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Abstract
In environmental markets, parties frequently exchange obligations through environmental
contracts. These contracts imply a distribution of risk between parties. The main focus of our
paper is to identify contracts that enable risk in environmental markets to be reduced, distributed
at least cost, or managed efficiently. The risks that we consider are: moral hazard risk, price risk,
exogenous environmental risk, measurement risk and production risk. The first section of our
paper outlines some of the contracts currently utilised in financial and insurance markets to
achieve these objectives. These are: futures and options contracts, spread contracts, weather
contracts and catastrophe bonds. We then provide a snapshot of current applications of these
contracts both in real markets and in the literature. Finally we discuss some possible applications
in the environmental sector and indicate how the use of these contracts may alter the way
government manages environmental assets and responsibilities. We also suggest a staged process
to the introduction of contracts that recognises the current limitations faced by government. This
paper does not propose new or novel contracts for tackling the problems of risk in exchange.
Rather it extends the application of existing contractual arrangements to a new type of problem:
environmental markets.