The CaliforniaEmissions Market.

Eco Global Markets focuses on originating, developing and trading carbon credits generated from projects that directly mitigate climate change.

We work with companies from developing countries across the globe to create carbon credits in a wide variety of sectors.

Eco Global Markets also work with companies in the developed world to assist them in meeting their greenhouse gas emission compliance targets.

California has implemented a comprehensive climate program to comply with Assembly Bill 32(AB32), the Global Warming Solutions Act of 2006. The program sets out to meet AB32’s goal of reducing greenhouse gas (GHG) emissions to 1990 levels by 2020, and ultimately to achieve an 80% reduction from 1990 levels by 2050.

One of the mechanisms to achieve this is the cap-and-trade program. When fully implemented, the cap-and-trade program will cover approximately 85% of California’s GHG emissions; it will cover industrial, utility and transportation fuels.

The regulations for the program are in place and underlying infrastructure for implementing it is being put in place over the course of 2012. The first auction of emission allowances is scheduled to take place in November 2012, and compliance obligations begin in January 2013, at this point a live spot exchange will commence.

California is also expected to link its program to other trading partners through the Western Climate Initiative, including the Canadian province of Quebec, which has formally adopted a cap-and-trade program as well, and British Columbia.

Cap-and-trade and other climate policies have proven to be a driver for economic growth. In the Northeast US, implementation of the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program limiting GHG emissions from the electricity sector, has already generated over US$1 billion in energy savings for customers and contributed $2.6 billion to regional economic growth.

The California Emissions Market

How does it work?

16/12/10California ETS regulations

approved

28/10/11Planned completion for

adopting all regulations and modifications

1/1/12CA ETS regulations come

in to effect

1/1/12 – 21/12/14First compliance period

covers operators of large energy processing facilities,

electricity generating facilities, electricity importers

1/1/15 – 31/12/17Second compliance period

extends coverage to suppliers of natural gas and

liquid petroleum gas

1/1/18 – 31/12/20Third compliance period

completes coverage

The regulations will cover approximately 600 facilities operated by 360 companies representing 80% of California’s emissions.

The number of companies that will need to comply with the regulations will increase over three compliance periods from 2012–20, until all regulated companies are covered by 2020.

The first compliance period from 2012–14 will only apply to operators of large processing facilities, electricity generating facilities, electricity importers and suppliers of carbon dioxide.

The California Air Resources Board

The California Air Resources Board is a part of the California Environmental Protection Agency, an organization which reports directly to the Governor’s Office in the Executive Branch of California State Government.

The California Air Resources Board (ARB) has designed the California cap-and-trade program that is enforceable and meets the requirements of AB 32. The program starts on January 1, 2012, with an enforceable compliance obligation beginning with the 2013 GHG emissions.

ARB offset credits (CCAs) are greenhouse gas emission reductions that meet regulatory criteria and may be used by an entity to meet up to eight percent of its triennial compliance obligation under the cap-and-trade program. Each CCA is equal to 1 metric tonne of carbon dioxide equivalent (MTCO2e) and can only be quantified using an ARB approved compliance offset protocol.

ARB has adopted four compliance offset protocols that may be used to generate ARB offset credits.

• U.S. Forest and Urban Forest Project Resources • Livestock Projects• Ozone Depleting Substances Projects (ODS)• Urban Forest Projects

www.arb.ca.gov

The Climate Action Reserve (CAR)

As the premier carbon offset registry for the North American carbon market, the Climate Action Reserve works to ensure environmental benefit, integrity and transparency in market-based solutions that reduce greenhouse gas emissions. It establishes high quality standards for carbon offset projects, oversees independent third-party verification bodies, issues carbon credits generated from such projects and tracks the transaction of credits over time in a transparent, publicly-accessible system. By facilitating and encouraging the creation of GHG emission reduction projects, the Climate Action Reserve program promotes immediate environmental benefits to local communities, allows project developers access to additional revenues and brings credibility and value to the carbon market. The Climate Action Reserve is a private nonprofit organization based in Los Angeles, California.

www.climateactionreserve.org

Credits - CRTsCRTs (Climate Reserve Tonnes) are issued by the Climate Action Reserve. CRTs are issued to eligible projects in the United States, Canada and Mexico. To be eligible for CRTs, GHG reduction projects must reduce emissions or increase sequestration of GHGs in a manner that is real, permanent, verifiable and additional. Additionality requires that a project activity is additional to “business as usual” and would not have occurred in the absence of an incentive provided by a GHG offsets market. A single CRT represents one metric tonne of carbon dioxide equivalent emissions reduction or sequestration.

At present the Climate Action Reserve has adopted 12 protocols and is working on 3 more. These protocols are methodologies for the reduction or sequestration of GHG gases which are eligible for the issuance of CRTs.

CRTs are well-respected as being among the highest quality offsets available. This means that CRT buyers can be confident that the offsets they purchase provide true and credible benefit to the environment.

