Climate Change: Opportunities in the Carbon Market Peter Koster Chairman, European Climate Exchange Athens, CEO & CSR 2007, 31st October 2007 Eurocharity

2 How Emissions Trading Will Have An Impact AGENDA Lessons to Be Learned : Phase I Trading Patterns and Trends – Is the Market Liquid? CERs – The Global Emissions Commodity? Outlook for Phase II Will Carbon Become a Global Commodity?

3 Lessons Learned Phase I EU ETS Market activity grew rapidly CO2 got a price signal CO2 has become an integrated part of the energy portfolio Market showing signs of maturity EU Emissions Trading Scheme has been a success:

4 About ECX Volumes reported include screen-traded futures and cleared bilateral contracts (EFP) BACK TO CONTENTS EUA Total Market Volume Sept 2007: Market Shares

: 260Mt 2006: 1,000Mt Jan-Sep 2007: 1,500Mt ? EU ETS Market Activity Mt = million tonnes of CO2 Phase I Source: Point Carbon Phase II Total (est.): ECX: 94Mt 450Mt750Mt

6 Price and volume ECX CFI Futures Contracts 1.3 billion tonnes of CO2 has traded on ECX/ ICE Futures since launch April 2005 with an underlying market value €24.5 billion Open Interest> 176 mt CO2

7 Open Interest & Volume ECX CFI Options Contracts 37 million tonnes of CO2 have traded in options on ECX / ICE Futures Europe since launch October 2006

8 Emission Trading has changed the correlation among commodities! Before 2005 correlations between commodity markets within European power were weak Gas and coal prices determined marginal cost but were not linked with each other Because of emission trading we have now trading markets that link power with commodity markets As a result companies (particularly utilities) are now exposed to volatile commodity markets like never before Oil market Power market Gas market CO 2 Coal market Source: McKinsey

9 Who Is the Carbon Market? Number of companies Utilities Cement Steel Pulp and paper glass Oil Speculative traders Hedge funds Banks Other BACK TO CONTENTS Market product sophistication

10 Screenshot ECX/ ICE Futures: Click and Trade!

11 What are the key elements of a successful carbon exchange?

12 Members List BACK TO CONTENTS

13 Clearing Members ECX CFI Clearing Members of ICE Futures able to offer clearing and trading services to third parties (‘order-routers’). BACK TO CONTENTS

14 Utilities, industrials and financials use ECX products to hedge their EUA and CER price risk

15 CERs – The Global Emissions Commodity? Interlinking of ITL and CITL scheduled end this year Development of standardised exchange-tradable CER contracts Increased participation of CDM players in EU ETS (biggest share of global carbon market) Exponential growth in market transactions?

16 Growing Secondary CER Market Growing market in CERs being bought by European and American companies. Transactions characterised by: Buyers with high credit ratings (BB+ to AAA) - no default risk Easy to get in and out of long or short positions Liquid market – strong demand from European Industrials Standardised lot sizes Instant trading – no need for costly contract negotiations Current Secondary CER prices are trading at about €17.42 or around 77% the price of the December 2008 EUA contract. ( as of 24 October 2007 ) 16

17 Outlook for Phase II Same gases as in Phase I Aviation sector included out of 27 NAPs approved so far Phase II NAPs on average 7% less than 2005 verified emissions Caps on use of CERs / ERUs Will the Market become global?

18 Global CO 2 Emissions Projections

19 EU ETS is “by far the most significant accomplishment in climate policy to date” and should form the basis of a “global framework for managing climate policy” --Denny Ellerman (MIT) et al, Review of Environmental Economics and Policy, Spring 2007 EU ETS

20 Peter Telephone: Website: Thank You!