Emissions Strategy Meeting Global Policy Landscape

1. Emissions Strategy Meeting Global Policy Landscape Lisa Jacobson, Manager, Environmental Strategies, Enron

2. Review of International Frameworks to Address Climate Change • 1992 Rio “Earth Summit” – Adopted the United Nations Framework Convention on Climate Change • Voluntary emissions reduction commitments by developed countries • Former President Bush signed; U.S. ratified UNFCCC in 1992 • Entered into force in 1994 • 1995 COP-1 Berlin • Voluntary commitments not sufficient to meet goals • Birth of Kyoto Protocol negotiations • 1997 Kyoto Protocol Adopted • Binding emissions reduction commitments by 2008-12 • US: 7 percent below 1990 levels; EU 8 percent below 1990 levels • Market-based mechanisms • International emissions trading • Joint implementation • Clean Development Mechanism

3. COP-6 and Beyond – Back the the Future? • November 2000 The Hague COP-6 – Negotiations Collapsed • Rules for market-based mechanisms • Role of carbon “sinks” • Compliance regime • March 2001 – Bush Statements on Climate Change • No mandatory regulation of CO2 under multipollutant plans • Opposed to Kyoto Protocol • Kyoto targets will harm U.S. economy • No developing country commitments • Sharp Reactions • International leaders – EU, Japan, Australia, Canada • Privately more accommodating • Environmental community • Business leaders Bush Administration’s Early Statements on Climate Change Resulted in Pressure to Develop Credible Alternative to Kyoto

4. Policy Landscape Today…FOCUS: United States - Domestic • Domestic Activity Under Bush Administration • Cabinet-level review of climate change impacts and policy • Development of domestic and international proposals • Objective: Release proposals prior to resumed climate change negotiations in July 2001 • Unlikely given timing/staff vacancies/learning curve on issues • Domestic Options: • Multipollutant regulations • Voluntary sectoral agreements • Voluntary emissions trading – opt-in to international system • Baseline protection for businesses • Tax incentives for clean energy technologies; sinks • R&D; commercialization and export promotion for clean energy • Crediting for sinks and forest management • New efficiency standards

5. Bush’s National Energy Plan • Support research on global climate change and incentives for new technologies • Support innovative approaches to address climate change, “including through international processes” • Promote market-based solutions; exports for clean energy technologies • Review NSR regulations • Direct EPA to encourage combined heat and power • Direct DOE to make energy efficiency a national priority • Direct EPA to propose multipollutant legislation • Establish mandatory reduction targets for emissions of sulfur dioxide, nitrogen oxides, and mercury • Phase in reductions over a reasonable period of time, similar to the acid rain reduction program established by the 1990 amendments to the Clean Air Act • Provide regulatory certainty to utilities • Provide market-based incentives, such as emissions credits

6. Climate Change Activity – State Level • Massachusetts • First state to mandate C02 reductions • Part of multipollutant program • NOx, SO2, CO2 and mercury • Companies have until 2004 to meet limits • Oregon • New generating plants must meet a standard of 0.7 lbs. of CO2/kWh • Non-generating facilities must meet a rate of 0.522 lbs. per horsepower hour • Compliance can be met through efficiency, cogeneration, offsets or a fee of $0.57 per ton • Standard cannot add more than 1.8 percent to cost of a new plant

7. Climate Change Activity – State Level • New Hampshire • Voluntary CO2 reduction program • Looking at CO2 reduction through multipollutant bills • Connecticut • Voluntary reductions are recorded for early credits • State has authority to require offsets – not used • New York • Multipollutant bill under consideration, includes CO2 and cap and trade provisions

8. Policy Landscape Today…FOCUS: United States - International • International Activity Under Bush Administration • Path Less Certain • Multilateral vs. regional or unilateral approaches • Mandatory vs. voluntary commitments • Developing country commitments – potential deal-breaker • How to include market-based mechanisms outside of Kyoto Framework? • How will trading work under voluntary systems? • Options • Regional or unilateral approach • Voluntary emissions goal/less stringent target • Voluntary emissions trading • Incentives to encourage U.S. exports for clean energy technologies • Project-based emissions reduction programs

