With a shot at becoming a $1 trillion market in little more than a decade, carbon trading is poised to take a major step forward in the United States.

What is for sale are carbon allowances, intangible credits allotted to big companies that produce carbon dioxide as a byproduct of their operations. Because carbon dioxide is one of several gases that contribute to the greenhouse effect, many countries in recent years have imposed stringent caps on emissions.

What’s more, some countries have established trading mechanisms that allow companies that pollute more to buy credits, or "allowances," from those that pollute less.

In 2005, the European Union established a mandatory emissions-trading program - also known as a cap-and-trade system. Today, that program represents the largest carbon-trading market in the world.

During the first half of this year, trading in the EU made up 70% of the $60 billion worldwide carbon-trading market, according to Washington-based research organization Point Carbon.

A national system of mandatory emission caps would likely spawn a $1 trillion carbon-trading market by 2020, according to New Carbon Finance, a New York-based research company.

So far, the opportunity for U.S. investors to get in on carbon trading has been largely confined to the institutional realm. In late June, however, Barclays Capital Inc., the New York-based investment-banking division of Barclays PLC, which is based in London, launched iPath Global Carbon Exchange Traded Notes, which track the carbon-trading market.

We think the carbon-emissions market is of interest to many investors and will grow over time," said Philippe El-Asmar, head of investor solutions at Barclays. "It’s an additional alternative to commodities investing and another means for investors to get an uncorrelated investment."

On Sept. 25, the Regional Greenhouse Gas Initiative Inc. - a New York-based coalition of 10 Northeastern states that entered into an agreement to reduce emissions from electric utilities by 10% by 2018 - will hold the nation’s first carbon allowance auction. The coalition’s mandatory cap-and-trade program kicks off next month.

Meanwhile, California, six other Western states and four Canadian provinces in July joined forces to launch a carbon-trading system. Unlike the RGGI, that effort will target a wide range of companies, and not just electric utilities.

Last year, six Midwestern states and one Canadian province also announced plans to launch a cap-and-trade program.

To be sure, investing in the U.S. carbon-trading market isn’t for the faint of heart.

"You could lose money on this. What happens if legislation comes to pass and the compliance framework doesn’t come to pass?" said William Scotti, director for Meradia Group Inc., a consulting firm in Philadelphia.

He worries that the federal government could step in and impose its own restrictions on carbon emissions.

"No one has bought into the cap-and-trade market as a standard," Mr. Scotti said. "There is no guarantee that a market-based solution will come into place."

The role of regulators in the creation of carbon-trading markets is also troublesome, said Veronique Bugnion, managing director of Point Carbon.

"These markets are created by regulators," she said. "You are trading in something intangible, and regulators dictate the life and development of these markets."

Even so, Wall Street is setting the stage for a robust secondary-trading market for carbon credits.

The New York Mercantile Ex-change, a subsidiary of Nymex Holdings Inc. of New York, and the Chicago Climate Exchange, owned by Climate Exchange PLC of London, both launched RGGI carbon futures contracts in August.

"RGGI has a small footprint relative to the European market, but it’s very important symbolically," said Randy Warsager, vice president of marketing for Nymex.

"The decision to list RGGI is not just the numbers or the fact that it’s the first mandated compliance program," he said. "But it has the potential to grow for the next few years."

The Chicago Climate Exchange launched a trading program for a voluntary emissions reduction program five years ago. Two years after that, in a bid to tap in to the international cap-and-trade markets, it launched the European Climate Exchange and the Chicago Climate Futures Exchange.

This year, Nymex partnered with 13 sponsors to launch its Green Exchange initiative and began trading in March.

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