1. Sustainability Forum Sustainability Forum The Global Carbon Market Business Opportunities for Sustainable Development Zurich, September 24-25, 2001 www.prototypecarbon.org

2. Greenhouse gases emission reductions: an unusual commodity ERs become a commodity after certification. Before certification ERs are very heterogeneous depending on the plausibility of their baseline. Emission Reduction = Hypothetical baseline emissions - effective emissions

3. Early developments of the market 1997 to 2001 Partial information available. Within OECD and EITs: 40-60 MtCO 2 e have been transacted. In developing countries: Less activity but growing. Mostly government funded, but private activity growing. General trend towards sophistication: buyers clubs (PCF), traders, financial derivatives (options), integrated marketplaces, etc.

4. Carbon prices on past transactions

5. Demand and supply under Kyoto scenarios Total Annex B demand for ERs Mitigation within Annex B (domestic or via trading or JI) Hot AirHot Air  financial flow to Russia and EE CDM Market Domestic Carbon Sinks

6. Volumes in Kyoto w/o the US Gross annual demand for ERs1400 – 2400 MtCO 2 e between 2008 and 2012 - Credits for hot air 950 – 2150 - Credits for Annex B Sinks  330 (  200) = Net demand 0 – 1800 MtCO 2 e

7. Carbon Market Impact Hot Air and new Annex I Sinks Allowances depresses CDM/JI market –W/o US, up to 100% of OECD needs may be met by Hot Air+sinks. Both CDM/JI “project-based” Market and “Hot – Air” (emissions trading) market will be “policy- driven” –Hot Air may be cheap but politically unpalatable –CDM/JI project-based more expensive and difficult but high quality and politically acceptable

8. Prices in Post CoP6 World With full competition, our market analysis suggests : –CDM trades from near zero up to $7/tCO 2; –Range of $1.50-4/tCO2 more likely in our view –PCF currently pays $3-4/tCO2 Non-KP Market drivers are significant: OECD domestic regimes and Corporate Voluntary market

9. Other Emerging Market Drivers Regulations constraining carbon emissions are being developed –National policies (UK, Denmark, The Netherlands, etc.) –Sub-national regulations (e.g. some US States) –Regional initiatives (EU-wide trading) Some firms are taking voluntary emission commitments

10. Current or projected national policies TradingStart-up Project-based mechanism? EU Yes 2005 At least from 2008 UK UK Yes. 2001 Yes France Yes 2003? Yes Norway Yes 2005 or earlier Yes Germany No  Later Denmark Yes 2001 Yes Sweden Yes 2005 or later Yes Netherlands Netherlands Ongoing work  Yes Finland Ongoing work  Yes Ireland Ongoing work  Ongoing work Australia Yes US dependent Yes USA Yes ? Yes Canada Yes US dependent  Japan Ongoing work  Yes New Zealand Yes Not decided Yes Russia No  Yes `

11. Regional regulations in the US Oregon: CO 2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms. Washington: New plants must demonstrate the use of best available techniques for CO 2 emissions control. Massachusetts: CO 2 emissions cap for energy utilities effective in 2005. Utilities can offset excess emissions using project-based mechanisms. New England and Canadian Eastern Provinces: 10% voluntary reduction of GHG emissions below 1990 levels by 2020

12. Voluntary corporate commitments Rapid survey indicates more than fifty companies representing one billion tCO 2 e emissions in 1999 have pledged to reduce GHG emissions by 2010. Resulting demand depends on the baseline. If we set baseline at 1999 emissions, we obtain a total demand of 500 MtCO 2 e over the next decade. At least eight have said they would use project based mechanisms.

