1. Copenhagen: A Global Assessment Carbon Markets North America 2010 Miami, Florida January 21, 2010 Ken Newcombe CEO C-Quest Capital Washington, DC cquestcapital.com

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3. Setting the Scene for Copenhagen Copenhagen Outcomes were G2 Dependent: First : China would not make further emissions reductions commitments without the US passing a credible, binding carbon cap consistent with long term global targets The US was not in a position to deliver needed commitment, given domestic constraints Second: The Obama Administration needed to convince Congress that China is serious. The only way to do this was by obtaining transparent verification of China's mitigation efforts China was not about to allow anyone to measure its activities, certainly not those responsible for the problem – those who have done little over the past 8 years These two facts explain the Chinese position in negotiations through the conclusion of COP15. Premier Wen and President Obama dramatically lowered expectations for COP15 outcomes at the November APEC summit by making clear that it was not possible to reach agreement on binding targets in the time remaining Mexico Too… No agreement on binding emissions reductions in Mexico City if the US has not passed a comprehensive climate bill US is unlikely to ever ratify a post-Kyoto Treaty, making domestic legislation with globally consistent long-term goals critical to an international Accord BASIC countries know the US won’t ratify and will condition further commitments on credible US domestic action before they advance their negotiating position

4. At Best Copenhagen Would : Firmly commit Parties to reach agreement in Mexico, in December 2010 Define the parameters of an agreement to be worked towards in the interim Agree on the design of new elements in the global framework: forest conservation/REDD, financing for adaptation and mitigation, technology transfer, CDM continuity and reform, sectoral crediting What Could We Have Expected? The Dual Challenge: 1.Accommodating the US and protecting the Kyoto Protocol 2.Getting around the Catch-22: Deep cuts in OECD versus expanded offset trade By Copenhagen the Process was Trapped In: 1.The North-South equity dilemma: i.e. “You caused the problem, so you pay for it.” 2.An extremely cumbersome UN process – reaching agreement in a one country-one vote framework When 115 heads of State reached Copenhagen there was no text to agree despite two years of negotiations and 3-4 major meetings a year.

5. Copenhagen Accord Given these substantial constraints, the achievement of the Copenhagen Accord (and CoP15) is significant and has far-reaching consequences for climate – and how future agreements are reached within the UNFCCC framework. But will it stick? Global Leadership  United States leadership was essential to break the UN deadlock and construct the Accord. Without President Obama there it would not have happened  A new US + BASIC (Brazil, South Africa, India, China) dynamic emerged. Is it durable? One Agreement – Breaking the Deadlock  Developed by 30 countries representing 80-85% of global GHG emissions  Explicitly built on the scientific consensus of 2 degree Celsius temperature limit  Offering unprecedented international funding for adaptation and mitigation  Achieved extraordinary support from Parties, despite falling short of adoption: 188 signaling for and 5 opposing following open debate Credibility of the Accord is Being Tested Immediately  By January 31, 2010:  Annex I Parties agree to submit commitments to implement economy-wide emissions targets  Non-Annex I Parties will communicate mitigation actions What will be the level of response? Source: UNFCCC, C-Quest Capital

6. Copenhagen Accord – The Details “The Conference of the Parties, takes note of the Copenhagen Accord of 18 December 2009.” Global Temperature Target Hold global temperature increases below 2 degrees Celsius Emissions Cuts Industrialized Parties to submit by January 31 st 2010 economy-wide emissions targets Developing Country Parties shall report mitigation activities every 2 years Reducing Deforestation “Crucial role” of REDD plus recognized Agrees need for immediate establishment of REDD-plus mechanism and to mobilize financial resources from developed nations Market Mechanisms Agreed to explore “opportunities to use markets” Funding “Scaled-up, new, and additional, predictable, and adequate” Listed Funding for REDD-plus, adaptation, technology development and transfer, and capacity-building explicitly listed New resources approaching $30 billion total from 2010-2012 Goal of $100 billion annually by 2020 for developing countries NAMAs Nationally appropriate mitigation actions will be recorded Supported NAMAs will be subject to international monitoring and verification Assessment Implementation of the Copenhagen Accord shall be assessed in 2015 Consideration of strengthening long-term goals, including global temperature increases Source: UNFCCC, C-Quest Capital

