The Carbon Market

1. The Carbon Market Trading Emissions Contracts February 2009

2. Contents Introduction Cap and Trade Kyoto mechanics ECX European market experience Conclusions

3. Why? • If your house was on fire, would you try to put it out? • The world is heating up, it is caused by humans (anthropogenic), and we have the chance to address it. • The global cost of a Cap and Trade based solution is estimated at 2% of GDP – if we act now. • If we don’t act, what legacy are we leaving to future generations?

4. Understanding Cap and Trade Cap and Trade

5. Measure License Limit supply Creating a shortage in something that was always deemed to be limitless Requires great political leadership – those covered will naturally resist Has different resistance points depending on local factors Will never be truly fair – some people will suffer more than others The Cap

6. Cap – underlying philosophy • Those who continue to pollute at the old levels will have to pay, and the charges will increase as the supply is squeezed. Over time this will make them LESS competitive • Those who change early will be rewarded for their action. Over time they will become MORE competitive. • The overall improvement is the quantum of the reduced supply

7. Trade • Brings buyers and sellers together thereby creating a price formation mechanism • Provides transparency and liquidity • Allows active financial risk management • Facilitates the monetisation of excess credits

8. Cap and trade SIMPLE! • Creates a cost and/or an opportunity

9. Kyoto Protocol – key points • Divides world into two parts – Annex 1 countries (developed world) and non-Annex 1 countries • Covers period 2008 -2012 • Reduce Annex 1 emissions by (an average of) 5.2% below 1990 levels • National caps applied – but multiple mechanisms for compliance

10. Kyoto Protocol flexible mechanisms • Emissions Trading • Annex I parties may trade emissions allowances at a national or regional level • Clean Development Mechanism (CDM) • Annex I parties may implement emission reduction projects in non-Annex I countries in order to meet their own emissions targets • Joint Implementation (JI) • Annex I parties may implement emission reduction projects in certain other Annex I countries in order to meet their own emissions targets BACK TO CONTENTS

11. Kyoto Implementation • Europe – global leadership position • Pre-Kyoto trading scheme (Phase I) 2005-2007 • Phase II coincides with Kyoto period • EUETS legally binding across all 27 member states • Average reduction of 8% (from 1990 levels) • 12% of allowances can come from CDM (national limits ranging from 0 to 20%) • 2013-2020 scheme being finalised

12. Kyoto Implementation • United States – failed to ratify agreement • The largest per-capita emitter of carbon, responsible for approximately one third of Annex 1 pollution • Various regional initiatives – California, RGGI • Voluntary (legally binding0 scheme managed by Chicago Climate Exchange • Both Presidential candidates vocal supporters of cap and trade • Possible post-Kyoto implementation 2013?

13. Kyoto Implementation • ROW – varied responses • Canada – scheme commencing 2010 • Australia – scheme announced 2010 • New Zealand – scheme to start 2009 (possible link to Australia) • Japan – details not yet available

14. Performance against Kyoto targets

15. Post Kyoto • Aiming for agreement in Copenhagen 2009 • To cover period 2013 – 2020 • 20-30% reduction by Annex I countries (?) • Number of CER’s to be allowed • Commitment from non-Annex I

16. Corporate structure

17. About ECX • European Climate Exchange is the most liquid marketplace for trading CO2 EU Allowances (EUAs) under the EU Emissions Trading Scheme. ECX is part of the Climate Exchange plc group of companies, listed on AIM of the LSE • ECX and ICE Futures Europe have a partnership where ECX manages marketing and product development for its carbon emissions contracts and ICE lists those products for trading on its electronic platform known as WebICE. • ECX CFI (Carbon Financial Instrument) contracts are: • Listed & traded on ICE Futures Europe electronic platform, a Recognized Investment Exchange • Regulated by the Financial Services Authority • Financially guaranteed by LCH.Clearnet

18. ECX Products

19. About ECX

20. Price and volume ECX EUA Futures Contracts•94 million tonnes of CO2 traded in 2005 with a market value of €2.1 billion• 452 million tonnes of CO2 traded in 2006 with a market value of €9 billion•1 billion tonnes of CO2 traded in 2007 with a market value of €17.5 billion

21. Open Interest ECX EUA Futures Contracts ECX EUA Futures Contracts Open Interest currently rests at 171 million tonnes

22. Volume ECX EUA Options Contracts341 million tonnes of CO2 have traded in EUA options and 79 million tonnes of CER options on ECX / ICE Futures Europe

23. Who is the Market?

24. ICE Futures Members enabled to trade ECX Contracts

25. Macro Political will National developments Economic (growth/recession) Innovation Micro Demand and Supply Oil price Coal price Gas price Weather/temperature Interest rates Other markets Price Drivers

26. EUA-CER Price Spread

27. EUA Price Correlations

28. ICE ECX Screen Shot BACK TO CONTENTS

29. Where Next? Aus ETS 445Mt EU ETS 2,080Mt NZ ETS 100Mt CERs bridge the Regional Schemes Japan ETS 1,272 Mt US ETS 5,760Mt Canada ETS 400Mt China/India?

30. Multiple roads to the same destination Behavioural change Renewable energy sources Voluntary markets (CSR and pre-mandatory) Mandatory cap & trade

31. Carbon – The Next Asset Class “Global greenhouse gas emissions markets are clearly the next great frontier in the commodities trading world” Commissioner Bart Chilton – US Commodity Futures Trading Commission, March 2008

32. Watch this space! “The total global carbon market value could reach €2 trillion ($3.1 trillion) by 2020.” - POINT CARBON, May 2008

33. Proud sponsors of the Catlin Artic Surveywww.catlinarticsurvey.com www.ecx.eu Patrick.birley@ecx.eu

34. Other Information Authorised Data Vendors