The landmark treaty to tackle the carbon pollution threatening the planet's climate system took effect on February 16, 2005, after prolonged diplomatic agony.

That was followed by another bruising boxing match in Montreal last December at talks on how to shape the pact's future after 2012, when its current roster of pledges runs out.

Meanwhile, the treaty remains weakened by the walkout of the United States, the world's biggest polluter, and worries that Kyoto's European champions will fail to meet their own high-minded vows on pollution reduction.

Yet even as political turbulence continues to beset the Kyoto Protocol, its key innovation is booming.

"The carbon market is going very well. We've seen tremendous growth this year," said Henrik Hasselknippe, senior analyst at Point Carbon, a firm that monitors the fast-growing business in CO2 pollution.

"Carbon is now being used as a commodity on the same lines as other energy commodities," he said from Oslo, Norway.

Trading in carbon dioxide (CO2) tentatively got off the ground in 2004 as the Protocol lurched towards ratification.

Now CO2 is one of the world's fastest-growing markets -- and according to Point Carbon's estimates, will be worth as much as 34 billion euros (40.2 billion dollars) annually by the end of this decade.

In 2004, the global volume of trade in CO2 was just 94 million tonnes. In 2005, it rose to 800 million tonnes. In January 2006 alone, the figure was more than 262 million tonnes for spot trading among European players alone.

A year ago, a tonne of CO2 sold for seven or eight euros (eight or nine dollars) on the spot market. Last Friday, a tonne was changing hands at more than 26 euros (31.2 dollars) -- a huge profit for anyone who had the foresight to buy futures before the Protocol took effect.

"Things are taking off. This is just a start," said Thierry Carol, a director of Powernext Carbon. Powernext Carbon, a Paris-based spot market, is one of several CO2 trading arenas in Europe, the others being in Oslo and London.

The mainstay of the carbon market is the European Union's Emissions Trading System (ETS). This was set up to help the 25-nation EU meet its obligation under Kyoto to bring greenhouse gas emissions down to a level eight percent lower than the 1990 levels, by between 2008 and 2012.

It covers around 11,500 EU firms, which account for about half of the CO2 emissions of the 25 member states.

These huge burners of fossil fuels -- mainly steelmakers, cement producers and the paper industry -- have to meet an individual target for reducing CO2 output.

The penalty is 40 euros (48 dollars) for every tonne emitted beyond this threshold, which will rise to 100 euros (120 dollars) in 2008.

Those who are below their quotas can sell the remainder to other firms who are above their quota -- in other words, a classic financial carrot-and-stick to encourage a carbon cleanup.

Powernext Carbon, a venture combining the merged continental European stock market bourse Euronext and a French state financial institution, Caisse des Depots, kicked off with six players last June.

Seven months later, it now has 33, including banks that act as trading intermediaries.

"Three or four newcomers are being added each month," said Carol. Trades concluded in January amounted to 1.9 million tonnes of CO2, a record, after 1.3 million tonnes in December 2005.

Adding to the surge of business in the EU ETS is trade in two other Kyoto mechanisms, Joint Implementation (JI) and the Clean Development Mechanism (CDM).

Under JI, countries can gain emissions credits if they help climate-friendly projects in other industrialised nations; CDM offers credits for similar projects in developing countries.

These two mechanisms -- open to any countries which has signed and ratified the Kyoto Protocol -- are only now getting underway, after being mired in procedural problems and funding shortfalls.

Other Kyoto countries, such as Japan and Canada, have also been mulling carbon markets, although the outlook for the Canadian initiative is uncertain after the election last month of the Conservative Party, which has been critical of Kyoto in the past.

The United States is not directly concerned by the Kyoto Protocol because President George W. Bush rejected the draft treaty in 2001, saying its binding commitments were too costly for the oil-dependent US economy.

But US corporations are affected if they have a subsidiary or an asset in Europe that comes under the EU's Kyoto Protocol provisions. And US banks, such as Merrill Lynch, J.P Morgan and Morgan Stanley, have swiftly positioned themselves in the EU CO2 market in order to turn a buck, said Hasselknippe.

The early success of the European market, mounting concern about climate change in the light of Hurricane Katrina, and sudden awareness of US dependence on foreign oil are also driving change in the United States, say analysts.

Many confidently say a CO2 market in the United States is inevitable and some say it could even start life a handful of years from now, even though the idea of a cap-and-trade system is anathema to Bush.

At state level, states in the northeastern US and in the Midwest have taken early political moves to forming regional carbon markets, and California, under Governor Arnold Schwarzenegger, has started the key first step of launching an emissions registry.

At US federal level, the Senate last year passed a non-binding resolution calling for "mandatory, market-based limits and incentives".

Two key senators, Pete Domenici, a Republican who chairs the Energy and Natural Resources Committee, and Jeff Bingaman, the panel's senior Democrat, followed this move up in early February with a technical plan for achieving that goal.

"There's a lot more interest in a carbon market in the United States than may seem in Europe," said Ian Carter, policy coordinator for North American affairs at the International Emissions Trade Association (IETA).

These initiatives are still in the embryonic stage and it remains unclear how a US market, if it emerges, will dovetail with the European market for CO2, he added.

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