Major greenhouse gas emitters recognize that uncertainties exist in both the science and the policy of global warming. However, it is also clear to these companies that some form of greenhouse gas emissions regulation is likely to be introduced over the next few years. The introduction of legislation would pose a significant financial risk to emitters, since the cost of compliance through internal process changes may be difficult and expensive.

The lowest cost route to emission compliance for many companies will be through the purchase of emission reduction credits on the open market, and currently transactions are being driven by this risk management mechanism.

Participants may wish to hedge price and liquidity risk by locking up price and quantity today.

However, there are several uncertainties that may make companies wary of entering into transactions at this stage:

• Regulatory risk – whether domestic and/or international GHG regulations will enter into force.
• Timing – when companies will become subject to binding regulations.
• Price – how the price of a metric ton of CO2 will vary over time.

These uncertainties may cause companies to delay their participation in the GHG market. This delay may cause companies to become exposed to higher compliance costs, or alternatively lose out on capturing valuable new sources of revenue to complement core business activities.

Rather than losing the opportunity, an attractive solution is to structure current transactions to eliminate or reduce the uncertainties outlined above. A broker’s role is to devise creative solutions that allow companies (both buyers and sellers) to capture maximum opportunity at minimum risk. A variety of transaction structures and special terms/conditions provide the basic tools to reach this objective:

In effect, the GHG market offers a cost effective insurance policy to major emitters.