Reviewing the Results of Carbon Market Forecasting Dr. Mark C. Trexler Director, EcoSecurities Consulting Limited September 5, 2015

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion Table of Contents

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Introduction and Overview EcoSecurities developed a series of reports for NWPCC in an effort to provide NWPCC with tools and information for evaluating the value of carbon as it relates to future grid capacity planning purposes in the northwest. Specifically, we focused on: 1.Carbon Capture and Storage Data for the Pacific Northwest 2.GHG Mitigation Supply Curves 3.Carbon Price Forecasting – Literature Review 4.Conceptualizing Several Carbon Market Scenarios

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC The Role of Carbon Market Forecasting Key to public and corporate policy and strategy development Forecasting the future value of carbon in a carbon-constrained world is usually done through GHG price forecasting models that use a carbon tax proxy to forecast carbon prices even in a cap-and-trade scenario. In reality, carbon markets and market-clearing prices will be profoundly dependent on the details of the policy scenario that is being implemented, since these details will largely determine both the demand for emissions reductions, and the shape of the emissions reduction supply curve. Absent in-depth scenario development, a relatively high-level look at GHG markets is likely to generate the most useful insight for NWPCC into the economic implications of future carbon constraints.

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Overview of Credit Price Projections Deliver insight into how CO2 liability costs may evolve in a carbon- constrained world, so as to assist NWPCC in incorporating potential future CO2 liabilities into its planning process for the power system in the Pacific Northwest. Literature review of publicly available model results aimed at highlighting the key attributes of a variety of GHG price forecasting approaches. Top-down models Bottom-up models “By analogy” forecasting “Historical extrapolation” forecasting “Expert surveys”

© 2008 ECOSECURITIES GROUP PLC The highest price projection found in the literature review suggested a carbon price of $257/ton CO2 would be needed by 2025 to accomplish the emissions reduction objectives to reduce emissions to 71% below the 2005 level by 2050 (Lieberman-Warner; 14% cap met with offsets). The lower price projections found in our literature review estimated that a carbon price between $0.41 and $0.30/ton CO2 would be needed by 2020 to 2025 to accomplish the emissions reduction objectives of reaching radiative forcing targets of 750ppm in the year The range of projections illustrates the challenges of evaluating price estimates without understanding 1) the details of the scenario being modeled, and 2) the details of the modeling process itself. Overview of Credit Price Projections The highest price projection found in the literature review suggested a carbon price of $257/ton CO2 would be needed by 2025 to accomplish the emissions reduction objectives to reduce emissions to 71% below the 2005 level by 2050 (Lieberman-Warner; 14% cap met with offsets). The lower price projections found in our literature review estimated that a carbon price between $0.41 and $0.30/ton CO2 would be needed by 2020 to 2025 to accomplish the emissions reduction objectives of reaching radiative forcing targets of 750ppm in the year The range of projections illustrates the challenges of evaluating price estimates without understanding 1) the details of the scenario being modeled, and 2) the details of the modeling process itself.

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Understanding Future GHG Supply and Demand Variables: Demand State, Regional, or Country Participation in the Trading Regime The Political Issuance of Free Allowances Economic Growth as a Contributor to GHG Market Demand Energy Prices Technology Evolution and Deployment How National Forest Sinks are Accounted For The Likelihood of Government Compliance with Targets All of these factors and more go into estimating demand when thinking about carbon market clearing prices

© 2008 ECOSECURITIES GROUP PLC Understanding Future GHG Supply and Demand Variables: Supply Rules Governing Market Mechanisms How A Reduction is Defined (including additionality) Technical and Implementation Barriers Technology Development and Deployment Project Economics The Cost of Electricity and Fossil Fuels The Availability of GHG Project Financing Market Psychology and Expectations All of these factors and more contribute to defining supply curves

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Developing Relevant Supply Curves Geography (Moderate Additionality) –WCI –US –Global Additionality Sensitivity Cases –WCI –US –Global Cap and Trade Supply Cases –WCI Capped Sectors and Eligible Offsets –US Capped Sectors and Eligible Offsets Individual Mitigation Sector Supply Curves –Methane –Forestry and Agriculture –Global Electric Sector –High GWP Gases –Transport Sector –Industrial Sectors Mitigation supply data organized in multiple ways:

© 2008 ECOSECURITIES GROUP PLC Supply Curves for the Year 2012: The WCI is targeting reductions to 15% below 2005 levels by 2020; this amounts to approximately 125 million tons of reductions from a business as usual baseline in WCI Region Supply Curves Reference case: 150 million tons of reductions available before costs escalate Low Additionality Case: Almost 250 million tons High Additionality: 50 million tons A target of a 15% reduction in U.S. emissions from 2005 levels, or a return to 1990 emissions by 2030, each requires approximately 2.3 billion tons of reductions. U.S. Region Supply Curves Reference Case: 500 million tons Low Additionality: Almost 850 million tons High Additionality: 160 million tons ; 115 million of these tons are available at a cost of less than $20 per ton

© 2008 ECOSECURITIES GROUP PLC Supply Curves for the WCI Region…

© 2008 ECOSECURITIES GROUP PLC Reference Case Supply Curve Supply Curves for the WCI Region…

© 2008 ECOSECURITIES GROUP PLC Low Additionality Stringency Supply Curves for the WCI Region…

© 2008 ECOSECURITIES GROUP PLC High Additionality Stringency Supply Curves for the WCI Region…

