-counter brokers ``as competitors rather than partners,'' said Andrew Ertel, chief executive officer of Evolution Markets. The Green Exchange will seek to partner with other markets around the world to capitalize on the fungible nature of carbon trading, Ertel said.

``We anticipate the exchange making global outreach to some of the international exchanges to find a way to coalesce and create one unified liquid product,'' Ertel said in an interview. ``Its time that we stop looking at regional exchanges and start looking at the global picture.''

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net or Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

Last Updated: December 12, 2007 14:38 EST