An Overview of Emissions Trading andAn Overview of Emissions Trading and

The Status of the Carbon MarketThe Status of the Carbon Market

Corinne Boone, MD, CantorCO2eCorinne Boone, MD, CantorCO2e

U of T Environmental Finance SeriesU of T Environmental Finance Series

Toronto, Ontario, CanadaToronto, Ontario, Canada

May 11 2007May 11 2007

AgendaAgenda

About CantorCO2e

What is emissions trading

Carbon market and trading

CantorCO2eCantorCO2e

– 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

Our marketsOur markets

EnvironmentCarbon Markets

US Compliance

Voluntary Offsets

EnergyBiofuels

Petroleum Fuels

Renewables

InnovationFinance

Technology

AgendaAgenda

About CantorCO2e

What is emissions trading

What is Emissions Trading?What is Emissions Trading?

400

300

200

Cap/Allocation level

Plant 1 Plant 2Source: EMA

What is Emissions Trading?What is Emissions Trading?

400

300

200

Cap/Allocation level

Plant 1 Plant 2Source: EMA

What is Emissions Trading?What is Emissions Trading?

400

300

200

Short 100 creditsAnd/or allowances

Long (excess) 100 credits/ and/or allowances

Allocation level

Plant 1 Plant 2Source: EMA

What is Emissions Trading?What is Emissions Trading?

400

300

200

Allowances/Credits held = emissions

Credits/allowances held = emissions

Cap/Allocation level

Plant 1 Plant 2Source: EMA

Role of the brokerRole 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…

AgendaAgenda

About CantorCO2e

What is emissions trading

Carbon market and trading

Origin of the Carbon MarketOrigin of the Carbon Market

1. United Nations Framework on Climate Change – 1992

2. Kyoto Protocol – 1997 Put limitations on developed countries; average of -5.2% from

1990 levels by 2012

3. Kyoto Protocol entered into force on February 16, 2005 USA and Australia not participating in Kyoto

4. The EU began pre-Kyoto regulated Emissions Trading Scheme in January 1, 2005

5. Voluntary markets have seen significant development Corporate, governments, individuals “offsetting” their

environmental footprint

6. State-level markets in USA and significant recent activity at federal level

7. Uncertainty about how Canada will approach CC but NOT “If”

Existing & Developing EmissionsExisting & Developing EmissionsMarket Instruments Market 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

Summary of Marketplace TodaySummary 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..

Carbon Emissions Trading SchemesCarbon Emissions Trading Schemes

Chicago Climate Exchange (CCX)VERs (CCX and other markets)

European Union Emission Trading Scheme (EU ETS)EUAs

Kyoto

CERs, ERUs, IET

CDM & Market StatisticsCDM & 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

Carbon Market StatisticsCarbon Market Statistics

(State and Trends of the Carbon Markets, World Bank, November 2006)

Q1-3’06Value $/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

ConclusionConclusion

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.

Contact InformationContact Information

www.CantorCO2e.com

Europe London Head Office

India

JapanAsia Head office

Tokyo

AmericasAmericas Head

office Toronto

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)

Ram Babu and Jay Mariyappan

c/o +44 207 894 8333

Matt Inamuro +81 3 3285 2705