1. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Update on Worldwide Greenhouse Gas Market Developments Michael J. Walsh, Ph.D. Senior Vice President +1.312.554.3350 www.chicagoclimateexchange.com

2. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Summary: Carbon Market Status Worldwide Now live: CCX, UK (pre-EU) Regulatory: Kyoto and before being implemented (e.g. EU) under discussion (Canada, NZ) unclear (Japan) State-level regulatory: active: New South Wales under discussion: Northeast U.S. Russia, Ukraine: will they be trade-eligible at 2008? Developing Countries: sellers from mitigation projects

3. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Global Carbon Market Size: Potentially Huge! SourceProjection of Size of Greenhouse Gas Emissions Trading Market World Bank$10 billion by 2005 US Council on Foreign Relations$2.3 trillion of trades completed by 2012 Energy Policy Journal$24-37 billion of trades completed annually during the period 2008-2012 Resource and Energy Economics$46.6 billion of trades annually (unspecified time frame) The Economist$60 billion - $1 trillion of trades annually (unspecified time frame) Lockwood Consulting$1.2 trillion market by 2008 – estimated $30 billion/year worth of global reductions Sources:” Value at Risk: Climate Change and the Future of Governance – CERES Sustainable Governance Project Report”, April 2002; Reuters, April 7, 2000

4. CHICAGO CLIMATE EXCHANGE, INC. ©2004 U.S. Situation Total emissions: 6.9 billion mt CO 2 (2002) (11% >1990) President Bush: reduce emissions intensity (CO 2 /GDP) 18% by 2012; fund R&D “Crediting” under revised 1605b program legally unclear McCain/Lieberman bill: return U.S. emissions to 2000 levels by 2010 trading upstream and downstream; sequestration latest Senate vote: 43 yes, 55 no Chicago Climate Exchange is live and growing

5. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Chicago Climate Exchange Chicago Climate Exchange ® is a voluntary, legally binding pilot greenhouse gas trading program for emission sources and offset projects in North America and offset projects in Brazil.

6. CHICAGO CLIMATE EXCHANGE, INC. ©2004 CCX ® Reduction Timetable 2003-2006: reduce emissions to 1%, 2%, 3%, 4% below 1998-2001 baseline Includes major direct emissions; sources small sources (e.g. fleets) and electricity purchases can be opted-in

7. CHICAGO CLIMATE EXCHANGE, INC. ©2004 CCX ® Members (1 of 2 )

8. CHICAGO CLIMATE EXCHANGE, INC. ©2004 CCX ® Members (cont’d.) CCX total emission baseline of ~250 million mtons CO 2 would make CCX the second largest “country” in EU CO 2 market

9. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Initial list of CCX ® eligible offset projects Landfill and agricultural methane destruction Sequestration: reforestation and agricultural soil projects Brazil: energy, methane, forestry (reforestation + conservation) CCX ® protocols: eligibility, quantification, verification Early Action Credits

10. CHICAGO CLIMATE EXCHANGE, INC. ©2004 CCX ® Market Screen bids and offers completed trades (each contract is 100mt CO 2 )

11. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Market Data: CCX Weekly Trade Volume and Prices

12. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Canada Total emissions ~743 million mt CO 2 2012 Kyoto Goal: -6% by 2012 (currently ~20%>1990) Planned GHG trading system (2008): Large Final Emitters 600 sites ~46% of Canada’s total emissions (342 mt): Feds promising per-ton net cost cap of C$15/mtCO 2 National government to be active (CDM) purchaser?