© 2008 ECOSECURITIES GROUP PLC Supply Curves for the U.S. Region…

© 2008 ECOSECURITIES GROUP PLC Reference Case Supply Curves for the U.S. Region…

© 2008 ECOSECURITIES GROUP PLC Low Additionality Stringency Supply Curves for the U.S. Region…

© 2008 ECOSECURITIES GROUP PLC High Additionality Stringency Supply Curves for the U.S. Region…

© 2008 ECOSECURITIES GROUP PLC WCI Cap and Trade Scenario… (using moderate additionality screens)

© 2008 ECOSECURITIES GROUP PLC Supply Curve WCI Cap and Trade Scenario…

© 2008 ECOSECURITIES GROUP PLC WCI Region Offsets WCI Cap and Trade Scenario…

© 2008 ECOSECURITIES GROUP PLC US Region Offsets WCI Cap and Trade Scenario…

© 2008 ECOSECURITIES GROUP PLC Global Offsets WCI Cap and Trade Scenario…

© 2008 ECOSECURITIES GROUP PLC Methane Sector Supply (moderate additionality screen)

© 2008 ECOSECURITIES GROUP PLC WCI Methane Sector Supply…

© 2008 ECOSECURITIES GROUP PLC U.S. Methane Sector Supply…

© 2008 ECOSECURITIES GROUP PLC Global Methane Sector Supply…

© 2008 ECOSECURITIES GROUP PLC Forestry Sector Supply (moderate additionality screen)

© 2008 ECOSECURITIES GROUP PLC WCI Forestry Sector Supply…

© 2008 ECOSECURITIES GROUP PLC U.S. Forestry Sector Supply…

© 2008 ECOSECURITIES GROUP PLC Global Forestry Sector Supply…

© 2008 ECOSECURITIES GROUP PLC Carbon Capture and Storage There is significant technical potential to store CO 2 in the Pacific Northwest The region is unlikely to significantly influence either the pace of public policy around emissions mandates, or the pace of technology development around CCS

© 2008 ECOSECURITIES GROUP PLC Carbon Capture and Storage Technologies Technical Components of CCS CCS ComponentCCS Technology Demonstration Phase Economically Feasible Under Specific Conditions Market Mature Capture Post-combustion X Pre-combustion X Oxy-fuel combustion X Transport Pipelines X Shipping X Storage Enhanced oil recovery X* Oil and gas reservoirs X Saline formation X Enhanced coal bed methane recovery X * CO 2 injection for EOR is a mature market technology, but when used for CO 2 storage, it is only economically feasible under specific conditions Source: IPCC 2005, 8

© 2008 ECOSECURITIES GROUP PLC Carbon Capture and Storage Potential Oil and Gas Reservoirs Unmineable Coal Seams Deep Saline Formations Source: NatCarb 2008

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Putting it All Together Baseline Development and Associated GHG Emissions Emissions Reduction Targets, Timeframe, and Geographic Scope Covered Gases and Sectors Carbon Tax vs. Cap and Trade Emissions Trading Rules, Including Access to Carbon Offsets Technology Advancement Rates and Associated Mitigation Costs

© 2008 ECOSECURITIES GROUP PLC 1.Introduction and Overview2.The Role of Carbon Market Forecasting3.Overview of Credit Price Projections4.Understanding Future GHG Supply and Demand Variables5. Supply and Demand Market Forecasting6. Pulling it all Together7. Scenarios, Conclusions and Discussion

© 2008 ECOSECURITIES GROUP PLC Considering the Future of Policy 3 Basic Scenarios: 1.“Regional Initiatives Dominate” (Pessimistic) Scenario 2.“1990 Emissions by 2030” (Base Case) Scenario 3.“Atmospheric Stabilization” (Optimistic) Scenario

© 2008 ECOSECURITIES GROUP PLC Regional Initiatives Dominate Implied Magnitude of Reductions: WCI targets reduced emissions to 15% below 2005 levels by 2020; amounts to approximately 125 million tons of reductions from a business as usual baseline in Key Variables in Projecting Carbon Prices: Political acceptability of carbon prices; Wouldn’t be politically acceptable for WCI ratepayers and residents to be paying a high price for carbon. Price Forecast: $10-20/ton CO2 in time frame; Does not assume any changes in policy measures being implemented which would lead to significant changes in the price forecast between 2020 and 2030.

© 2008 ECOSECURITIES GROUP PLC 1990 Emissions by 2030 Implied Magnitude of Reductions: National BAU baseline suggests 2030 emissions of 8.5 billion tons. A target of a 15% reduction from 2005 emissions, or a return to 1990 emissions by 2030, each requires approximately 2.3 billion tons of reductions. Key Variables in Projecting Carbon Prices: Supply and demand are key variables in establishing a market clearing price for GHG emissions reductions; offsets would deliver up to half of the necessary reductions. Price Forecast: $20-50/ton CO2 in the 2020 to 2030 timeframe. Depending on how the mandates are implemented the price could rise early and level out, or climb over time.

© 2008 ECOSECURITIES GROUP PLC Atmospheric Stabilization Implied Magnitude of Reductions: Global BAU baseline suggests emissions in 2100 of as much as 100 billion tons. Stabilizing atmospheric concentrations of GHGs in the atmosphere might require a 90% reduction from the business as usual baseline. Key Variables in Projecting Carbon Prices: Assumes a large-scale transformation in the world’s use of energy. The earlier a price signal is imposed, the easier it should be to achieve the ultimate targets; There will always be political pressure to start with a low price signal. Price Forecast: $30/ton CO2 in 2020 as a reasonable step towards stabilization, with that price ratcheting up to $50/ton in 2030.

© 2008 ECOSECURITIES GROUP PLC Discussion…