1. Presented at the Sustainable Energy Roundtable Series: Next Steps Post-Kyoto: U.S. Options Session 1 – Where Are We Now? January 13, 2005 Emissions Trading Mechanisms and Feasibility of U.S. Trades with Kyoto Nations Daniel L. Chartier President Emissions Markets Association

2. About the EMA Non-profit industry trade association 275 members Federation structure –Two chapters: US and Canada –European chapter development work in progress Dedicated to the application and advancement of market-based approaches to environmental management Soon to be the Environmental Markets Association to reflect expansion into RECs and other products, in addition to the air markets

3. EMA’s Position on Regulation The need, timing and stringency of emissions trading programs will be decided in other forums –EMA’s diverse membership, and its alliances with government agencies and environmental NGO’s require a degree of neutrality on certain regulatory and legislative aspects

4. EMA’s Position on Market Design EMA’s Membership Does Agree on These Principles: –If regulation is required, it should include the use of market mechanisms –Program rules should define products, ownership and transfer mechanism to facilitate an efficient and robust market –Government oversight should be limited to ensuring compliance and not interfere with the efficient operation of a market

5. One View On Kyoto If review of the Kyoto Protocol is limited to just emissions trading, it is a qualified success* –First use of emissions trading in an international environmental agreement EU use of trading scheme to support its Kyoto compliance obligation –Based on success story of US-based programs including the much heralded Acid Rain Program –Adherence to principles such as clear commodity definitions * Qualifications: Restrictions on the use and fungibility of trading units; overly bureaucratic CDM processes and procedures; and other shortfalls will impact market efficiency.

6. Can US Companies Participate in Kyoto? The simple answer is NO. –The US is not a Party to the Kyoto Protocol –Strictly speaking, there is no defined mechanism that will allow a reduction created on US soil to be credited No Assigned Amount Units (AAUs) will be registered by US No Emission Reduction Units (ERUs) from Joint Implementation (JI) projects undertaken by the US in other Annex 1 (industrialized) nations can be created. (ERUs are created by converting an AAU) No Removal Units (RMUs) ca be issued based on inventory of sequestration activities

7. The Impact on Multinationals If a multinational has cost effective emissions reductions that can be made at its US-based operations, it will be forced to instead make the reductions in a Kyoto country where it operates –Sub-optimal decision when looking at corporate asset optimization –Impacts to shareholder earnings –Could force investments in plants and facilities to be diverted from US-operations

8. The Impact on US-based Companies Trade Imbalances –Will a carbon levy be assigned to US exports to rebalance the playing field –Will this become a WTO issue? Will companies ignore emission reductions at US-based facilities? –Case studies abound for companies that reduce their costs while pursuing emission reductions –Despite the apparent advantage, US companies may become noncompetitive

9. Can US Companies Participate in Kyoto? The more creative answer is YES –US companies can participate indirectly –Example: A US company makes an investment in an energy project that also results qualifying emissions reduction in an Annex B nation Projects results in Certified Emission Reduction (CER) units under the Clean Development Mechanism (CDM) US company (or its local partner) sells credits into Kyoto market since it does not require them for operations. Proceeds from sale help boost the profitability of the investment.

10. Closing Thought “Technology and market mechanisms have driven massive economic progress during the past two centuries. Now we need to harness them to tackle the environmental challenges that the world faces. It is vital that…industry play its part. …[E]missions trading scheme[s] offer an ideal opportunity to do so” Rod Eddington CEO British Airways Financial Times January 4, 2005

11. Contact Information Daniel Chartier, President Emissions Marketing Association 815 Connecticut Avenue, NW Suite 650 Washington, DC 20006 Phone: 202-822-5110 Fax 202-822-5286 Email: dchartier@emissions.org Web: www.emissions.org