"We are surprised how fast trade is growing," said Albert de Haan, commercial director of the Amsterdam-based European Climate Exchange (ECX), which launched a CO2 futures market in April.

"We are seeing many new participants coming forward," he told Reuters.

De Haan said three US hedge funds had recently inquired about trading ECX futures contracts, which are listed on London's International Petroleum Exchange.

The EU's scheme caps CO2 emissions from about 12,000 factories and power plants, and allows firms to trade credits. The EU wants the mechanism to be the mainstay of its bid to cut pollution in line with the Kyoto Protocol on climate change. Prices for CO2 credits for the first phase of the scheme (2005-2007) have surged off a low of just over six euros a tonne in mid January to nearly 30 euros.

Traders have torn up earlier projections that prices could peak at around 25 euros.

"We expect the CO2 price to continue to increase, and it could reach 30-40 euros a tonne by early next year," UBS analysts Per Lekander and Vincent Gilles wrote in a recent research note.

Prices rallied after the European Commission ordered some governments to set industry tougher CO2 targets, reducing the number of credits in circulation.

A dry spell in southern Europe, which has cut hydro-electric power output and forced utilities to burn more fossil fuels has also been factor.

Arguably the biggest factor has been a surge in gas prices. Expensive gas means utilities -- the biggest polluters covered by the EU scheme -- are opting to burn cheaper coal in power stations.

Coal emits more CO2 than gas, so utilities' demand for CO2 credits is booming. Soaring CO2 prices have helped drive electricity prices to record levels across much of Europe, handing windfall profits to utilities.

SURGING VOLUMES

Investment bank Barclays Capital has predicted the CO2 market ultimately could be worth 40 billion euros a year. That level of business is some way off but brokers report rapidly rising volumes.

"Volumes are now at some 15 million credits per month, compared with 5 million at the start of the year, said Jussi Nykanen of Finland-based brokerage GreenStream.

Trade is dominated by utilities and oil companies, which have the toughest CO2 targets, and banks which are dealing on behalf of small companies, according to market sources.

Other industrial firms covered by the EU's scheme, such as steelmakers and cement companies with less challenging CO2 targets, have not been heavily involved but are expected to come in later this year, possibly as sellers of spare credits.

Surging volumes have triggered interest from rival brokers and exchange. Traders say over-the-counter (OTC) brokers which dominated the market in the early stages have lost ground to exchanges in recent weeks.

"I would guess volumes at the moment are about 50/50 between OTC and exchanges," said Louis Redshaw, an associate director at Barclays Capital in London.

Traders say the ECX is pulling ahead of rival bourses after launching in April with rock-bottom transaction fees. Earlier this month the bourse traded over a million tonnes in one day for the first time.