Market Development in GHGs Protecting Your Carbon Asset

1. Market Development in GHGs Protecting Your Carbon Asset Martin Whittaker PhD Senior Vice President Swiss Re Fin. Services Corp. Environmental Finance Toronto 31 March 05

2. Profile of Swiss Re Key facts • North America’s largest reinsurer; Worldwide: #2 overall • AA credit rating (S&P) • Direct Insurance/financial services (Fortune 2000) • 2003: CHF 36 bn Revenues • CHF 90 bn in Managed Assets Our sustainability commitment and expertise • #1 sector sustainability rating (since 2000) • 2001 - Created business unit: GHG/Environmental Markets (Zurich and New York City)

3. Climate Change is a Top Topic at Swiss Re • Property and casualty insurance • Flooding - due to change of weather patterns; • Increase in frequency and severity of floods and storms • Worldwide economic losses due to natural disasters appear to be doubling every 10 years and next decade will reach $150bn • Source UNEP Financial Initiatives Climate Working Group Report 2002 • D&O Liability • Life and health insurance • Change in tropical disease vectors • Mortality rate changes (e.g. - increase of respiratory diseases) • Financial Services • Investment management in ‘sustainability’ • Development of new products: Emissions Trading, Weather Products • Investments long term value

4. GHG Risk Solutions • Group-Wide Responsibility • EBC funded; situated within Risk Underwriting; • 4 FTEs (ZH and NY) • Incubation to Commercialize Swiss Re’s Sustainability Commitment • Carbon finance advisor to European Clean Energy Fund • Environmental investment portfolio restructuring • Renewables insurance • GHG emissions trading, structured solutions • Leading Voice – “Awareness building” • High profile with regulators, media, market participants • Extensive network within clean energy/carbon industry worldwide • Evolutionary: Development of Ecosystem Markets • “Footprint Neutral”: voluntary markets initiative

5. Environmental Finance Encompasses • Carbon emissions markets • SO2 and NOx markets • Renewable energy and energy efficiency financing • REC/ROC/green tag markets • Voluntary environmental offsets • Clean technology venture capital • Weather markets • Sustainability and socially-responsible investing • Timberland and biodiversity conservation • Water and water markets • Green real estate, brownfields and urban redevelopment

6. Greenhouse gas market snapshot – 2000/4

7. Examples of How Credits Can Add Value

8. Examples of How Carbon Is Being Treated By Developers 50 MW Wind Farm in Poland: • Total capital requirement = €55 million • Expected annual output = 125 GWh • Estimate of Greenhouse Gases abated (in tonnes of CO2-equiv.) =78,204 tCO2e/year, average 2005-2012 • Estimated total of Claims on ERUs to be delivered (Up to and incl. 2012): 625,629 tCO2e • Volume of expected ERUs: 563,000 tCO2e taking into consideration 10% contingency • @€5/t, JI ERUs expected to provide at least € 2-3 million over the life of the project • Developeris counting on JI ERU sales for completion of financing

9. EU ETS Is Becoming Dominant Market • EU ETS currently a €30m/week market and growing: Forecast traded market size: US$30 billion to US$1 trillion by 2010 • Point Carbon predicts financial value of EU ETS alone to be €10 billion per year by 2007 • EU Emissions Trading Scheme affects >12,000 installations across Europe: 6,000 companies • Total volumes of 2.1 billion tons CO2 per year allocated (note: only CO2 traded) • Phase 1 (’05-’07) launched Jan 1st, €40/tonne penalty for non-compliance; Expanded 2nd phase runs ’08-’12, €100/tonne penalty for non-compliance • E.U. “Linking Directive” Provides for Kyoto Project Credits to be Exchanged for EUAs • Spot market emerging; Banks and insurance companies testing the water as part of integrated trading strategy

10. 4 Types of Primary Carbon Buyer Exist • Governments committed to GHG reductions, notably Japan, Canada and European countries. Governments (via national carbon fund facilities) will be in market for AAUs. • Agencies acting on behalf of governments, typically World Bank, IFC, EBRD, Ecosecurities and Rabobank. World Bank, EBRD and IFC are only in the market for ERUs. • Large private sector industrial companies that are obliged to meet emissions reduction targets under the EU ETS or national GHG reduction plans (Japan, US, Canada, Australia). • Speculators, primarily banks and specialized carbon funds, that aim to buy and sell carbon credits for a profit (CDC carbon fund).

11. Climate Change: Potential Opportunities in GHG Markets • GHG Emissions Trading • Trading counterparty services • Structured Risk Solutions • Assurances around price, delivery of carbon credit value on specific transactions • Linking of emissions and weather risk transfer • Carbon Asset Generation & Protection for Managed Funds • Clean energy infrastructure investments • European Clean Energy Fund • GHG Exchange Indemnification • NORD Pool • Voluntary GHG Market Services • Footprint Neutral

12. Structured Solutions • Put Options • Protection against price collapse; Option to sell carbon at agreed price (e.g., for carbon funds to protect against loss) • Call Options • Protection against price rise; Option to buy at agreed price (e.g., for compliance buyers to clarify compliance exposure) • “Compliance Assurance” • Assuring compliance (“supply of compliance instruments”) for a premium • Integrated Contracts • Weather-triggered coverage on emissions risk • Financial Assurances • Capex, investment and financing decision based around value of GHG credits

13. Major Challenges • Price • Specifically, mismatch between price and perceived need • Regulatory Incentive • Unclear or lack of emissions regulations • Awareness • Particularly among investors and banks • Effort • Structuring deals can be hard work, particularly in complex situations • Risks • Despite above, some risks are tough to eliminate (e.g., political risk factors)

14. GHG Exchange Insurance • Developing counterparty default coverage for clearing operations in emissions/green exchanges • Existing clearing operations can be easily utilized to accommodate to listed emissions trades. • Model is a successful default insurance for power market of Nord Pool clearing • Nord Pool recently announced entering of GHG trading market • How coverage works: Insurance Policy indemnifying Nord Pool against losses as a consequence of defaults (settlement defaults, failures to honor margin calls) of its clearing members

15. Market Catalysis: Footprint Neutral Program Menu of Offset Options Fund Management • Energy efficiency • Renewable energy • Carbon sequestration Greenhouse Neutral Asset Gathering • Restoration • Parks • Eco-entrepreneurs Consumers Biodiversity Neutral Fund Manager Company • Water purification • Wetland protection Water Neutral • Micro-entrepreneurs • Food security • Health interventions Social Impact

16. Discovery Channel Film (Canada – 3/2004; United States – 2005) Sponsored by Swiss Re Contact details: Environmental Markets Martin_Whittaker@swissre.com Tel: +1 212-317 5106 www.swissre.com/emissions “Reducing GHG emissions” conference series