Telegraph

"Why should it be different as a commodity to the way people trade oil or gas?"

As the man in charge of the world's biggest exchange for companies, banks and hedge funds to trade permits to emit carbon dioxide, Birley is fed up with the environmentalists' charge that dirty capitalists should not profit from the global effort to tackle climate change.

Ahead of the Copenhagen summit next week, campaigners such as Friends of the Earth have argued that the entire system is so flawed it may need to be demolished in favour of a straightforward tax on polluters.

Firstly, they insist, the European system has failed in its fundamental aim to reduce emissions, meaning its only effect is to redistribute wealth among companies and traders. Secondly, the market is a magnet for derivatives that few people understand, brewing up a second sub-prime bubble. Lastly, the opportunities for fraud are vast, given the intangible nature of the product. .

These well-worn concerns are resurfacing as the whole concept of carbon trading stands at a crossroads. This totally invented $126bn (£76bn) market has the potential to flare into a $2 trillion green giant over the next decade, if US President Obama manages to push his carbon trading bill through the Senate early next year.

The Commodities and Futures Trading Commission even believes that within five years, carbon could surpass crude oil as the world's most traded commodity. Mr Birley is the first to admit that the European system "hasn't actually reduced emissions" so far. But having run exchanges throughout his career, he has faith in the ability of the market to deliver in its own good time.

"The goal of the system is reducing emissions: why should it matter how we get there?" he asks.

With weariness, he debunks the idea that policymakers can control who makes money from reducing emissions. The point of a market mechanism is that the market decides.

"Carbon-related products are probably the most profitable part of trading for any of the investment banks right now, because the margins are so good," Mr Birley admits. "Because it's such a specialist area, a little bit of knowledge goes a very long way."

Part of what makes the profits potentially so high are the price swings. Currently carbon is 20pc more volatile than oil, meaning utilities need the banks to help shoulder some of the risk associated with trading and provide liquidity.

But for many – maybe illogically – it still sticks in the throat to know that the vast proprietary trading desk of Citigroup or Vincent Tchenguiz, the property and carbon offset investor, are likely to end up with sizeable financial proceeds from a system that will have added to household bills by the end of the decade.

Underpinning resurging concerns about carbon trading is the world's crisis of faith in capitalism itself. Markets have proved to be more capricious and uncontrollable than anyone imagined possible in the last year. Where does that leave the theory behind an artificial trading system set up to pursue a single, ethical goal? The economic concept is simple, but the practice itself has been fraught with complications. In Europe, since 2005, policymakers distribute permits to emit carbon to utility companies and heavy industrial polluters – at first for free.

Any allowances not used or extras required may be traded on the open market, as each country gradually reduces the amount of available credits and begins to auction them.

On top of that scheme, there is the Clean Development Mechanism, where companies can buy up a certain number of extra credits (known as offsets) from low-carbon projects in developing countries. However, the main problem is that industrial players, from cement-makers to paper companies, proved so effective at lobbying that they were showered with extra permits that they did not need in the early years.

Between 2008 and 2012, the UK power sector will make an additional €1.3bn (£1.18bn) purely from carbon trading, with windfall profits mostly going to the coal sector.

The recession has only exacerbated the glut as industrial emissions fall, pushing down the price of carbon credit to around €13. And instead of keeping their credits for the 2013 deadline when caps tighten in Europe, industry is liquidating its positions.

"You might have expected industrial users to hoard their permits for when fewer are given out for free, but they are selling them off just to keep afloat," says the head of trading for a UK steel maker.

But does it really matter if emissions have been reduced due to the recession or carbon trading as long as the target has been hit?

When industrial activity comes back, defenders of the system argue that carbon price ought to rein in emissions below pre-recession levels.

All this, however, is threatened by the old risk of "carbon leakage", where UK companies may relocate abroad to avoid a higher carbon price – shifting emissions elsewhere as well as damaging the economy.

The carbon trading system is expected to add £40 to household energy bills when the carbon price reaches €35 per tonne – but the cost to businesses could be even more crippling.

With more countries preparing for cap-and-trade schemes over the next decade, worries about global competitiveness ought to diminish. But the practical problem of international standards in auditing emissions remains.

Only this month, the UN banned Croatia from trading carbon after it cheated in the way it reported emissions. Greece has also been disciplined. And earlier this year, Greenpeace exposed phoney carbon offset projects in Bolivia, where 90pc of promised carbon reductions had not been delivered.

Architects of the US cap-and-trade system argue that there is time to iron out practical problems, but the concern remains that after almost half a decade of carbon trading in Europe, incentives still are not reaching those with a genuine commitment to reducing emissions.

While banks and hedge funds have created new businesses from their carbon trading desks, coal producers and heavy industry have banked billions in windfall profits. Meanwhile, utility companies complain that it is still cheaper to build a gas-fired power station than a wind farm or nuclear plant.

Joe Stanislaw, a leading independent energy economist working for Deloitte, argues that the world has no hope of hitting climate change targets without carbon trading.

"A lot of people can criticise Europe but it has led a brave experiment," he says. "The US will need tighter caps and tighter regulation. It will take time, but I believe the world can learn from these mistakes."