Transaction Structures

Through a variety of deal structures, smart brokering helps firms hedge their risk and capture opportunity:

  • Immediate Settlement: In transactions involving historically created or banked credits, payment is made within 3 to 5 business days of the confirmation that title to the reductions has been transferred to the buyer.
  • Forward Settlement: May be structured as:
  1. pay now (at a discounted rate) and receive title to credits in future years, or;
  2. payment upon delivery, where payment is made in future years on an agreed date in return for delivery of title to credits created in those years. The second transaction type is often restricted to those with investment grade credit. Credit problems often may be solved through negotiation.
  • Streams: Both immediate and forward settlement is available for streams of allowances of consecutive vintages. Streams of consecutive vintages allows the buyer to secure the emission reduction credits of the vintages that he/she considers most valuable. It also allows the seller to package and receive revenue for credits generated over a long period of time.
  • Call Options: Options provide a level of flexibility and risk management that can not be provided through other types of transactions, by giving the purchaser of the option the right but not the obligation to buy at a specified price for a for a specified premium. Options can give both buyer and seller the opportunity to hedge against price and regulatory risk risk. In an uncertain market, options allow traders to take early positions at relatively low cost. Options also provide a window of time during which rules for trading will become more clear.
  • Inter-pollutant and Inter-commodity Swaps: This structure includes the exchange of SO2 and NOx allowances for Greenhouse Gas Emissions Reduction Credits. These structures may enable a company to avoid capital gains or losses, for example in the US, if the IRS rules that these transactions will be treated as "like kind".
  • Bundling: GHG transactions may be structured by bundling reductions with other commodities such as coal or wholesale power. GHG credits may be supplied with coal contracts to offset the GHG emissions associated with the burning of coal, thereby lowering the coal’s environmental risk. The same may be done with GHG emissions associated with natural gas combustion and electricity production. In addition to making contracts for the sale of the commodity more attractive, bundling can help develop "green power" strategies.
  • Portfolio building: For the purpose of managing risk through diversification, the broker is uniquely placed to develop portfolios of various greenhouse gas instruments that meet different quality, location, and vintage criteria.
  • Contract liability clauses: Special conditions may be provided where the buyer requires assurances that the emission reduction credits being transferred in the future will actually be valid under future regulations. For example, if a mandated Emissions Trading Program is put into place and the transacted emission reduction credits are not valid under the future program, the party delivering emission reduction credits will return the initial payment plus interest or substitute valid credits.