1. Providing critical insights into energy and environmental markets www.pointcarbon.com The market for the flexible mechanisms: Carbon till 2012 and beyond Olga Gassan-zade Point Carbon April 24, 2008

2. Providing critical insights into energy and environmental markets www.pointcarbon.com Point Carbon today Trading analytics, Research & advisory, News and Conferences Covers carbon, power and gas markets 170 employees (25 Ph.Ds) Oslo, London, Tokyo, Washington, Kiev 15.000 subscribers in 150 domains

3. Providing critical insights into energy and environmental markets www.pointcarbon.com Overview Carbon market now Carbon market in 2008-12 Post-2012 Focus on mechanisms and AAU trading

4. Providing critical insights into energy and environmental markets www.pointcarbon.com Carbon Market Now

5. Providing critical insights into energy and environmental markets www.pointcarbon.com Emergence of an effective carbon price Significant impact on European power prices

6. Providing critical insights into energy and environmental markets www.pointcarbon.com Maturing market

7. Providing critical insights into energy and environmental markets www.pointcarbon.com Still going strong EU ETS remains the key driver

8. Providing critical insights into energy and environmental markets www.pointcarbon.com Overview of CDM and JI Activities (as of April 2008) CDMJI # Projects/ transactions Total volume -2012 (MtCO2e) # Projects/ transactions Total volume -2012 (MtCO2e) Projects (total) 6,2174,546919767 PDD level and above 3,5963,015353396 Registered and above 1,0231,30013 Transactions7561,31710366.5

9. Providing critical insights into energy and environmental markets www.pointcarbon.com CER and ERU price categories (April 2008) Contract category CDM (€/t) JI (€/t) 1. Project is still at concept/prospect stage or has developed a Project Idea Note. €6–11€ 4 – 7 2. Project has developed a PDD, and the PDD has been submitted to a DOE for validation. € 8 – 11€ 8 – 10 3. Firm volume, compensation upon non-delivery € 12 – 13€ 10 – 12 4. Guaranteed delivery, seller assumes all delivery risk € 13 – 15n.A Lower risk for the seller Higher risk for the seller

10. Providing critical insights into energy and environmental markets www.pointcarbon.com 2008-12: Balancing supply and demand

11. Providing critical insights into energy and environmental markets www.pointcarbon.com Kyoto Gaps (2008-12) 05001,0001,5002,0002,5003,000 EU 15 Japan Canada Others [Mt CO 2 e] Net Kyoto Gap NTP GPP ETS Source: Point Carbon

12. Providing critical insights into energy and environmental markets www.pointcarbon.com Supply: Majority already in pipeline 010002000300040005000 Total CDM JI Mt Existing projects - not risk-adjusted Upcoming projects - not risk-adjusted 19 % 81 % 94% 70%30% 57%43% Source: Point Carbon

13. Providing critical insights into energy and environmental markets www.pointcarbon.com Issuance 0% 20% 40% 60% 80% 100% Industrial processes Fuel switching RenewableEnergy efficiency WasteTotal Issuance rate Source: Point Carbon

14. Providing critical insights into energy and environmental markets www.pointcarbon.com What we say they will deliver 4,066 2,505 0 1,000 2,000 3,000 4,000 5,000 CDM face value CDM PCA estJI face valueJI PCA estTotal face value Total PCA est Mt -35 % - 52 % - 38 % Source: Point Carbon

15. Providing critical insights into energy and environmental markets www.pointcarbon.com...Add the AAUs...Make a supply estimate... -5-4-3-2012 Russia Eastern Europe Other Canada Japan EU15 Gt CO 2 e Source: Point Carbon Ukraine

16. Providing critical insights into energy and environmental markets www.pointcarbon.com Estimate Kyoto market balance...  Will the market be oversupplied? EU ETS0.5 - 1.5 Other private (incl. AAU)0.0 - 0.5 Governments2.5 - 3.0 Total demand3 - 5 ERU+CERs1.0 - 3.0 Potential AAUs7.0 - 8.0 Total potential supply8 - 11

17. Providing critical insights into energy and environmental markets www.pointcarbon.com …Not that simple Source: Carbon Project Manager, Point Carbon

18. Providing critical insights into energy and environmental markets www.pointcarbon.com Realistic supply of AAU

19. Providing critical insights into energy and environmental markets www.pointcarbon.com A balancing act between the mechanisms A split between CER/ERU and AAU demand Environment and development value of CDM and JI projects Banking between the periods? –ERUs and CERs can be banked only up to a limit of 2.5 % of the initial assigned amount Theoretically, AAUs can be banked without restrictions But will there be a value to AAUs post-2012?

