The continent's bureaucrats hope their counterparts in China, India, and the US will embrace carbon regulation next year in Copenhagen.

The bureaucrats that run the European Union's day-to-day business aren't known for taking risks. Yet back in 2005, when they devised the EU Greenhouse Gas Emission Trading Scheme (EU ETS), these pencil pushers gambled that a cap-and-trade scheme would help cut the EU's carbon dioxide emissions. Now, three years on, the environmental benefits from the EU ETS remain unclear: The continent's CO2 output actually rose 1.1 percent last year.

Moreover, its impact on the European economy is far from clear. Optimists think Europe's early adoption of a cap-and-trade CO2 market will give local companies a competitive advantage when other regions of the world finally start trading carbon. Under the EU ETS, companies are given a set number of carbon allowances (the "cap" in cap and trade), which then can be bought and sold on the open market. In theory, this provides a financial incentive for firms to become more energy efficient, giving European businesses a head start in cutting overhead just as fuel costs begin to hit company profits.

This goal will be put to the test ahead of next year's U.N.-backed meeting in Copenhagen to negotiate a global agreement on climate change. For Europeans, the summit holds particular importance. The continent has banked its financial future—and moral authority—on creating a low-carbon economy. This gamble's efficacy now depends on the likes of China, India, and the U.S. deciding whether to embrace carbon trading. "Copenhagen will play a big part in showing that Europe's creation of a cap-and-trade carbon market will pay off," says Mark Spelman, global head of strategy at consultancy Accenture (ACN).

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