Peony Capital LP Australian Embassy 25th June, 2007 New York

The Environment. we have a problem….

China Today….

CHINA SURPASSES U.S. IN GREENHOUSE GAS EMISSIONS

people are recognizing this

The response is significant and increasing US $50 billion over 10 years to invest in climate change activities May 2007 US$20 billion environmental Initiative March 2007 $3 billion Euro in carbon credits and energy project October 2006

Rupert Murdoch Global Climate And Energy initiative:   Newscorp will reduce emissions by 10%  by 2012 in absolute terms, go Carbon Neutral by 2010 perhaps most importantly of all they will engage there global customer base of several hundred million  A company that spans Ice Age and The Simpsons, from the London Times to Fox,  can have a real impact in engaging the public.   Addressing climate change is good business practice. Immelt John Browne Sir John Bond (the former Chairman of HSBC: first bank to announce that it would be carbon neutral) Blair Schwarzenegger

the global carbon market is well established….

The Carbon Market Breakdown RGGI Allowance Markets NETS? California KYOTO Project Based Mechanisms EU Emission Trading Scheme CDM (and JI) 1101 MtCO2e 491 MtCO2e (forward) NSW Certificates Voluntary & Retail Other Compliance Chicago Climate Exchange 20 MtCO2e 6.1 MtCO2e 17 MtCO2e 10 MtCO2e UK ETS

Size of the market 2006

Non Kyoto Markets.. Physical Volumes (30.5 Mt CO2e) Financial Value (€300 million)

Volumes steadily increasing.

the market in operation…

The basics: stimulating lowest cost abatement € Emissions Reductions at High Cost Emission Reductions at Low Cost Global Carbon Reductions 15 € per ton of carbon 8 € per ton of carbon ER Party A Party B

construction materials, EU ETS General Objective: -meet international emission reductions targets – 8% by 2012 Measures: -obligation of energy intensive sectors to reduce emissions Member Country -National Allocation Plan (NAP) -Register for emissions allowances EU Directive -sets rules -central administrator -transaction record Affected Sectors: energy, iron, steel, ceramics, construction materials, glass and paper Market -trading -tangible commodity -transparent Company -permit for plant operation -annual allocation of allowances -reporting and surrender of allowances

Project Based Mechanism and the Kyoto Protocol Establishes formal system for carbon reductions from projects. Encourages investment in clean technology in developing countries and economies in transition. Provides benefits beyond carbon reductions: -health -employment opportunities -stimulates investment in renewable technology CERs Asia Europe $ $ ERUs Russia Benefits -lower cost reductions -business opportunities and relationships Benefits -access to capital -access to clean technologies -access to information

Who is participating? 1. Countries

Who is participating? 2. Private Sector

Where are they buying from? Countries of CDM projects 2006

What are they buying? As a share of volumes contracted in 2006

Outlook 2008/2012 Residual demand for kyoto mechanisms is 1 billion tonnes - more than double what has already been contracted. volume

The success of the carbon market has long term implications for Conclusion The Carbon Markets are increasing in size, volume and activity Project based mechanisms are and will continue to form a major part of the market The major transactions are occurring between Asia and Europe Participating companies are taking advantage of a new opportunity to leverage other benefits including: -Forging new relationships -Leveraging other investments (WB study shows leverage value for renewables is upwards of 7 times CER value) The success of the carbon market has long term implications for the profit margins of big business, but also for the health, welfare and well being of the local populations in the developing countries so badly affected by the impacts of climate change

Oriental Kenzo Office Building Peony Capital Limited Unit J, 21st Floor Oriental Kenzo Office Building No 48, Dongzhimenwai Street, Dongcheng District Beijing 100027 China Telephone: +86 (010) 84476471 Fax: +86 (010) 84476483 Mina Guli, Vice Chairman International Mobile: +44 (0)791 704 8845 China Mobile: +86 136 4106 1027 mg@peonycapital.com Private and Confidential. For discussion purposes only. © 2007 Peony Capital, L.P.

Euro payments Seller Buyer CER re-purchase on EU market Chinese Plant Buyer (Private Fund, World Bank) Resell through IM process World Bank raised U$1.2 billion in 23 mins CER re-purchase on EU market compliance buyers traders CERs (ERPA/ SERPA) Euro payments Revenue to plant Potential technology funding unless paid for upfront or netted off 65% tax to NDRC

CER/ERU forward stream supply via ERPAs The Global Emissions Regulatory Market EU25 Canada Japan Large Final Emitters EU ETS Russia, Ukraine, Former Eastern Bloc countries AAU supply via GIS? Kyoto CDM / JI projects CCX, RGGI California? Australia? US Federal system? CER/ERU forward stream supply via ERPAs Spot market will emerge when sufficient volume has been issued and made available Keidanren Voluntary Agreement International Transaction Log, European Community Transaction Log, National Accounts

And…Volumes steadily increasing Physical Volume (1,632 Mt CO2e) Financial Value (€22.5 billion)

Project Example Seller has project idea Puts into document “PIN” Shows to buyer Makes Preliminary Agreement Start Due Dilligence and legal documentation Project Development document Approval by Buyer’s country gov’t Approval by host country e.g. China Validation- checking of project against calculation of baseline (what would have happened without project) Registration of Project with UN Annual Independent verification of number of tonnes of carbon reduced UN CERS Market