1 New Business Opportunity: The Carbon Market AFM Bucharest, 27 June 2005 Peter Koster, Chief Executive, ECX

2 Contents Introduction to the European Climate Exchange The EU Emissions Trading Scheme Market characteristics How can you trade emissions at an exchange? Looking ahead – how will the carbon market develop?

3 Background The European Climate Exchange (ECX) and the International Petroleum Exchange (IPE) is working together to offer exchange-traded products for CO2 emissions; Futures contracts were launched on 22 April 2005; Contracts will fall under the normal exchange infrastructure:  Traded electronically on the ICE Platform;  IPE Regulations apply;  LCH.Clearnet Ltd. to act as Central Counterparty;  IPE market surveillance and compliance.

4 The EU Emissions Trading Scheme EU ETS started on 1 January 2005 under Directive 2003/87/EC; Regulates CO2 emissions across 12,000 energy-intensive installations including power generation, mineral oil refineries, offshore installations, pulp, paper and chemical industries; Operates on a ‘cap-and-trade’ basis enforced by financial penalties (€40 per tonne in Phase 1 rising to €100 per tonne in Phase 2); Each EU Member State must prepare a National Allocation Plan (NAP) to be approved by the European Commission; Allowances will be held in dematerialised form in national registries.

5 Emissions Trading: “cap” and “trade” Total emissions 2004 Target emissions 2005 Actual 2005 Scenario 1 – business as usual Actual 2005 Scenario 2 – emissions reduced Shortfall – need to buy Excess – can sell Emissions cap set

6 How many allowances are there in the market? 2.2 billion EU allowances per year = over €40 billion market value* * Current market price is around €18 per ton CO2

7 State-of-Play 23 National Allocation Plans approved or conditionally approved by the Commission Greece and Italy still awaiting their approval Commission has tightened allocations by million tonnes so far + agreed that unused reserves are cancelled (e.g. France)

8 Development of the EU ETS First forward trade Feb 2003 First index-linked OTC trade in Feb 2005 First spot trade Feb 2005 ECX IPE futures contract launched 22 nd April 2005

9 Market Data

10 Emerging Carbon Risks  Regulatory Risk 25 NAPs and 25 legal jurisdictions  Price Risk Volatile prices  Market Risk Risk of various local liquidity pools  Credit Risk Counterparty risk  Operational Risk Experienced staff?

11 How can an exchange add value? Market requirementsExchange offering Fair market priceStandardised contracts Liquidity Low cost central market place Easy accessMember or use bank/broker Credit risk management - No counter-party risk - OTC registration ability Post-trade administrationEstablished back office and invoicing system Highly-regulated marketplace Regulated by the FSA

12 Contract specifications ECX CFIs (Carbon Financial Instruments) SettlementPhysically settled against transfer of EU allowances Settlement cycleQuarter-ends on Mar / Jun / Sept / Dec cycle to Mar 2008 – first expiry Dec annual contracts – Dec expiry 2008 – Contract size1000 tonnes CO 2 (i.e allowances). Quotation€ per metric tonne. Tick size€0.05 per tonne (i.e. €50.00 per contract). Trading hours8:00am to 5:00pm UK time Closing priceWeighted average of trades during the daily settlement period.

13 How can you access the market? Trade directly as an IPE Member; Order-Route as a customer of an IPE Member or a Broker electronically (or place orders by telephone); Access route decision will be driven by:  Nature of company;  Type of trading activity (market-making);  Volume of trading activity;  Regulatory status;  Cost (inc. taxes).

14 Members in IPE ECX CFIs* (As per 24 May 2005) ABN AMRO Futures Accord Energy ADM Investor Services International Bache Financial Barclays Capital Bear Stearns International BNP Paribas Commodity Futures BHF Bank BP Gas Marketing Breakwater Trading Calyon Financial Cargill Investor Services Deutsche Bank E.On UK Fimat International Banque Fortis Bank Global Clearing Goldman Sachs Kyte Trading MAN Financial Marquette Partners (UK) Merrill Lynch International Merrill Lynch Commodities (Europe) Morgan Stanley & Co International Refco Overseas Scottish Power Energy Management Sempra Energy Europe Shell Energy Trading Shell International Trading & Shipping Spectron Energy Services TFS Derivatives UBS * Entities marked in red are General Clearing Members (offering clearing to third parties) in IPE ECX CFI futures contracts.

15 Delivery mechanism LCH. Clearnet Account IPE Clearing Member’s Account Buyer’s Account IPE Clearing Member’s Account Seller’s Account Community Independent Transaction Log LTD +3 Registry 2Registry 1Registry 3

16 Screenshot

17 Looking ahead..  Creating a liquid pan-European marketplace  Exchange-traded contracts such as spot and options  Kyoto ratification – global emissions trading

18 Thank You! Tel