20. Providing critical insights into energy and environmental markets www.pointcarbon.com A market with a certain dynamic AAU supply is sensitive to demand Snowball effect: –Success will create more supply No liquidity in the AAU market: –No transparent price-setting mechanism Pressure on the seller governments to deliver on the AAU value Pressure on the buyers to deliver on the price or other concessions

21. Providing critical insights into energy and environmental markets www.pointcarbon.com Not a commodity market A market with a limited number of sellers and a limited number of buyers A commodity with a limited circulation and dangerously close expiry date Price will not be set by an equilibrium of supply and demand Instead it will be set by –The willingness of the buyer to pay –The assessment of the seller of the value of the AAUs –Pricing in of risks and valuation of premiums Competitive selling or a cartel?

22. Providing critical insights into energy and environmental markets www.pointcarbon.com Timing is critical Eligibility established Early to end 2008 Compliance 2 year lag in reporting Accounting for 2012 will be done in 2014 True-up: +100 days True up reporting (undecided) Compliance assessment: mid-2015 The Kyoto balance: Saved by the AAUs? A report by Point Carbon Research. Publication date: May 2008

23. Providing critical insights into energy and environmental markets www.pointcarbon.com Factoring in post-2012…

24. Providing critical insights into energy and environmental markets www.pointcarbon.com InTrade, Apr 15: Winning individual Supports a mandatory cap-and-trade system to reduce US carbon emissions 80 percent below 1990 levels by 2050 47% Co-sponsored the "Climate Stewardship and Innovation Act of 2007," which would cut carbon emissions by 30 percent from 2000 to 2050. 40% Supports a mandatory cap-and-trade system to reduce US carbon emissions 80 percent below 1990 levels by 2050 12% Source: Intrade.com New US President: New policy

25. Providing critical insights into energy and environmental markets www.pointcarbon.com The proposal by the European Commission Proposal for 2020 –20-30% reduction of emissions –20% from renewable of total energy consumption –20% increase in energy efficiency –10% use of bio-fuels in the transport sector –Strong limitation on imports of credits  Significant increase in carbon and power prices across Europe  Massive investments in renewable energy and CCS  Any demand for new CDM projects? Transforming the European power market

26. Providing critical insights into energy and environmental markets www.pointcarbon.com Supply-demand for CDM EU demand if EC proposal implemented –20% target: 250 Mt/year, 2008-2020 –30% target: 370 Mt/year, 2008-2020 Supply in 2012: 600-700 Mt/year US bill by Lieberman-Warner –750 Mt/year from countries that have a cap, not CDM Potential oversupply, unless –Change in policy –Large demand elsewhere International policy will define the future of CDM

27. Providing critical insights into energy and environmental markets www.pointcarbon.com Our main assumptions about post-2012 We believe there will be an international agreement - with broad participation US companies will rapidly start setting their mark on the global carbon market over the next couple of years Offset projects in developing countries will continue to play an important role, but in a different way We question whether there will be one reference price

28. Providing critical insights into energy and environmental markets www.pointcarbon.com Prospects for CDM and JI JI will take the place of CDM –Developing country caps –Large market Four types of involvement –Extended Annex I: country cap –Capped developing country sectors –Developing country sectors not eligible for CDM –Developing country sector eligible for CDM Narrow and small CDM

29. Providing critical insights into energy and environmental markets www.pointcarbon.com Timing and structure Timing –New protocol in Copenhagen 2009 –2-4 years for extending and ratification of the protocol Instruments for reduction –Cap-and-trade for extended Annex I –Cap for individual sectors in many developing countries Market structure –Individual markets in USA and Europe –To some extent linked through CDM –Significant developing country emission will be capped

30. Providing critical insights into energy and environmental markets www.pointcarbon.com Post-2012: What price?

31. Providing critical insights into energy and environmental markets www.pointcarbon.com The known unknowns Number of participants and level of ambition Supplementarity limitations Banking (of hot air) The redefinition of the CDM And then we have the unknown unknowns...

32. Providing critical insights into energy and environmental markets www.pointcarbon.com Conclusions  From Europe, the global carbon market looks well and healthy  Post-2012 will be very different from the current world  Challenges for JI and AAU trading  Not a negotiating priority  No longer JI as we know it?

33. Providing critical insights into energy and environmental markets www.pointcarbon.com Thank you! Olga Gassan-zade ogz@pointcarbon.com +81 90 4420 2641 +81 3 3365 5586