Carbon Offsets Demystified

1. Carbon Offsets Demystified Mark Chadwick, CEO Carbon Clear Limited

2. Agenda • Introduction to Carbon Clear • Background to offsets: • What is a carbon offset? • Why are they needed? • How are they made? • Lifecycle of a carbon offset credit • Offsets in a carbon management programme

3. Introduction to Carbon Clear • Mark Chadwick • CEO, Carbon Clear Limited • Carbon Clear Limited • Corporate climate change strategy • Carbon footprint measurement • Internal emission reductions • Carbon offset credits

4. Background to offsets … what, why and how

5. What is a carbon offset? • Carbon credit • An instrument representing a reduction in greenhouse gas emissions, usually denominated in metric tonnes • Carbon offset • Using a carbon credit to ‘offset’ and emission that has happened or is about to happen • Primarily found in the compliance markets such as the European Emissions Trading Scheme (soon CRC) • Increasingly used by other businesses to achieve reduction goals or demonstrate their green credentials

6. Why are they needed?

7. Why are they needed? Under performance Over performance

8. Why are they needed? • Offsets allow countries or companies who are targeted to reduce their emissions to trade between each other • Achieve compliance at lowest cost by using market forces to allocate capital • GOAL: Use market forces to price an externality; in this case greenhouse gas pollution

9. How are they made? • Permits to pollute • Issued by a regulating body to place a cap on emissions • Emission reduction performance impacts supply • Allocations usually reduced year on year • Permits have limited use outside of the compliance sphere • E.g. EUA • Emission reduction projects • Derived from projects that lie outside of the compliance sphere • Based on emission reductions from projects, e.g. wind farms or industrial efficiency improvements • Issued based on the reduced emissions after a project versus emissions prior to the project • E.g. CER, ERU, VER

10. Carbon Credits How are they made?

11. Lifecycle of a carbon credit … a real life example

12. At Carbon Clear we invest in projects that improve living standards in developing countries, while providing global climate benefits. Carbon offset projects: Our approach • Verifiable emissions reductions • ISO 14064-2 reporting • Third-party verification • Additionality • CDM measurement rules • Sustainable livelihoods • DfID evaluation criteria • Materiality • Client’s contribution makes a real difference • Diverse portfolio • Minimum 80% clean energy

13. Size: 100K tCO2e Providing support to a local business that converts two-stroke mini-taxi engines to modern fuel-injection technology. More efficient engines reduce carbon emissions and ambient air pollution. Monitoring: Project created and managed by our local partner Envirofit. Project will be submitted to the CDM Executive Board with independent verification by a UN Designated Operational Entity. Why we like it: High climate change reduction potential New business opportunities for local entrepreneurs Improving air quality in cities Reduced fuel costs for taxi drivers Saving more than the environment:Mini-Taxi Engine Retrofits in the Philippines

14. How are they made? • Compliance Market • Trades CERs / EUAs • European trading scheme • 700m tonnes per annum • €23 per tonne Sale Sales Verification Monitoring Sales Carbon Credit Development Validation Start • Voluntary Market • Trades CERs / VERs • 23m tonnes worldwide in 2006 • €8-10 per tonne Contract Concept

17. Manila: August 19, 2005 - morning

18. Manila: August 19, 2005 - afternoon

19. Yamaha RS 100T Kit Kit Components Before After Majority of components manufactured in the Philippines

20. Emissions and Fuel Consumption Comparison Carbureted 2 - Stroke Hydrocarbons Carbureted 4 - Stroke Direct Injected 2 - Stroke Carbon Monoxide Fuel Consumption * SAE Technical Paper No. 2001-01-0010 ** Envirofit Draft Paper Publication at BAQ – Asia Conference 2006 *** Envirofit 2006 Field Test Results (5/06)

21. Monitoring • Each retrofit includes an engine management computer which monitors fuel flow • Lower levels of fuel consumption mean lower carbon emissions • Quarterly reports are submitted to Carbon Clear • Annual 3rd party verification of emissions reductions provides actual carbon credit numbers

22. Offsets in a carbon management programme … where and how they should be used

23. Offsets in their place • Reduce first, then once you’ve reduced all you can, consider offsetting for unavoidable emissions • Is this right?

24. Problems with approach • How long does it take to reduce all that you can? • Lowers return on carbon reduction investments • No penalty for not reducing emissions • Leads to a higher cost of carbon reduction • No help for less developed nations • Leaves a solution on the table

25. An alternative view • Carbon management: • Calculate carbon footprint • Develop a reduction plan • Offset emissions from previous year • This approach: • Offsets truly unavoidable emissions • Creates an additional financial driver • Pollution is no longer free!

26. Concluding thoughts