Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 1 Introduction to Emissions Trading Paul Vickers Managing Director Natsource

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 2 Background…Government and Business leaders in Canada have done much GERT and PERT…establishing standards for project based reductions VCR…establishing reporting process…could evolve into registry GEMCo…driving supply and innovative contract structures Leading companies have built portfolios of emission reduction credits Buyers are building legal, due diligence and other skills Leading suppliers are also building skills and financing needed

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 3 Why emissions trading? The driver is regulation ! Why emissions trading? The driver is regulation ! GHG Canada: – Kyoto: non zero obligation, compliance not strategic, duty of care obligation, ‘covenant ‘ negotiations beginning – Covenants will differentiate amongst sectors and subsectors – BAU efficiency gains will be built into targets - will likely be larger than 15% reduction GHG Provincial : new power faces GHG permit requirements in Quebec, Alberta, BC; Bill 32 discussions beginning with other sectors GHG USA: state by state regulations on new power and existing power. Permit negotiations at local siting Boards. Federal regulations on reporting. Federal proposals for cap-and-trade. “Mandatory-Voluntary” agreements in Oil, Chemicals and Power sectors RPS requirements in USA; likely in Canada USA Clear skies: new reductions in So2 and Nox etc…applies to most emitting sources across the USA Importers of commodities in Europe and Japan beginning to seek concessions and / or ‘bundled’ product

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 4 CementPowerChemicalsPulp & Paper Steel Co2 Intensity (t / unit of product) BAT Intensity Production (t or other per year) 1,000,000 Target Reduction (%) 15 Emissions (t)800,0001,000,000700,000300,0001,800,000 Allocation (t)450,000663,000476,000170,0001,020,000 Shortfall (t)350,000337,000224,000130,000780,000 An Example of possible regulatory Obligations

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 5 There are two distinct markets emerging world wide…what will Canada do ? Emission allowances and / or credits Renewable energy and demand side management credits

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 6 From the World Bank- emissions markets Project-based Emission Reduction purchases Allowance Trading National trading systems Intra-Firm trading Retail UK DK Shell BP “Pre-Compliance” From voluntary To Kyoto Pre-Compliance

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 7 Data show emissions market is growing ( From the World Bank) The past year has been the most active GHG market to date – volume traded in first half of 2002 already exceeds overall 2001 volume (24 MtCo2e transacted, 103 deals). Based on closed and pending deals, total 2002 volume could be in the range of MtCo2e. – Conservatively, this could represent a manifold increase in volume over the previous year’s volume of 12 MtCo2e. This is significant compared to 157 MtCO2e transacted overall since 1996 (190 MtCO2e if post-2012 vintages are counted).

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 8 From the World Bank: Evolution of buyers’ shares of market (in % of total volume purchased through projects ) Other Europe

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 9 GHG instrument2002 Prices ($ CAN/mt CO 2 e) Project-based reductions that could be converted to Kyoto compliance instruments Developing country VERs, vintage years (candidate CERs)$ $5.00 (current bid-ask spread; one transaction reported in 2002 for $3.82) Developed country project-based VERs, vintage years (candidate ERUs) No transactions reported, see also Dutch ERUPT anticipated prices. Project-based reductions that could be converted to domestic compliance instruments Developed country emission reductions, vintage years $ $3.88 Developed country emission reductions, vintage years before 2002$ $3.88 Other Kyoto compliance instruments AAUs of vintage year (for future delivery)2 transactions with prices undisclosed National and regional compliance instruments UK allowances$ $30 Danish allowances$ $4.33 Other ghg instruments Dutch ERUPT candidate ERUs and CER’s$6.91 (anticipated) Renewable Energy Credits (REC’s) $1.50-$ 7.00 / Mw-Hr Current GHG / REC market prices

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 10 Emission / REC Sales Issues RISKS Supplier Default Risk – Project Delivery Supplier Default Risk – Credit Risk Price Risk Validity Risk – Quality of Reductions Validity Risk – Regulatory Certainty Risk of Fraud

Greenhouse Gas GREENHOUSE GAS REDUCTION BUYERS POOL NATSOURCE ASSET MANAGEMENT 11 Further Information Ottawa Doug Russell 150 Isabella Street, Suite 305, Ottawa, Ontario, Canada K1S 1V fax Calgary Paul Vickers 615 3rd Avenue, S. W. Suite 300 Calgary, Alberta, Canada T2P 0G fax Washington D.C. Rich Rosenzweig th Street, NW Suite 730 Washington D.C., U.S.A fax With offices in Vancouver, Edmonton, Toronto, Tokyo and London