Natsource at a Glance

1. The State of the Carbon Market - Overview and market characteristicsCDM WorkshopMexico City – April 22nd 2005Neil Cohn- Senior DirectorNatsource

2. Natsource’s Global Offices Europe London Oslo Asia Tokyo North America Calgary New York Ottawa Washington, D.C South America La Paz Corporate Focus Emissions Markets Renewable Energy Markets Three Business Units Asset Management Services Transactional Services Advisory & Research Services Natsource at a Glance

3. Natsource Experience GHG Asset Management: • Development of the Greenhouse Gas-Credit Aggregation Pool (GG-CAP) • Representation of World Bank Carbon funds and Dexia-FondElec funds in Asia • Manage account for Fortune 100 Company in North American and UK Markets Emissions Brokerage and Project Structuring Experience: • In 2004, brokered over 10 million tonnes of candidate CERs to European & Japanese buyers • Early pioneer in GHG transactions • Brokered the first transactions of U.K., Danish national allowances and first swap • In 2000, brokered early transatlantic and transpacific transactions • In 2002 – 2004, largest broker in UK ETS & ROCs markets • A leading broker of US SO2 allowances, NOx allowances and credits, renewable energy certificates (RECs) and renewable obligation certificates (ROCs) Strategic Services: • Provide market intelligence, policy expertise and assess risk to assist asset managers, Fortune 500 multi-national energy and manufacturing firms and governments • Advisors to developers on project structure • GHG project screening and portfolio modeling • Advisors to governments on emissions trading system design • Staff developed the first project-based mechanism designed to reduce GHG emissions and participated in the negotiations to develop the rules governing the project-based mechanisms in the Kyoto Protocol

4. Greenhouse Gas Credit Aggregation Pool (GG-CAP) • The world’s first private-sector mechanism to assist entities manage their compliance with the EU ETS and Kyoto Protocol • Strategy and benefits • Pool large-scale demand to allow for purchase of high-quality, cost-effective compliance units • Use proprietary model to screen and score projects • Utilize risk management techniques to guard against under delivery • Acquire a diverse portfolio to achieve a more favorable risk profile • Currently €98.6 million (approximately US$130 million) • Nine Japanese, European and Canadian firms committed • Electricity Supply Board (Ireland), The Chugoku Electric Power Company., Inc., Hokkaido Electric Power, Company, Inc, Cosmo Oil Japan, Tokyo Gas…

5. GG-CAP – Structure • Allows buyers to purchase tonnes collectively • Large diversified portfolio • Extensive risk management • Reduced transaction costs

6. Greenhouse Gas Market Overview

7. Estimates of GHG Market Demand • Market driven by Kyoto Protocol entry into force • Requires developed countries to reduce their GHG emissions to approximately 5% below 1990 levels by 2008-2012 • Much of obligation will be devolved to private firms • Approximately 3.5 billion tons emissions shortfall in 2008-12 under BAU emissions estimates • Japan is estimated to be short by approximately 0.8 billion tons during the five year commitment period * • Canada is estimated to be short by over 1.2 billion tons during the five year commitment period ** • Europe is estimated to be short by approximately 1.6 billion tons during the five year commitment period *** • Modest demand in Europe from 2005-07 * Japan’s Second National Communication to the UNFCCC (based on existing measures) ** Climate Change Plan for Canada, 2002 *** European Environmental Agency, GHG Emissions Trends and Projections 2003 (based on existing measures)

8. Market Development Through 2004 • Traded volume more than doubled from 02-03 to 78 million tonnes and doubled again to well over 150 million tonnes traded in 2004 • Buyers purchasing high quality, potential compliance instruments • Pre-compliance instruments trading for $3.00-$6.50 per tonne • HFC destruction projects created 31% of traded reductions • Reductions created by power sector projects account for 50% of traded volume • 30% of traded ERs are created by renewable projects • Over 75% of traded ERs created by projects in Latin America and Asia • Japanese private sector has become most prominent market participant * Lecocq, F. (2004) “State and trends of the carbon market 2004,” Washington, DC: World Bank, based upon data and analysis provided by Natsource

9. Buyers Purchasing Higher Quality ERs • Buyers purchasing for compliance – 95% of reductions likely to count • Projects with approved baselines reduce uncertainty Source: World Bank Carbon Report

10. 2003 Market Buyer’s Delta RegionCanada Falls From 1st to 4th In 2003 Canada Falls from top buyer to 4th place Source: World Bank Carbon Report

11. 2002/3 ER Volume Supply by Region Latin America Gains Early Lead Transacting CER Supply Latin America Gains Early Lead Transacting CER Supply Source: World Bank Carbon Report

12. 2003/4 ER Volume Supply by Region Asia Surpasses Latin America as Largest CER Supplier Source: World Bank Carbon Report