13. Alcoa --25% below 1990 in 2010 BP Amoco 79.8Cumulative 2%/year below 1990  Chubu EPCo. 51.30.410 kgCo2/kWh in 2005 Dupont 44.465% below 1990 in 2010 Kodak --20% below 1990 in 2004 Fortum 90.5 MtCo2e below baseline in 2010  IBM 4.1Cumulative 4%/year below 1998 until 2004 Intel 3.310% below 1995 in 2010 (PFCs) Johns. & John, 1.57% below 1990 in 2010 Motorola -- 50% below 1995 in 2010 (PFCs) Ontario Pow.Gen. 26 6% below 1990 in 2010  PEMEX 177-1% per year until 2010  Shell 99103 MtCo2e in 2002  Statoil 8.31.5 MtCo2e below baseline in 2010  Suncor 5-1.5%/year until 2002 (-1%/year for 2003-2008)  Transalta 38.5 -----  Keidanren478.6Level of 1990 in 2010 (34 Japanese industries representing 75% of Japan’s industrial emissions) 1999 Emissions Commitment Internal Trading CDM/JI Corporate voluntary commitments

14. The Opportunity of CDM/JI For international business –To support strategic positioning in new markets with carbon finance (increasing profits, reducing risk) –Align current business development strategy and GHG reduction compliance needs –Grow entirely new businesses in financing, brokering, intermediation, insurance, and carbon asset servicing (certification, validation, baselines/MVP) For developing or transition economy entities (governments, parastatals, local private sector) –Create new export business in new “sovereign commodity” –Catalyze private investment flows in infrastructure and forestry through cleaner and greener technologies

15. Impact of Carbon Finance on Project Financing at $3/t CO2e Technology  IRR Energy Eff.-District Heating2.0 Wind0.9-1.3 Hydro1.2-2.6 Bagasse0.5-3.5 Biomass with methane kickUp to 5.0 Municipal Solid Waste with methane kick >5.0 Note: data are preliminary

17. Waste-to-Energy project : Chennai, India, MSW Gasification of solid waste 15 MW plant, 95 GWh/ann, $38m cost ERs from: –Power generation displacing fossil fuel (40%) –Methane capture & conversion (60%) Project IRR Equity IRR Without carbon finance14% 16% With carbon finance>19% > 25% Impact of Carbon Finance on Project Financing at $3/t CO2e

18. AnnualUganda 1-7MW Costa Rica Chile 25MW Mini-Hydro off-grid grid ERs (000 t) 49 61 79-138* Net Gen.(GWh) 30 75 160 CO2 ERs/GWh1664 807 494-860 ER (USc/kWh) 0.50 0.24 * Gas vs. 0.15-0.26 coal BL Hydro: Off-grid vs. Grid

19. Methane-capture projects: carbon finance can turn “dogs” into “cash cows” “Traditional” renewables: boost return by 0.5-2.5% –Off-grid projects have higher carbon factor –Makes marginal deals bankable –Reduces subsidy required – may attract ODA (addl boost) Improves project’s access to capital markets thru: –Certain, contractual flow of FX from reliable counterparty –“Seal of approval” –Improved Quality of cash flows  Sponsor can borrow against contract (like PPA) Impact of Carbon Finance on Project Financing at $3/t CO2e

20. The Constraints Regulatory Risk –UNFCCC/Kyoto Protocol related Now through 2004 in finalizing regulations Interpretation and administration of rules –National Regulatory Risk (Hosts and Non-Annex I) Ratification of Protocol Maintenance of compliance and capacity to implement “seemlessness” of OECD domestic regimes Transaction Costs –Added time and uncertainty in bringing deals to closure (trade-offs may be positive or negative) –Costs of delivering carbon finance to small projects

21. The Constraints Short-Term UNFCCC Regulatory Risk Transferability and Fungibility of Credits –Are CER’s bankable for later commitment periods? Requirements of CDM Host Countries to participate Crediting Period –Starting Date for eligible projects (1/1/2000, 1/3/2000?) –3 x 7 years for up to 21 years, but how to renew crediting period? What criteria? What data to assess? Annex I (including OECD) country eligibility to participate in CDM/JI –Ratification? Retrospective credits possible? Acceptance of Compliance Regime? –Requirement to obtain approval from ALL governments in a deal? A show-stopper for brokers, intermediaries, multi-country funds JI Issues: few rules decided; early crediting for ERUs?

