Suddenly, it seems being green is not a regulatory burden business has to put up with, but a competitive advantage. It's all the rage for companies to boast they are doing their bit for the environment, from cutting back on handing out plastic bags to claiming lower greenhouse gas emissions than their rivals.

Few, however, can match the experience of Climate Exchange, the Aim listed company that has seen its share price soar from 332p this time last year to £13 today, bringing a market value in excess of £500m.

Not bad for a company which, though it can clearly turn investors' heads, has only just turned a profit.

So what makes Climate Exchange so attractive? The company describes itself as the world's leading specialist exchange for trading emissions and environmental products. Behind that rather grandiose title are exchanges in London and Chicago that allow companies to trade rights to emit greenhouse gases - carbon dioxide in Europe, carbon dioxide and sulphur and nitrogen oxides in the US.

On this side of the Atlantic the operation is underpinned by the European Union's emissions trading scheme. In the US the position is more complex. There, sulphur contracts have been traded since the 1990s as part of the battle against acid rain under legislation brought in by George Bush Sr. That seems ironic in the light of the indifference to climate change in the current White House, which has failed to introduce a statutory federal scheme to underpin carbon trading and match the European regime.

Climate Exchange has benefited from this lack of leadership, which has left many American corporations embarrassed at the lack of action and pressing the administration to do something sooner rather than later. Corporate America is signing up for voluntary arrangements through Climate Exchange's Chicago arm.

Neil Eckert, its chief executive, believes this has been very good for Britain and allowed it to become the world centre for this type of trading. "We are not the only clean technology company on Aim," he said. "London has become a world centre for clean technology companies. The US has been bypassed. The UK is really in the forefront of what is going on."

First-round jitters

Europe's trading system has its critics. First time round, emission levels were too generous, countries had little problem meeting their targets and the price of carbon collapsed. This time the European commission is taking a tougher line. Some worry that the position after 2012, when the current phase ends, is unclear; others think Europe is sticking its neck out in paying the price of curbing pollution while the US has yet to sign up for Kyoto; and others still argue that companies should not be given any carbon allocations free but should have to bid for them.

But the market is growing - fast. Earlier this month Climate Exchange said daily volume on its European arm was up by 233%. The Chicago Climate Exchange turned in an even more stellar performance with volumes up more than 600%. It is heady stuff, but investors including the US investment bank Goldman Sachs are clearly expecting plenty more to come.

They may be right. Henrik Hasselknippe, a senior analyst at Point Carbon, the Oslo-based energy and carbon market research organisation, believes developments in Europe, the US and elsewhere point to the growth of a global carbon market.

He acknowledges there were weaknesses in the first round of the EU's emissions trading scheme but "they will have been mended in time for 2008" when the second phase kicks in. In the US, according to Mr Hasselknippe, there are developments at a number of levels. California, Oregon and states in the industrial north-east are beginning to bring in their own rules. Big companies, faced with a patchwork of regulation, are now pressing for a joined-up approach. Earlier this month the supreme court ruled greenhouse gases were air pollutants under the US clean air legislation.

"The one level that is missing is the White House," said Mr Hasselknippe. He draws a parallel between the development of carbon trading in the US and the earlier establishment of a regime covering sulphur and nitrous oxides, which itself provided the model for the European emissions trading programme.

Though Europe has signalled it is prepared to carry on unilaterally with its carbon trading scheme, "there is increasing global pressure for greenhouse gas reduction and carbon trading will play a central role in that".

Unsurprisingly, Climate Exchange's Mr Eckert agrees. He believes market-based "cap and trade" schemes are more effective than either a command and control approach or taxation.

If governments' plans to cut greenhouse gas emissions over the coming decades reach fruition, trading environmental permits will be the biggest business in global commodity markets, he said.

Mr Eckert believes that factors such as the Stern report and the former US vice-president Al Gore's campaign have alerted investors to the growing political consensus behind efforts to battle climate change, and the role of carbon trading in that struggle.

Trading scheme

The European emissions trading scheme was designed to provide a market-based approach, rather than a direct tax, to the problem of curbing big industrial users' carbon dioxide emissions. It covers sectors such as power generation, steel, glass, cement, ceramics and paper. However there have been suggestions that it should be extended to cover air transport.

Countries are given allocations of the amount of carbon dioxide they can emit which is then divided up between firms covered by the scheme. Firms which emit less than their allocation can sell the unused portion to over-polluters.

The aim is to create a market in carbon where the price is high enough to encourage firms to curb their emissions to keep down costs. Critics argue that the scheme so far has been too generous in allocating permits which means the price has remained low and that it should be extended to include aviation.

There have also been suggestions that the market principle should be taken further and all permits should be auctioned, rather than simply handed out by governments.

Industry is also concerned that the next phase of the scheme only extends to 2012, causing uncertainty over whether there will be a price for carbon beyond that date. That makes it more difficult for power companies to make investment decisions about new capacity