9. Policy Landscape….FOCUS: Strategy Outside United States • European Union • Kyoto ratification strategy – EU to go it alone? • Pick-off Russia, Japan • Challenges – EU coordination/political will • Political Statements to ratify Kyoto by 2002 • Domestic plans in place – UK, Germany, The Netherlands • How to get U.S. back to the negotiating table • EU willingness to re-negotiate targets for mandatory commitments • Umbrella Group • Domestic plans on hold; stalled • Waiting for direction from U.S. • Japan wants political recognition for Kyoto • Developing Countries – G77 and China • Want U.S. back in negotiations • Seek technology transfer and aid programs

10. Canadian Climate Change Program • Climate Action 2000, October 2000 • Over $1.1 billion commitment to climate change mitigation activities • Promotion of fuel-switching from coal to natural gas • Promotion of fuel cell technology • Incentives for retrofitting of buildings; new energy efficiency standards for the building sector • Emissions trading program – rule development underway • Tradable Permits Working Group • Report released in 2000; http//: www.nccp.ca • Working group on domestic emissions trading launched • “Wait and See” – looking at U.S. next steps • Ontario intends to start emissions trading for SOx and NOx • Report released March 2001; http//: www.ene.gov.on.ca.envision/news/032601

11. UK Climate Change Program • Emissions Trading – Launch delayed until July • Draft framework released last week • First compliance period December – April 2002 • £43 million annually for five years from 2003 for companies who take on voluntary targets • Climate Change Levy • Business electricity customers (0.43/kWh, from April 2001) • Qualifying renewables exempt • 80 per cent discount for industries in voluntary agreements • Sectoral agreements – 40 negotiated by March 2001 • The Carbon Trust – (£50 – 33 million from climate change levy; £17 million from energy efficiency program) • Short term: Help companies save energy and money • Long term: Buy down costs of clean energy and assist with commercialization of clean energy technologies

12. Australian Climate Change Program • Emissions Trading • Sidney Futures Exchange – Pilot program/sinks credits • Credit for early action initiative • Discussion paper released in 2000; Comments by March 2001; http//:www.greenhouse.gov.au/emissionstrading/early_credits.pdf • Activity stalled due to U.S. political dynamics • $180 million Climate Change Plan – November 1997 • Renewable energy commercialization, R&D, incentives and “showcase” projects • Utilities required to increase renewable energy by 2 percent by 2010 • Sector agreements with industry – Greenhouse Gas Challenge • Transportation – fuel efficiency • Tree planting and revegetation

13. Greenhouse Gas Emissions Trading Activity: The Netherlands and Denmark • Joint Implementation in The Netherlands • Dutch government purchased four megatonnes of carbon dioxide reduction credits for $31.5 million from Poland, Romania and the Czech Republic – April 2001 • Intention to link with Kyoto Protocol • Emissions Trading in Denmark • Cap and trade program launched in January 2001 • No trading or market established • Eight biggest power companies regulated • Allocation based on historical emissions from 1994 – 1998 • Banking permitted • Low penalty for non-compliance • Intention to link with Kyoto Protocol or other International Emissions Trading System (if and when developed)

14. What Does this Mean For Enron… • Despite U.S. Opposition, Governments and Industry Moving Ahead to Reduce Greenhouse Gas Emissions • Regulation of Greenhouse Gas Emissions “Just a Matter of Time” • While the Greenhouse Gas Emissions Market Is Developing Slowly – There Is Movement, Despite Obstacles • Key Question: • How can Enron’s Business Capitalize on Emissions Market/Develop New Products and Services • Trading Desks • Risk Management Services • Value-added Services – EES • Investments in New, Clean Energy Technologies • Renewable Energy Credits

15. Enron’s Climate Change Policy and Strategy Enron Climate Change Statement, 2000 http://www4.enron.com/corp/pressroom/responsibility/Climate_Statement.doc • “The lack of scientific certainty over climate change does not justify inaction…Meaningful, cost-effective, and flexible mitigation activities can be taken now to prevent the need for more onerous and costly measures in the future.” • “Market-based energy and environmental solutions will create the most cost-effective, efficient and environmentally-sound systems for reducing greenhouse gases and provide the greatest amount of choice and flexibility for institutions worldwide.” Enron Environment, Health and Safety Report, 2000 http://www4.enron.com/corp/pressroom/responsibility/EHS_Annual.pdf • “Incorporating environmental and social considerations into the way we manage risk, govern our projects, and develop products and services will help us maintain our competitive advantage.” – Ken Lay, Chairman