The ARB has recently announced that CRTs from certain methodologies may be converted to ARB offset Credits and accepted as AB-32 compliant carbon offsets (CCAs).

The news that certain methodologies will be eligible for conversion to AB-32 compliant ARB offset Credits has already seen the price of these units rise significantly. These units will make it easier for companies to offset their emissions through projects located outside of the State of California. As the Climate Action Reserve is a privately owned company and not a government body, it is expected to be better equipped for the fast-changing U.S. carbon market.

Protocols

Adopted Protocols Current Date Issued Development Status Version

Coal Mine Methane 1.0 October 7, 2009 Under revision – Version 2.0 expected September 2012

Forest 3.2 August 31, 2010 Approved

Mexico Landfill 1.1 September 13, 2011 Approved

Mexico Livestock 2.0 September 29, 2010 Approved

Nitric Acid Production 2.0 September 28, 2011 Approved

Organic Waste 1.0 June 30, 2010 Approved Composting

Organic Waste 1.0 February 3, 2010 Under revision - Version 2.0 Digestion expected June 2012

Ozone Depleting 2.0 September 28, 2011 Approved Substances

Rice Cultivation 1.0 December 14, 2011 Approved

Urban Forest 1.1 March 10, 2010 Approved

U.S Landfill 4.0 June 29, 2011 Approved

U.S. Livestock 3.0 September 29, 2010 Approved

differently

Credits - CCAsUnder the new cap-and-trade system, California will supply California Carbon Allowances (CCAs), each permitting the release of one tonne of carbon, through a combination of free allocations and auctions. Large industrial sources such as power plants and oil refineries must hold a permit for every tonne of carbon they release beginning Jan. 1, 2013. Transportation fuel distributors will follow in 2015. Allocations will start at 90 percent of industries’ recent emissions levels to force emissions reductions.

The market for California carbon permits is already months in the making. The Atlanta-based Intercontinental Exchange Inc. and Green Exchange started clearing futures and forwards for California carbon allowances in August, and London-based Barclays Plc has been making a market in CCAs since November 17 2011. Patrick Pfeiffer, senior broker for BGC Environmental

Brokerage Services, said of the board’s approval of the final rules of the cap-and-trade system: “The passage of the rule should increase liquidity as a result. With greater regulatory certainty we expect prices will firm up.”

Under the ARB rules, companies may use offsets, or credits from carbon-reducing projects, to cover up to 8% of their emissions. This has led to Bank of America buying options to acquire several million tonnes of carbon offsets designed to comply with California’s program through 2020. “ARB’s vote to adopt the final draft of the cap-and-trade regulation marks a critical turning point in the development of the California emissions market,” said Abyd Karmali, Bank of America Merrill Lynch’s global head of carbon markets. “Market participants are already gearing up their preparatory activities in anticipation of the first allowance auction.”

Key California Carbon price drivers Economic• Electricalloadgrowth(2000-20090.7% compound annual growth rate, forecasted to be 1.4% 2010-2020 driven by population)

• EconomicoutputgrowthinCalifornia’s industrial sectors

• California’sclimatepoliciesaremaking California a leader in green jobs and investment, drawing new companies into the state.

• Threeofeveryfivedollarsinvestedinthe country’s clean technology sector comes to California, five times more than it’s nearest competitor.

• AB32enjoysthestrongsupportofadiverse and formidable alliance of California’s economic powerhouses including Google, Gap, eBay, Bloom Energy, E2, Small Business California, Yahoo!, California Business Alliance for a Green Economy, Cleantech, California Ski Industry Association, and much more.

Transportation• Addedtocapin2015;allocationsfor the sector unclear and several complimentary policies will impact emissions growth in the sector (i.e. clean car standards, LCFS)

Offset Supply• Only4projecttypesapprovedbyCARB to date (ODS, Livestock, Urban Forestry, Forestry)

• Estimated6Missuedtonnesavailable to date, anticipated average annual requirement will be 24M – significant undersupply.

• Highreserveprice(floorprice)on allowances ($10/tonne to start, rising 5% per annum)

differently

AnalysisAs the Californian market matures throughout 2013 we can expect to see continued growth in the volume of offsets traded. In the coming year there is already a shortfall of over 230 million credits leading most analysts to predict a significant uplift in price. Coupled with a legislated floor price of $10, rising annually, we perceive the Californian emissions market as an excellent opportunity for capital gain with limited downside risk.

Price forecasts

• Barclays Bank: Will begin trading at $12/t in 2012 and will average $40/t in the 2015 – 2018 and shall average $73/t in 2018- 2020.

• Reuters/Point Carbon: Program will average $36/t over the average of 2013 – 2020 and end with a price as high as $68/t in 2020.

• Bloomberg/New Energy Finance: Forecast that the program shall average $37/t in 2012 – 2020 which will consist of a gradual price increase over time reaching $54/t by 2020.

• Tschach Solutions: Prices rise to $35/t in mid-2013 before falling to $11/t in 2014 and then rising to levels above $25/t by 2018 and beyond.

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