2. © Copyright CantorCO2e 2011 California Offsets Workshop Current State of the California Carbon Market June 21, 2011 Josh Margolis jmargolis@cantorco2e.com 415-296-9359 1

3. © Copyright CantorCO2e 2011  Who are these guys?CantorCO2e  LitigationSound and Fury signifying?  Market mechanicswhat, when, how  Market size$3 - $128 billion  Allowances & offsets $6 - $70  Transaction types spot, stream, options, hedge  Market color its complicated  Actions to take nowassess, prepare, hedge Agenda 2

4. © Copyright CantorCO2e 2011 Who is CantorCO2e? California roots o Since 1992 (and before)Auction agreements with >300 companies o Most credits brokeredLos Angeles o CEC Climate Change Advisory CommitteeSan Francisco Brokerage, strategy, advisory, marketing, and regulatory assistance Subsidiary of Cantor Fitzgerald, global financial services firm > $10 billion environmental & energy transactions o CARB CRTs & CAsSO2 EAsNOx SIP CallERC o GHG VERsRECLAIMHGADERs o RGGIRECs/ROCSBiomassVERs o CERsEU EAsWastewater o VCUsATUs Helping companies develop and implement successful offset/carbon management strategies Environment Markets Compliance Voluntary Innovation Finance Securitization Technology Energy Renewables 3

5. © Copyright CantorCO2e 2011 Litigation from Market’s Perspective Key dates Roller coaster – What’s EJ got to do with it? – it’s all over/we agree with them? – just show your homework – the sun’s coming up tomorrow – the other shoe Betting on: – programwhat’s creditable – start datenext lawsuit Just give me certainty Pricing uncertainty Prohibition on speculation

6. © Copyright CantorCO2e 2011 Potential Value of Traded * Credits Allowances2,700,000,000 AuctionAmt Auctioned (est) Unit Price (est)Total Value Low (est)5%$10$1,350,000,000 High (est)60%$70$113,400,000,000 Offsets216,000,000 Unit Price (est)Times Sold Total Value Low (est)$101$2,160,000,000 High (est)$704$15,120,000,000 Total Est Value of Allowances & Offsets Low $3,510,000,000 High $128,520,000,000 * Excludes value of freely allocated emission allowances

7. © Copyright CantorCO2e 2011 AB 32: Cap vs. Allocations + Offsets  Net Cap  Offset forecast  The amount of allowances that CARB will remove from each year’s cap and set aside for the Allowance price Containment Reserve BAU emissions forecast Million Metric Tonnes 2012 2013 2014 2015 2016 2017 2018 2019 2020 1 23 6

8. © Copyright CantorCO2e 2011 Declining Emissions Checkbook

9. © Copyright CantorCO2e 2011 Single Year Trade 400 300 200 Seller Buyer Sells 100 allowances to buyer Buys 100 allowances from seller

10. © Copyright CantorCO2e 2011 300 250 200 150 100 50 20122013201420152016201820192020 Required obligation Surplus saleable reduction Actual emissions Multiple Year Trade

11. © Copyright CantorCO2e 2011 Transaction Types  Spot  Stream  Swaps  Options  Firm delivery  Unit contingent  Guaranteed CARB  Offsets  Allowances

12. © Copyright CantorCO2e 2011 Transaction Types  Spot Transaction o Verified, issued offsets or allowances Pros: POD, low quantity/delivery risk, seamless transaction Cons: Some buyers looking for future vintages  Stream Transaction o Multiple years of created, prospective offsets/EAs Pros: Lock in future year price, establish cash flow/cost Cons:Locked price eliminates ability to transact at better price Hedge: Structure a floor/ceiling profit share 11

13. © Copyright CantorCO2e 2011 Transaction Types  Firm Delivery o Supplier guarantees delivery at set date/price Pros Higher price ConsPenalties for non-delivery, credit?  Unit Contingent o Delivery of credits when/if issued Pros No non-delivery penalty if not issued Cons Likely to be priced lower 12

14. © Copyright CantorCO2e 2011 Transaction Types  Swaps o Non cash transaction  Options o Risk management o Right, not obligation Calls right to buy at set level over set term Puts right to sell at set level over set term 13

15. © Copyright CantorCO2e 2011 Transaction Types  Guaranteed CARB Offset or Allowance  Terms  Program in force  Dec 12, 13, 14 (one year delay?)  Allowances/offsets issued/blessed by CARB  Issues  Credit  Policy/legal 14

16. © Copyright CantorCO2e 2011  216 MMTCO2e through 2020 limit  8% of compliance obligation  Location – CA, North America… for now  ARB Protocols o Forestry protocol v 2.1, 3.0-3.2 o urban forests protocol v 1.0-1.1 o US ODS protocol v 1.0 o Livestock manure protocol v 1-3 Offsets 15

17. © Copyright CantorCO2e 2011 What’s next (maybe?)  CAR Ag o Cropland Management o Nutrient Management o Rice Cultivation  VCS REDD  CAR Nitric Acid  CAR Mexico Livestock  LFG? Potential Offsets 16

18. © Copyright CantorCO2e 2011 Allowances vs Offsets AllowancesOffsets Available from CARBYesNo Third Party MarketYes*Yes Available Outside AuctionsLimitedYes Holding LimitYesNo Price LimitNo Forward BuysYes*Yes Charismatic (Carbon with a Story)NoYes Risk of ReversalNo*Yes Due Diligence ImportanceLimitedVery 17

19. © Copyright CantorCO2e 2011 Price Indications Recent Bid/Ask for Carbon Instruments (6/20/11)

20. © Copyright CantorCO2e 2011 Price Indications Source: Reuters graph ic/Stephen Culp via Point Carbon

21. © Copyright CantorCO2e 2011 Price Indications 20

22. © Copyright CantorCO2e 2011 Market Color Herky jerkey Traders mostly, fewer permit holders now – Depth of market - > millions of tons – Traders, permit holders with trading desks, compliance sources Mostly OTC, for now CARB’s green curtain – Rules – Methodologies/prospective Forecast – Offset re-verification – Policy (go/no go, start date, allocations, trading rules, buyer beware) – Speculation – Credit (offered/taken) – Control, manufacturing, allocation/offset planning Cost curves – capital costs vs. offsets and allowances vs. hybrid Options Portfolio Remember CEQA/Voluntary 21

23. © Copyright CantorCO2e 2011 Know Who You are Talking To Motivations, products, and costs between: Brokers  Traders  Marketers  Retail offset provider  Exchanges 22

24. © Copyright CantorCO2e 2011  Appreciate policy challenges/opportunities  Quantify current and expected 12 – 20 emissions  AB32, CEQA, voluntary  Build portfolio of solutions o Onsite controls, efficiency improvements, biomass o Identify control cost curve o Managing carbon liabilities  Create CARB offsets if possible  Define and resolve expected net short position o Participate in 3 rd party projects o Offset due diligence (reversals, delivery, PR risk)  OTC Transactions o Price and terms o Swap (ERC, RTC for carbon) o Trade clearing Actions to Take Now

25. © Copyright CantorCO2e 2011 Josh Margolis CEO 415.296.9359 jmargolis@cantorco2e.com www.emissionstrading.com Thank You