13. 2004 Japan Doubles ParticipationCanada’s Share Falls Again Canada has big latent Kyoto demand and Brazil is favored for proximity CFB =World Bank Carbon Finance Source: World Bank Carbon Report

14. 2003 Volume by Technology Type MSW was the initial leading technology Source: World Bank Carbon Report

15. 2004 Volume by Technology Type Huge HFC Projects Alter Market Dynamics Source: World Bank Carbon Report

16. Current Compliance Market Pricing Source: Natsource, April 2005

17. EU Market Overview

18. Status of National Allocation Plans • European Commission has carried out 3 rounds of review against Annex III allocation criteria • In total 11 NAPs approved unconditionally: • 1st round—Denmark, Ireland, Netherlands, Slovenia, Sweden. • 2nd round—Belgium, Estonia, Latvia, Luxembourg, Portugal and Slovakia. • 3rd Round - formally adopted the national allocation plans (NAPs) of Spain, Hungary, Lithuania, Malta and Cyprus • 4 Partially rejected and required further clarification – now received final approval - Austria, Germany, Finland and France • Poland asked for a 16.5% Cut (286m to 239m) by the EC - deciding on how to respond • Czech republic agreed a 9.4% Cut with EC (108m to 97.6m) • UK resubmitted NAP for approval—adding 19.8mt over 2005-2007 to their original draft NAP citing changes in emissions projections. Revisions rejected by European Commission and UK agreed to go on July NAP target (736m) whilst initiating legal action • Ongoing talks with Italy proving “difficult”. • Only the Greek NAP has NOT yet been submitted.

19. Market Settlement Transactions • Emissions markets function like any commodity market (Energy, gas, coal) • Immediate settling (Spot market) • Transfer is immediate. Seller’s account is debited and buyer’s account is credited. Buyer makes payment within 2-5 business days of receipt. • Need Registries functioning and allowances issued • Only Finland, Denmark, Sweden, Netherlands to date • Forward trades: • Credit and Contract issues important • Terms (price, quantity, vintage, delivery) agreed now and payment can be made in two ways: • Immediate settling: up front money paid to seller • Forward Settlement Transactions: current EU allowance trades

20. EU ETS – The Market • Market characterised by forward trades of 10,000 – 25,000 allowances (larger trades reported) • Traded contracts for 1 Dec 05, 1 Dec 06 and 1 Dec 07 Delivery • Credit and contract major issues with forward trades • Current minimum deal size 1,000 allowances • Ever Increasing activity in trades of EU allowances. • Over 30 million allowances have traded for all delivery years • Over 70% for 2005 Delivery • Market liquidity growing • Market still lacks depth and susceptible to sudden price changes • Development of spot market will give more flexible credit and contract issues

21. 2004 – NAP effects dominate UK, Germany to set tone with tough NAPs Russian ratification+ EC accepts 2nd set of 8 NAPs EC tightens, accepts 1st 8 NAPs Other NAP Announce loose targets + Linking Directive

22. 2005 – Market driven by fundamentals Oil, Gas, Power price all rise & coal use up Polish NAP tighter, UK allocation to occur at lower NAP. Cold snap across Europe Mild winter, High rainfall in Scandinavia

23. EU Market Pricing Factor:Dark Spread vs. Spark Spread Spark Spread = Difference between the Power price and the cost of Natural Gas Dark Spread = Difference between the Power price and the cost of Coal + additional Carbon Allowances Pricing Effects: • When dark spread exceeds the spark spread, it makes sense to prefer the coal over the gas plant. • EU Pricing is currently driven by the economic dispatch of power plants. The high price reflects the relative prices of fuels for power generation including natural gas, coal, and oil. • EU Allowances will adjust in value as • Dark Spread widens or narrows (i.e. expensive gas) • Price of power moves • Supply changes

24. EU Market Pricing Factor:Lack of Spot Market Supply • EU Utilities hedge “Dark Spreads” at time of generation • Current EUA market is only “forward” basis • Allocation of EUAs not yet facilitated (only 4 registries so far) • Large generators only current market participants • All need to buy EUAs • Not able to accept many potential seller’s credit risk • Registries finalization will allow Allocation • Will create ability for spot market to develop • Will decrease importance of credit risk concerns • Should bring supply to market and decrease price swings

25. EU: Currently a Restricted Market • Current Bids, offers and traded prices reported in the current EUA market are limited to large companies, such as utilities, oil companies and banks, with agreed contracts and approved credit lines in place - the “wholesale” market • Time and effort to put in place the infrastructure to allow them to freely trade with each other. • Without the necessary credit or contracts, companies are not able to enter this “wholesale” market and access the bids and offers reported.  No natural sellers in wholesale market • Most industrial, “compliance driven” and Eastern European companies do not have the appetite, credit or resources to enter the wholesale market. • Will develop bespoke trades • Natural buyers and sellers • How can they access the wholesale market?

