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 emitters that there is a fair probability that some form of greenhouse gas emission regulation will be introduced over the next few years.

The likelihood of GHG emission reduction regulation poses a significant financial risk to emitters. Emitters therefore recognize the value of managing this risk in order to protect revenue flow and shareholder value. The objective is to manage the risk of GHG regulations in the most cost-effective manner:

Emitters may opt for technological changes such as fuel switching. But for many emitters a technological approach is either unavailable or prohibitively expensive.

An emitter might wait to see exactly what reductions are required before purchasing the required credits in the GHG market. But projected future prices of greenhouse gas emissions suggest that the cost of compliance at these levels could be crippling to the emitter.

In the current GHG market banked credits and forward streams of emission reduction credits are trading at attractive prices. Hence, an emitter might consider hedging exposure on a forward basis right now. Given the uncertainty about the exact nature of emissions trading legislation, option structures are particularly popular.

The GHG market offers the most cost effective route to achieving future emissions reduction compliance levels. Therefore the market is driven by risk management concerns rather than compliance concerns at this stage. In effect, the GHG market offers a cost effective insurance policy.