Although the United States has not signed the Kyoto Protocol, California and numerous other states have enacted programs that will restrict greenhouse gas emissions. Congress is reviewing nine bills that would create a US cap-and-trade system. When a US program goes into effect, the international market for carbon credits will explode into hundreds of billions of dollars. Ironically reducing greenhouse gas emissions from oil and gas operations as well as diversification into biofuels and renewable energy presents a tremendous potential opportunity for companies that produce fossil fuels to monetize greenhouse gas emission reductions in the form of carbon credits. Oil and gas companies should consider both the effect of these changes on the production, refining, and marketing of fossil fuels and economic opportunities. Oil companies should develop corporate climate strategy as part of their corporate governance. In particular, a short and long term strategy should be developed to determine what if any restrictions may be imposed. On the other hand, part of the strategic review should be the analysis of what if any carbon credits may be needed to offset emissions and what opportunities exist to develop projects that generate carbon credits for internal use or external sale. Projects in a developing country could be used to offset emissions in the US or Europe. This paper will explore these issues and discus the UN process for reviewing and approving carbon projects and issuing certified credits as well as the voluntary credit market that exists outside the UN system. I will also address the capital mobilization through international banks, investment firms, and hedge funds for investment in carbon credit development projects and financial products, such as futures contracts, carbon credit guarantees, derivatives, and swaps that will be used to provide greater liquidity and risk hedging in these markets.

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