7. Copenhagen Accord: Last Minute Changes  A view to reduce global emissions by 50 percent below 1990 levels, taking into account the right to equitable access to atmospheric space.  A view to reduce global emissions so as to hold the increase in global temperature below 2 degrees Celsius.  We call for a review of this Accord and its implementation to be completed by 2016…”consideration of strengthening the long term goal to limit the increase to 1.5 degrees Celsius.. Global Cuts Implementation Final Accord Draft Accord Annex I Cuts  Annex I Parties to the Convention commit to reducing their emissions individually or jointly by at least 80 per cent by 2050.  Annex I Parties agree to implement individually or jointly the quantified economy-wide emissions targets for 2020… by 31 January 2010.  We call for an assessment of the implementation of this Accord to be completed by 2015….to include strengthening the long term goal referencing various matters, including in relation to temperature rises of 1.5 degrees Celsius What was almost agreed in the Accord is just as important. It was a clear signal of intent and would have been published if China had not signaled disapproval Source: UNFCCC, C-Quest Capital

8. Copenhagen Conference – Clean Development Mechanism CDM reform measures approved are sweeping and comprehensive enabling CDM to become the anchor in global offset trade at scale with potential post-Kyoto period demand Market Capacity Building: Third-Party Verification by Private Sector Entities (DOEs) To avoid market disruption from suspensions and to remove the bottleneck of third-party validation and verification: Streamlined and continuous monitoring and performance reporting of Designated Operational Entities (DOEs) Proactive cooperative measures to increase capacity and performance of DOEs and to enhance transparency on guidance Continuous training on CDM project cycle and increased guidance Accountability: An Appeals Process To enable arbitration and recourse against the “Regulator” and its agents: For DOEs under performance improvement measures Against decisions by the CDM Executive Board itself Streamlining: Registration and Issuance To make offset project registration and issuance faster and more predictable Speeding up registration and issuance of projects and credits (CERs) Making Programmatic CDM easier Allowing and encouraging consultation and feedback between the Regulator, DOEs, and private sector market participants Quality assurance on the Regulator – Independent technical assessment of secretariat analysis Source: UNFCCC, C-Quest Capital

9. Copenhagen Conference – Clean Development Mechanism CDM reform measures approved would make CDM to be truly scalable to meet post-Kyoto period, including North America, Japan and Europe, but reform will take years to fully implement Extending: Market Reach of CDM by Asset Class and Geography Sustainable land use and Agriculture To make CDM easier for low offset supply countries Tailoring methodologies to local needs, deferring registration costs, making DOEs collaborative Increased study of CDM potential in low offset supply countries (<10 CDM projects) Agriculture /Soil Carbon, revegetation, wetlands, and grazing lands to be eligible activities. Replacing temporary credits with buffer reserves, and insurance mechanisms to cover risk of impermanence (KP draft text, no brackets) Standardizing: Baselines To reduce uncertainty and increase efficiency within CDM project approval process Developing broadly applicable baselines Considering specific national circumstances as well as environmental integrity Simplifying: Additionality To increase transparency and objectivity in additionality assessment New guidelines for demonstration and assessment of barriers Standardized calculations of financial parameters Guidance for project participants on first-of-a-kind barriers Simplified modalities for renewables projects under 5 MW and energy efficiency projects under 20 gWh per year Source: UNFCCC, C-Quest Capital