22. Public Sector (6) Governments of Netherlands, Finland, Sweden, Norway, Canada, and Japan Bank for International Cooperation Private Sector: (17) RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP-Amoco, Fortum, RaboBank, NL PCF Subscribers ($145 million)

23. PCF Status and Focus Deal flow far exceeds funding - several carbon contracts now under negotiation  >50 deals with $350m+ carbon purchases reviewed Targeting signed Emissions Reductions Purchase Agreements (ERPAs)  by end 2001, 6 deals of $20-25mm in Chile, Costa Rica (3), Brazil, Uganda;  by July 2002 ~$50mm in Morocco, Nicaragua, India, Guatemala, Argentina, Honduras, Thailand, Czech, Poland, and Kazakstan; Under active review for CY2002 ~$30mm: Guyana, Hungary, El Salvador, Brazil (small-scale), Kenya, and Colombia (and others awaiting Govt. endorsement) Constraints: PCF and country capacity, quality of asset

24. PCF Deals under Negotiation Uganda: W. Nile small hydro displacing small diesels, carbon purchase negotiations this week; indicative price $3/t/CO2; about 1 million tCO2 through 2016 Chile: 25 MW run-of-river hydro; displacing coal or gas for grid supply; pre-negotiations completed for final deal mid-October; about 1 million tCO2; indicative price $3.5/tCO2, plus options Brazil: Sustainable Fuelwood/Charcoal displacing imported coal in pig iron industry; indicative price $3/tCO2; about 5 million tCO2; negotiations complete mid-December Cost Rica: small hydro and wind; streamlined procedures; indicative price $3/t/CO2; up to 3 million tCO2 over 7-8 projects. First 3 deals closed in November

25. Sustainable Development Brazil’s Plantar Case UNFCCC/KP promotes sustainable development Host Governments decide and assert PCF deals certify other environmental and social attributes if feasible and cost-effective to Quantify for stakeholders sustainable development outcomes, and Increase the market value of these reductions Brazil Plantar project will: Certify biodiversity assets from restoring ‘cerado’ forest ecosystems; Certify improvements in worker health

26. Methane to atmosphere Pyrolytic Oils/Tars & Particulates Poor Respiratory Health From To Carbon Credits/$s from methane flaring Fines made to briquettes with tars Healthier workers certified

27. Annexes

28. Impact of Carbon Finance on Project Financing at $3/t CO2e CountryProjectTot. ($m) ERs ($m) IRR w/o IRR w/ER  IRR RomaniaDH375.516.918.92.0 Costa RicaWind18.60.59.710.60.9 JamaicaWind26417181.0 MoroccoWind2001412.714.01.3 ChileHydro3749.210.41.2 Costa RicaHydro1.30.17.19.72.6 GuyanaBagasse5067.27.70.5 NicaraguaBagasse3.10.314.618.23.6 BrazilBiomass53138.313.55.2 LatviaMethane162.511.418.87.4 IndiaMethane40813.818.74.9

29. Typology of Funds/Plays Pure Carbon Funds (PCF, National Funds) Private Equity Funds  Aimed at JI/CDM Projects  New Energy, RE, EE Funds with Carbon Credits  Forestry Funds with Carbon Credits  Energy or Forestry Funds that Could Add Carbon Credits Mutual Funds with % in Private Equity NGO Funds Sustainability, Social, Ethical Mutual funds Corporate “Funds” Earmarked for Carbon Credit Investment

30. Carbon Funds (All leverage private finance) PCF $145M + potential fund subscription by Participants up to $180m Netherlands Clean Development Funds: ~$230m over three to four years Commonwealth Bank’s Clean Fuel Program BP is first participant, other companies expected. Funded by consumer “checkoff.” Program invests in GHG mitigation projects in Australia. AGO certifies. National Funds  Australian government funds/initiatives  The Netherlands – Eru-PT – government funded

31. Summary Findings from Fund Manager Interviews 5 private Funds to capture C-credits in all investments (UBS, Hancock, Commonwealth, Carbon Trader, Env Fin Prod) Handful of private equity funds also seeking carbon credit investors to raise IRR in deals Major forestry funds thinking about C credits New energy private equity and mutual funds might seek C credit deals if demand rises Social funds use C as screening indicator total capital driving C credits: $2.5-4 billion in Energy sector; $1bn+ in forestry

32. Investor Carbon Market Sentiment February 2001 Most fence sitting – waiting for national and international regulations Early movers in deals and funds: –have high carbon exposure and regulatory risk, –are seeking strategic positioning –are seeking to influence policy –are at an early stage –wish to capture upside speculative C benefit Mainstream investment, “big” money still skeptical