Page 1 AEM Board Meeting August 2007 Climate Change Calculations And Implications John T. Disharoon Sustainable Development Manager Caterpillar Inc.

Page 2 AEM Board Meeting August 2007 Caterpillar has a credible reputation as a global company concerned about the environment … but good environmental stewardship calls on business to do all it can to protect the environment. Shape the debate… look out not only for our interests but the interests of our customers (like Clean Coal Technologies). Global perspective - Caterpillar is positioned to work for consistent climate change policies across the board. Climate Change

Page 3 AEM Board Meeting August 2007 Not a linear activity Must take into account all aspects of: Energy Security (available when you need it, where you need it, in the quantity you need it) Energy Competitiveness ($ per KwH) Environmental effects Climate Change 3- Dimensional Chess?

Page 4 AEM Board Meeting August 2007 International Response Sources: World Resources Institute and Pew Centre on Global Climate Change CO 2 trading USD $26-35/metric ton since March ‘07 CO 2 trading USD $26-35/metric ton since March ‘07 What Is Known > International Responses To Climate Change EU – GHG allowance allocations tightening (Kyoto) –EU ETS “warm-up” phase: –~12,000 installations covering 46% of CO 2 emissions Australia – mandatory GHG reporting in 2008 –ETS by 2011 China - speed up implementation of laws/regulations to cut GHGs India - drafting national strategy on measures to cut GHGs by YE2007

Page 5 AEM Board Meeting August 2007 US Response – 11 Bills On The Floors Of Congress Sources: World Resources Institute and Pew Centre on Global Climate Change Federal Level – 11 Bills On The Floors Of Congress GHG Emissions Targets GHG Reporting Initiatives What Is Known > US Responses Regional Climate Initiatives

Page 6 AEM Board Meeting August 2007 Current Climate Bill Discussions House: –Speaker Pelosi promising climate debate in fall session Senate: –Bingaman-Specter release bipartisan bill –Warner-Lieberman seeking to build on other bills

Page 7 AEM Board Meeting August 2007 CDM market in operation under caps market with caps proposed/forthcoming JI ? CDM What Is Known > Proliferation Of Cap & Trade market participation through CDM/JI projects

Page 8 AEM Board Meeting August 2007 Three choices if you operate under a cap: –Hold emissions below your cap –Purchase allowances (credits) to emit more –Pay “carbon tax” to emit above your cap What Is Known > Implications Of Cap & Trade USD $20-50/mt CO 2

Page 9 AEM Board Meeting August 2007 CDMCDM CDMCDM CDMCDM CDMCDM CDMCDM What Is Known > Market Opportunities Project example: Sihe Coal Mine, Shanxi Province, China 90 MW total installed capacity Project produces ~ 648GWh of electricity/yr worth USD $21.4M 15M emissions reductions credits (~2.1M/yr) worth USD $39.7M Value of emissions reductions credits: 738 CDM projects registered to date Average annual reduction ~ 157M mt CO2e Credits worth USD $3B/yr Total credits (968M) through 2012 worth USD $18B Project registrations increasing

Page 10 AEM Board Meeting August 2007 What Is Not Known Specific form that federal, regional and/or state regulations (incl. cap & trade) will take in US –Regulate the manufacturer? –Regulate the customer/industry sector? Specific timeframes when regulations will enter force –RGGI to enter force in 2009; 9 states; min 25% auction; 5 states plan 100% auction How US carbon market will interface with non-US markets (EU, Australia, etc.) How major non-Annex I emitters (e.g. China, India) will be dealt with post-2012 (post Kyoto) Specific price of carbon in a “global” market

Page 11 AEM Board Meeting August 2007 What Is Known > Caterpillar Response 1.Mandatory approaches to reduce GHG emissions from the major emitting sectors 2.Flexible approaches to establish a price signal for carbon 3.Incentives to encourage actions by other countries, including large emitting economies in the developing world, to implement GHG emission reduction strategies

Page 12 AEM Board Meeting August 2007 US-CAP Engagement and Expansion 18 New Members Several members have testified Warner-Lieberman soliciting input Membership expanded to more than 30 companies (market cap: $1.9 trillion)

Page 13 AEM Board Meeting August 2007 Six Principles: 1. Account for the global dimensions of climate change; 2. Create incentives for technology innovation; 3. Be environmentally effective; 4. Create economic opportunity and advantage; 5. Be fair to sectors disproportionately impacted; and 6. Reward early action.

Page 14 AEM Board Meeting August 2007 Thank You

Page 15 AEM Board Meeting August 2007