10. Copenhagen conference – REDD Plus The REDD agenda was addressed on multiple levels, including the essential link to markets and private sector investments, including increases in forest stocks (REDD-plus) Subsidiary Body on Scientific & Technical Advice (SBSTA) text  Adopted by the Conference of the Parties (COP15)  Requests developing country Parties to:  Identify deforestation drivers, and also identify REDD activities in-country  Utilize latest IPCC guidance on REDD  Establish national monitoring Copenhagen Accord  The Accord recognizes the crucial REDD role; endorses mechanism for REDD-plus  Funding to be included for “substantial finance” for activities including REDD-plus Ad Hoc Working Group on Long-Term Cooperative Action (AWG-LCA) draft text  Not adopted by the COP15, but hidden reference to market mechanisms and private sector trade as “results-based activities” and  Bracketed text “flexible combination of funds and market-based sources  REDD-plus incorporates enhancing forest stocks as well as avoided deforestation Funding  Australia, France, Japan, Norway, UK and U.S. agreed to total $3.5 billion fast-start financing through 2010. France/Norway taking lead to establish REDD mechanism Source: UNFCCC, C-Quest Capital

11. Sea Change in How Agreements are Reached in UN Framework “You can’t underestimate the breach in the firewall between developed and developing countries.” - US Special Envoy for Climate Change Todd Stern on the Copenhagen Accord Emergence of a fragile consortium of North and South, eroding historical North-South stalemate Seismic change in global power balance in evidence in Copenhagen: G2? US +BASIC Meeting of BASIC countries in Delhi next week will send signal on Accord vs. Twin Track. But process of reaching agreements has changed inexorably Confusion reigns. COP15 also endorsed continued twin track of Kyoto Protocol and Long-Term Cooperative Action. Plus Accord makes 3! If you’re confused, you’re not alone!

12. Country Level Initiatives to Maintain Momentum The world may wait a long time for a global climate deal, but individual country actions will create niche markets that will keep carbon trade and investment alive driven by energy security and widely varying appetite to address climate change regardless of super-power intransigence Australia Reductions up to 25% by 2020, from 2000 levels 60% reductions by 2050 China Up to 45% reduction in carbon intensity, from 2005 levels 15% increase proportion in renewable fuels by 2020 European Union Up to 30% reduction by 2020, from 1990 levels Up to 95% reduction by 2050 India Carbon intensity reductions of 20% below 2005 levels Japan 25% reductions by 2020, from 1990 levels 80% reductions by 2050, from 2005 levels Mexico Reductions of 30% below Business as Usual by 2020 50% reductions by 2050, from 2002 levels United States Proposed reductions of 17% by 2020, from 2005 levels 83% reductions by 2050 Source: Sustainability Institute, UNFCCC, H.R. 2454

13. Opportunity: Containing Global Temperatures Source: Sustainability Institute, C-Quest Capital (Increase From Pre-Industrial Levels) Potential proposals flagged by major emitters North and South amount to a surprising 67GT/year reductions of 100 GT/yr required reduction avoid a two degree C world

14. Deep US re-engagement in post-Kyoto negotiations is key to economic efficiency and private sector resource mobilization to manage climate change. But no likelihood of a uniform global market What Does This Mean for the Carbon Market? Fragmented global market, few fungible carbon assets (such as CER’s, ERUs). Key role for the unique domestic and voluntary market Standards Long-only carbon positions just became much more risky given global market uncertainty Scale up of domestic emissions reductions efforts will vary greatly, resulting in constantly changing demand for tradable credits Unique national and regional paths to long term targets. No harmonization for at least 5-10 years Country-unique mitigation strategies, use of markets, and eligibility of domestic and international offsets/credits

15. Copenhagen Implications: United States “As the world's largest economy and the world's second largest emitter, America bears our share of responsibility in addressing climate change, and we intend to meet that responsibility…. So America is going to continue on this course of action no matter what happens in Copenhagen. But we will all be stronger and safer and more secure if we act together.” -President Barack Obama Copenhagen, December 18, 2009 The U.S. has finally and fully re-engaged at the global climate negotiating table, while pressing forward with a domestic climate agenda Source: www.whitehouse.gov

