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Agenda

An Overview of Emissions Trading and The Status of the Carbon Market Corinne Boone, MD, CantorCO2e U of T Environmental Finance Series Toronto, Ontario, Canada May 11 2007. Agenda. About CantorCO2e What is emissions trading Carbon market and trading.

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Agenda

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  1. An Overview of Emissions Trading andThe Status of the Carbon MarketCorinne Boone, MD, CantorCO2eU of T Environmental Finance SeriesToronto, Ontario, CanadaMay 11 2007

  2. Agenda • About CantorCO2e • What is emissions trading • Carbon market and trading

  3. Brokerage firm co-owned by two leading global financial houses - Cantor Fitzgerald and Mitsui Offices in 8 countries over 4 continents with international network of agents and access to over 250 private sector potential buyers for carbon emissions Long track record - CF EBS formed in 1992; CO2e established in 2000 CF EBS & CO2e have transacted billions of dollars in environmental transactions Working relationship with investment banking group, merchant banking group and asset management group CantorCO2e

  4. Our markets Environment Carbon Markets US Compliance Voluntary Offsets Energy Biofuels Petroleum Fuels Renewables Innovation Finance Technology

  5. Agenda • About CantorCO2e • What is emissions trading

  6. What is Emissions Trading? 400 300 200 Cap/Allocation level Plant 1 Plant 2 Source: EMA

  7. What is Emissions Trading? 400 300 200 Cap/Allocation level Plant 1 Plant 2 Source: EMA

  8. What is Emissions Trading? 400 300 200 Short 100 credits And/or allowances Allocation level Long (excess) 100 credits/ and/or allowances Plant 1 Plant 2 Source: EMA

  9. What is Emissions Trading? Credits/allowances held = emissions 400 300 200 Cap/Allocation level Allowances/Credits held = emissions Plant 1 Plant 2 Source: EMA

  10. Role of the broker • Market expertise - brokers see a range of different transactions. This expertise helps: • suppliers to structure an attractive offers (partial sales, up-to sales, options, right of first refusal, etc..) • buyers to structure a realistic bid • Assists both buyer and seller to manage risk and uncertainties • Get to successful transaction. • In the greenhouse gas market, we guide the counter-parties through the deal process. • Initial contact • Broad terms and conditions • Formal term sheet • Transaction execution • The greenhouse gas market is driven by politics and legislation. Brokers provide a much needed financial perspective in this new market. We begin by understanding regulation and potential regulation and its potential impact…

  11. Agenda • About CantorCO2e • What is emissions trading • Carbon market and trading

  12. Origin of the Carbon Market • United Nations Framework on Climate Change – 1992 • Kyoto Protocol – 1997 • Put limitations on developed countries; average of -5.2% from 1990 levels by 2012 • Kyoto Protocol entered into force on February 16, 2005 • USA and Australia not participating in Kyoto • The EU began pre-Kyoto regulated Emissions Trading Scheme in January 1, 2005 • Voluntary markets have seen significant development • Corporate, governments, individuals “offsetting” their environmental footprint • State-level markets in USA and significant recent activity at federal level • Uncertainty about how Canada will approach CC but NOT “If”

  13. Existing & Developing EmissionsMarket Instruments • Verified Emission Reductions (VERs) – Voluntary markets (compliance driven plus retail) • Certified Emission Reductions (CERs) – primary market • CERs (secondary market) • Assigned Amount Units (AAUs) – International Emissions trading • European Union Allowances (EUAs) - EUETS • Emission Reduction Units (ERUs) – Joint Implementation • Domestic Emissions Trading Units – still questionable about how this will develop in many countries • Canada (permits and offsets) and provincial programs (ex. Alberta) • United States (RGGI, AB32, Western States Initiative

  14. Summary of Marketplace Today • Market driven by: • EU from pre-Kyoto compliance regime and forward contracting for First Phase of Kyoto (2008-2012). • Japanese buyers of CERs (who have blessing of Japanese government to buy) for 2008-2012 period. • Banks and hedge funds (buyers and investors to resell) • Typical Contract structures: • Spot, Forward, Option, Direct project investment, swaps, etc. • Majority Over the Counter (OTC) through brokers, minority on exchanges and some bilateral contracts. • Payment profile: • Upfront (rarely) and Upon delivery (sometimes with cost sharing for transaction costs) • Typical Types of Projects: • LFG (flare and/or to energy), Renewable Energy, Energy Efficiency, Coal Mine Methane, Coal Bed Methane, Animal Waste Management, industrial process changes, etc..

  15. Carbon Emissions Trading Schemes European Union Emission Trading Scheme (EU ETS) EUAs Kyoto CERs, ERUs, IET Chicago Climate Exchange (CCX) VERs (CCX and other markets)

  16. CDM & Market Statistics Registered projects: 631 & 72 requesting registration (>1,600 in the CDM project pipeline) (as of 18 April 2007, www.unfcc.int/CDM) Issued CERs: 44,750,470 (as of 18 April 2007, www.unfcc.int/CDM) Expected CERs: > 870,000,000 (from registered projects & projects requesting registration until the end of 2012, as of 18 April 2007) Global carbon market transactions worth $21.5 bn for quarters 1 to 3 in 2006 • 74% EU ETS and 21% CDM, as of September 30, 2006 (State and Trends of the Carbon Markets, World Bank, November 2006) CDM buy side dominated by private sector & carbon funds

  17. Carbon Market Statistics Q1-3’06 Value $/tCO2 EU ETS 88% 24.66 NSW 0.9% 11.37 CCX 0.1% 3.29 UK-ETS 0.0% 4.10 CDM 11% 10.55 JI 0.4% 7.92 Other 0.3% 7.58 Total 100% 21.00 (State and Trends of the Carbon Markets, World Bank, November 2006)

  18. Conclusion • The GHG market is developing rapidly – based on early EUETS and CDM.. • There is some uncertainty about what the global system will look like post 2012 – but there is no uncertainty about whether there will be a GHG constrained future. • There is a significant role for technology in this arena – energy efficiency, process change, etc. • Private Sector participation will only INCREASE over time as markets begin to move – use of private sector vehicles (ie., through investment, through brokers and if direct, through traders, exchanges, etc.) • Canada needs to make its’ position known and actually implement a policy – Skip Willis to elaborate on this • on what markets it will provide access to … in order to meet its clean air targets targets…Today’s release is a step towards making position clearer … next months should help.

  19. Contact Information Europe London Head Office Steve Drummond, CEO +44 20 7894 8333 Corinne Boone +1 416 350 2177 Ubaldo Inclan +52 55 5202 3967 (Mexico) Divaldo Rezende +55 11 5083 3252 (Brazil) Sergio Vives +56 3 223 3323 (Chile) German Cripovich +1 416 350 2177 (Central America) Americas Americas Head office Toronto India Japan Asia Head office Tokyo Ram Babu and Jay Mariyappan c/o +44 207 894 8333 Matt Inamuro +81 3 3285 2705 www.CantorCO2e.com

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