26. Price: EU Allowances vs. CERs CERs trade at a discount to EUA, because of: • Timing – CERs not issued or available • Only EUAs available during tight market (Dark Spread) • CER Risks • Kyoto process risk • Methodology changes (aggregated renewables, AMOO1 HFC) • Host country risks • Political, Taxation • Project risks • Technology failure, Financial, Improper calculations, Monitoring • Seller Risks • Credit, Fraud • Transfer Risk • Market will pay for risk-free compliance • Market must pay for compliance when needed

27. CDM: The Art of the Deal

28. CDM: Buyer’s Preference • LOW PRICES!!! • Guaranteed compliance tools • Consistent delivery schedule from Sellers • Damages for non-delivery • Creditable seller (Strict credit checks) • Ability to move CERs, easily, around the EU and ITL • May have multiple sites covered in EU or Annex I • Ability to become a Project Participant • Prefer Payment on Delivery • Ability to “Mark to Market” (may restrict contract length)

29. CDM: Seller’s Preference • HIGH PRICES!!! • Possible funding for PIN/PDD preparation • Equity and/or debt participation from investors • Upfront or partial upfront payments for CERs • Transfer project risks/CER creation to Buyers • Sales of CERs pre-PDD validation, approved methodology and EB registration • Clarity of rules from Meth Panel, EB & DNA • Ability to, easily, deliver CERs to Annex 1 Parties via the ITL

30. Carbon Market Trendsand Issues to WatchCarbon Market EvolvesPost Ratification

31. Carbon: Supply & Demand • Upward price pressure: • Canadian buying has not yet begun • Japanese buying will continue • US regional programs are creating demand • EU tightness will seek CERs to fill needs • Downward price pressure: • No CERs have used Linking Directive yet to enter into the EU • EB is ramping up activity – more approved CDM projects • Corporations with excess allocation have withheld from market pending institutional reasons (board approval, lack of credit and legal infrastructure, not professional traders, etc.). • Russia, Ukraine (and New Zealand) supply is not been priced into the market • Green Investment Schemes (GIS) will bring additional supply • Potential for huge non CO2 CDM projects including HFC, SF6 and N2O • Canada may face a new election soon. If the Conservatives take over, process could slow down demand for 1.3 billion tons of compliance.

32. What Happens Post 2012? • Second commitment period of Kyoto is up for negotiation • Current demand is only for vintages up to 2012 • Limited window for projects to be developed and viable with current short-term economics • China and India have indicated resistance to post 2012 commitments • Bush administration makes US Federal participation less likely

33. Mexico: Advantages & Challenges • Buyers will pay for preferred CDM countries • A known and stable investment and crediting regime • A defined and speedy process for approvals (Established DNA) • A known unchanging tax regime for credits. • Rule of law for adjudicating disputes in an impartial way • No investment rules that require state owned or in country owned enterprises sharing of projects or credits • Mexico’s Advantages • Strong legal system exists for carbon contracting • Financial infrastructure in place • Strong sustainable development factors • Proximity to Canada • Challenges • Relatively late entry into CDM supply market

34. Natsource’s Recent CER Transaction Experiences • Natsource has successfully finalized commercial terms for over 10 million CERs in late 2004 using a variety of innovative structures to best suit the specific profile of each project. • Projects located in India, S Korea, Bolivia and China and cover 5 different technologies (Hydro, Wind, HFC, Landfill & Waste Heat Recovery). • Active project clients include Ineos Fluor, Grontmij, Xinwen Mining • Transactions signal growing strength that the CDM market offers environmental service companies in launching successful emissions control projects. • Transaction structures involve a mix of techniques to address credit, counter-party and carbon-related delivery risks in a way that balances buyer and seller interests. • Recent deals have provided a range of financial arrangements, including upfront payment, part pre-payment part payment on delivery and the more traditional payment on delivery.

35. NATSOURCE TRANSACTION SERVICES: • Provide up-to-date market, price and trading information • Devise suitable strategies for marketing and selling ERs through forward, derivative and immediate settlement transactions; • Develop the appropriate transaction structures and draft term-sheets for potential transactions; • Market sellers’ offer(s), negotiate with potential buyers and confer with sellers regarding the risk profile of potential transactions to assist the seller to make an informed decision on which transactions to pursue; • Provide the seller, where suitable, with a draft of an Emission Reduction Purchase Agreements (“ERPAs”); • Assist in selecting and contracting with a suitable legal advisor to conclude the ERPA with buyer(s), where required; • Assist in obtaining approval, where required, from Annex 1 Countries; • Manage the settlement of payment between buyer and seller, assisting in the establishment of trustee accounts, where desired; • Manage the transfer of the ERs to the buyers’ registry account according to the terms agreed between seller and buyer.

36. Neil CohnTel: +1 212 232 5305 Email: ncohn@natsource.com Some new thinking from Natsource. More growth. Less pollution. www.natsource.com