16. US draft legislation is tied a UNFCCC agreement outcomes in various ways:  Funding of developing countries to implement a UNFCCC agreement  Funding of multilateral instruments as part of a UNFCCC agreement  US use of international offsets must follow UNFCC rules or be issued by UNFCCC entities  US-approved REDD and A/R must satisfy the UNFCCC rules Copenhagen Implications: United States What the US needs from global process:What the US can bring to a global process:  Improved mitigation transparency from China and developing countries (major success for US in Copenhagen)  Commitment by other OECD States to commensurate GHG reduction targets  Adequate burden sharing within OECD of funding commitments for developing country adaptation and technology  Clear and consistent rules for REDD  Ample supply of CDM credits to lower cost of compliance domestically  Funding commitments as seen in Copenhagen  Senate climate bill passage in the US will remove major roadblock in negotiations  Acceptance of international offsets – REDD, ARR and CDM credits for US compliance  Support for technology transfer Efforts in the United States and global climate efforts are mutually dependent on each other

17. Copenhagen Implications: United States International Investment: 1.Expanded Offset Supply: US investors can have increased confidence in scalability of the CDM following 2-3 years of implementation of agreed reforms 2.Commitment to REDD: International commitment to REDD as a new element in climate change management under the UNFCCC supports the US domestic commitment to REDD as a source of international offsets. Bilateral and Multilateral efforts to create the framework for REDD trade have gained momentum 3.Markets and Market Continuity: Using markets to support climate change management is recognized in the Accord, sweeping CDM reform provides de- facto support for market continuity, as do long term funding promises Support for Domestic Policy-Making: 1.Transparency in Implementing Commitments in Large Emitters: Obtaining a commitment to a Monitoring, Verification and Reporting regime, focused on China, was a key victory for the US 2.Central Role President Obama in Breaking UN Deadlock: Sends signal of commitment of Administration to the Climate agenda, and US Climate Bill. 3.US Role in Catalyzing Change in UN Process: Potential sea change in how agreements are reached in the UN framework should be seen favorably by US lawmakers to move forward with a climate bill

18. 2010 Challenges: US Climate Bill Mid-Term Congressional Elections -No more “tough votes”? Congressional Legislative Calendar -Health Care, Financial Reform, Jobs Bill, Massachusetts? “Cap-and-What”? -Climate/energy effort re-branded to emphasize “green jobs.” Is this enough to catalyze a 2010 success? Economy -Lingering fears of “jobless recovery”? “There will be a significant effort on the part of all in the [Obama] administration to press forward. The president is focused on it…” - US Special Envoy for Climate Change Todd Stern An increasingly small window remains for a comprehensive bill in 2010, but we must ask key questions… Kerry-Lieberman-Graham effort -What are the specifics? Source: C-Quest Capital and The New York Times

19. What happens in the next 6 months in the US has huge implications for our ability to manage climate change in any coordinated manner globally Meaning of Copenhagen to the US Long-only Carbon Positions are Risky: Ample opportunity for profit but diversification in investment strategy is key The Global Carbon Market will Remain Fragmented: Expanded markets and trade is key to mobilizing private capital to manage climate change Market expansion will be delayed further if there is no deal in Mexico This a G2 Game: Passage of US climate bill before Mexico is key to a global deal China will make no further significant commitments without it If no US bill in 2010, when? Will EPA action be seen as a substitute? An Expedited UN Agreement Process Hangs in the Balance: Crucial role of new US+BASIC grouping to de-emphasize the LCA and Kyoto agreements in favor of the Accord, in preparing for Mexico

20. For additional information, please contact: Ken Newcombe CEO Tel. +1 202.416.2400 knewcombe@cquestcapital.com Phil Ovitt Sr. Policy Analyst Tel. +1 202.416.2400 povitt@cquestcapital.com cquestcapital.com