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For the foreseeable future, the global financial-services sector will be wrestling with the grim realities of credit losses, deleveraging, and challenges to traditional business models. With dramatic industry restructuring already underway and a clear need for players to concentrate on the here and now, it would be easy to lose sight of a nascent but significant long-term opportunity: facilitating carbon trading.

By placing a value on greenhouse gas emissions, regulators have created a new asset class—carbon allowances. The European Union, for instance, issues allowances to companies in the industrial and energy sectors, stipulating that companies can emit capped levels of carbon emissions during the year. Enterprises that overshoot their allowances can buy supplementary ones from companies that have a surplus. China is discussing plans for a similar scheme, and the United States may introduce one soon as well.

Many banks, including Barclays, Merrill Lynch, and Deutsche Bank, already profit from trade in this new asset class, which had a market value of about €65 billion in 2007. By participating in those transactions, banks earned around €500 million in revenues last year. Trading volume could grow to €2 trillion by 2020—more than double the size of the global commodities derivatives market...

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TUMBLING exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions: these sound like the ingredients of a distant third-world-debt crisis from the 1980s and 1990s. Yet in Europe the mess has been cooked up closer to home, in east European countries, many of them now members of the European Union. One consequence is that older EU countries will find themselves footing the bill for clearing it up.

Many west Europeans, faced with severe recession at home, will see this as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?

Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shriveled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.

Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilize the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.

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