Chicago Climate Exchange An Example of a Voluntary Emissions Trading Market

2 CCX Voluntary, but legally binding greenhouse gas reduction and trading system for emission sources; Trades gas emission allowances for six greenhouse gases; Trading started 2003: companies joining the exchange committed to reducing their aggregate emissions by 6% by 2010 ;

Operated by the public company Climate Exchange PLC, also owns European Climate Exchange; Founded by Richard Sandor, ex-Economics Professor UC-Berkeley; Exhange trades in emissions of six gases: Carbon Dioxide, Methane, Nitrous Oxide, Sulfur Hexaflouride, Per fluorocarbons, and Hydrofluorocarbons

4 More than 350 members: Corporations: Ford, Dupont, and Motorola Utilities: American Electric Power, Green Mountain States and municipalities: New Mexico, Oakland, Chicago Educational institutions: University of California, San Diego, Tufts, University of Minnesota, Michigan State; Farmers: National Farmers Union, Iowa Farm Bureau Government financed entities: Amtrak

Emissions Reduction Schedule Cap and trade system: members make a legally binding emission reduction commitment; Members are allocated annual emission allowances in accordance with their emissions Baseline and the CCX Emission Reduction Schedule; Members who reduce beyond their targets have surplus allowances to sell or bank; Those who do not meet the targets comply by purchasing CCX Carbon Financial Instrument contracts; 5

Each CFI contract represents 100 metric tons of CO 2 equivalent (CO 2 e). Geographic Coverage: Emission sources and offset projects worldwide. Emission Targets and Timetable: Phase I ( ) emission reduction targets were 1% per year, below an average of baseline period Phase II parameters extend the reduction period through 2010 and a total of 6% reduction commitment by 2010 for new Members joining in Phase II. Emission Baseline: Average of annual emissions during years 1998 through 2001 or the single year 2000 for new Phase II Members. 6

7 CCX has an aggregate baseline of 226 million metric tons of Carbon Dioxide equivalent Equals the UK’s annual allocation under the EU ETS; Makes the CCX market comparable to one of the larger countries in the EU CO 2 market, or 4% of U.S. annual GHG emissions Quote from website: “CCX is the only available mechanism through which US based entities may engage in the integrated carbon market with a linked reduction and trading system”

8 Offsets Agricultural soil sequestration Reforestation Landfill and methane combustion Switching to biomass based fuels Uses “independent” verification systems

Trading History and Systems 9

10 December 2003CCX launches trading of the Carbon Financial Instrument (CFI), a CO 2 spot contract 2004Further £15 million raised to back the launch of the Chicago Climate Futures Exchange (“CCFE”) in the U.S. and the European Climate Exchange (“ECX”) in Europe October 2004The Commodity Futures Trading Commission approved CCFE’s application to operate as a Designated Contract Market in the U.S. December 2004CCFE launches the Sulfur Financial Instrument (SFI), a futures contract on the U.S. EPA SO 2 emissions allowance April 2005The European Emissions Trading System (“EU ETS”) futures contracts are launched on ECX under a revenue sharing agreement with the ICE Futures in London December 2005Montréal Exchange and Chicago Climate Exchange announce joint creation of a Canadian environmental products exchange, Montréal Climate Exchange

11 October 2006Option contract launched on the European Carbon future February 2007CCFE launches the Nitrogen Financial Instrument (“NFI”), a futures contract on the U.S. EPA NO x emission allowance April 2007CCFE launches an options contract on the SFI futures contract May 2007CCX announces formation of the California Climate Exchange to develop and trade financial instruments relevant to the California Global Warming Solutions Act, AB 32 June 2007 CCFE launches futures contract on Wilderhill Clean Energy Index (ECO index) United States House of Representatives votes by 216 to 176 to offset its CO 2 emissions through CCX September 2007Climate Exchange plc and Deutsche Bank launch trading in catastrophe event-linked futures on CCFE (IFEX) December 2007CCX announced the signing of a memorandum of understanding with the Chinese National Petroleum Corporation Assets Management (“CNPCAM”) to create a joint venture company to explore the feasibility and implementation of an emissions trading platform in China February 2008 CCFE launches CFI options contract

12 The CCX Registry The CCX Registry The CCX Registry is the electronic database that serves as the official record holder and transfer mechanism for CFI contracts. All CCX Members have CCX Registry Accounts The CCX Trading Platform The CCX Trading Platform is an internet-accessible marketplace for executing trades among CCX Registry Account holders, and to complete and post trades that are established through private bilateral negotiationsThe CCX Trading Platform The Clearing and Settlement Platform The Clearing and Settlement Platform The Clearing and Settlement Platform processes daily information from the CCX Trading Platform on all trade activity. This system is directly linked to the Registry to facilitate same day delivery of CFI contracts from trading activity, provided as a service to Registry Account holders.

13 Transaction participation eligibility is limited to CCX members who qualify as eligible commercial entities; Internet-based, electronic trading system for submission of bids and offers for anonymous, cleared agreements executed on price and time priority; Electronic bilateral agreements between members; Pre-negotiated block trades and cash transactions may be negotiated at any time, but must be reported to CCX in accordance with its rules

14

15 Role of FINRA (Financial Industry Regulatory Authority): To independently verify all CCX Members' Baseline and annual emissions reports for Phase I and Phase II program years for accuracy and completeness, and to ensure compliance with the Emission Reduction Schedule; To monitor CCX trading activity using its state-of-the-art market surveillance technologies To review all verifier's reports for offset projects; Compliance with the CCX Emission Reduction Schedule is enforced by the CCX Environmental Compliance Committee

16

Futures and Options 17

18 Chicago Climate Futures Exchange (CCFE) is a CFTC designated contract market; Offers standardized and cleared futures contracts on emission allowances and other environmental products ; Clearing services provided by The Clearing Corporation ( only active independent futures clearinghouse); Market surveillance services are provided by the National Futures Association --- industry wide, self- regulatory organization;

19

20

21

22