13. CHICAGO CLIMATE EXCHANGE, INC. ©2004 European Union European Council Directives Establish EU ETS for 2005 through 2007 Instructions to each EU-25 Member State Allocate tradable CO 2 emission allowances to affected installations Establish uniform, linked registries Require monitoring, verification, true-up and penalty systems

14. CHICAGO CLIMATE EXCHANGE, INC. ©2004 EU ETS (2005 – 2007) Covers CO 2 emissions from 12,000 installations combustion devices >20mw (electricity, heat, steam) oil refineries, metals, cement, glass, ceramics pulp and paper Covers ~46% of total emissions (total~ 4.9 bil mt CO 2 ) Annual true-up by April 30, independent verification Encourages Linkages (e.g. Japan, Canada, Norway) Allows UN-approved CDM credits

15. CHICAGO CLIMATE EXCHANGE, INC. ©2004 EU ETS 2005-2007 CO 2 Reduction Schedule -2.7%

16. CHICAGO CLIMATE EXCHANGE, INC. ©2004 EU Market Activity to Date, Prices Total allowance trading volume >3 million tons (forwards) CCX founds European Climate Exchange at IPE

17. CHICAGO CLIMATE EXCHANGE, INC. ©2004 European Union: Market Issues Largest: Germany (barely short) and UK (very short) Natural longs (e.g. Poland) but may not over-allocate Natural shorts (e.g. Ireland, Portugal): growth allocations No allowance banking after 2007: price spike or crash? CDM CERs are bankable – premium commodity?? Viability of registries/transaction log; tax, accounting issues; capacity of verifiers

18. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Norway, Switzerland Norway: emissions 56 million mt CO 2 (1999) National goal: +1% vs. 1990 by 2012 (now 8% >1990) Long experience with carbon taxes (from $10-51/tCO 2 ) Switzerland: emissions 45 million mt CO 2 National goal: -8% vs. 1990 by 2012 (now = 1990) Now imposing carbon taxes on fuels Both countries are natural candidates for linkage with EU.

19. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Russia emissions: 1.88 billion mt CO 2 (38% < 2012 target) Over 1 billion mt/yr surplus if this persists (now growing?) IETA survey finds buyers in west are willing, especially if purchases linked to reduction initiatives Ukraine emissions: 704 mil mt CO 2 (23% < 2012 target) Over 200 mt/yr surplus if this persists Both countries may have trouble achieving GHG inventory quality required to trade under Kyoto Russia, Ukraine

20. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Japan Emissions: 1.3 billion mt CO 2 2012 goal: -6% vs. 1990 (currently +9%) Industry: emissions flat, opposes caps and taxes Government may be big buyer on behalf of industry Corporates, government active with CDM (forwards) No specific implementation plan for trading system

21. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Developing Countries Clean Development Mechanism (CDM) under Kyoto Certified Emission Reductions from mitigation projects Predominant project types to date: HFCs: 31% of tons Landfill gas:18% biomass energy:14% small hydro:11% CERs usable in ETS, bankable past 2007: still discounted Prices: non-Kyoto: $0.30-$3.00 buyer takes CDM risk:$3.00-$4.25 seller takes CDM risk:$3.00 - $6.50

22. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Developing Countries 65 countries now have Designated National Authorities Includes Brazil, Mexico, China, India Four approved verification firms (“Designated Operational Entities”) Japan Quality Assurance, DNV, SGS, TUV CDM Executive Board has approved 11 projects, 5 more on “B” list (good candidates), 14 incomplete, 2 withdrawn Forest projects yield temporary CERs

23. CHICAGO CLIMATE EXCHANGE, INC. ©2004 Developing Countries: Volume Growth (All vintages, subject to Term Sheets or contracts, delivery subject to CDM, other risks) Biggest buyers: Japanese Firms, Netherlands, World Bank Biggest sellers: Asia (51%), Latin America (27%) Source: World Bank Prototype Carbon Fund

24. CHICAGO CLIMATE EXCHANGE, INC. ©2004 How to Raise Opportunities for Brazil(1)? Near-term: grow ability to profit from global market Long-term: Brazil must bring superior knowledge, built through hands-on MARKET experience, in order to effectively influence Kyoto Phase II and beyond Aggressive education/support for CDM projects DNA, other bodies Natural CER customers – global corporates with Brazil operations

25. CHICAGO CLIMATE EXCHANGE, INC. ©2004 How to Raise Opportunities for Brazil (2)? Industrials - adopt offset purchase commitments Provide additional market for Brazil offsets Stimulate knowledge base Preparation for international policy evolution Participate in existing/emerging markets Take emission reduction commitments in CCX (North America and Brazil operations?) Pure trader: EU, Chicago Submit alternative projects into CCX