1. 1 “Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles” Meeting the Low Carbon Challenge The Low Carbon Vehicle Partnership Third Annual Conference Thursday 15 June 2006 Robert Rabinowitz, PhD ECX Associate Membership Ltd. robert@ecxeurope.com +44 (0)20 7382 7803

2. 2 The most liquid, pan-European platform for carbon emissions trading cleared | quoted | liquid | transparent | regulated The world’s first and North America’s only voluntary, legally binding rules- based greenhouse gas emission reduction and trading system.

3. 3 What is Emissions Trading? A mechanism for efficient allocation of capital to reduce greenhouse gas emissions €0 €10 €20 €30 €40 Plant APlant B No Trading €10 per tonne €30 per tonne New regulations: each plant cuts 1 tonne. Total Cost to Society: No trading = €40 Trading = €20 €30 (Plant B) €10 (Plant A) €10 pollution control cost structure €10

4. 4 “Cap and Trade” Emissions Markets Emission target: 95 tons (5% cut) 100 ton baseline 85 tons 105 tons 10 ton surplus 10 ton shortage

5. 5 PHASING OUT LEADED GASOLINE (1982-1987) 100% compliance 10 billion allowances banked to offset later costs Saved $250 million vs. “command-and-control” regulation ACID RAIN PROGRAMME (1995-) Sulphur dioxide emissions reduced 38% Compliance levels exceed 99% Costs ≈30% of lowest estimate prior to launch Health benefits exceed costs by a ratio of 40:1 LESSONS LEARNED: Flexibility on “when,” “where” and “how” is viable and enforceable Multiple participants creates market liquidity Essentially 100% compliance Targets met early Significant cost-savings Successful US Environmental Markets

6. 6 The Global Carbon Market Today EU EMISSIONS TRADING SCHEME Volume > 600 million tonnes Notional value > €12 billion Price: €7-€30 UN CLEAN DEVELOPMENT MECHANISM Volume > 500 million tonnes (mostly forward contracts) Average Price: $5 in 2004, $12 in Q1 2006 Major “north-south” capital flows for sustainable development CHICAGO CLIMATE EXCHANGE All 6 GHGs, major multinationals, independent audit & regulation Included emissions ≈ UK National Allocation Plan Over 10 million tonnes traded Price: $0.8 per tonne at launch, now at $4

7. 7 CORPORATE AVERAGE FUEL ECONOMY (CAFE) Sales weighted annual average fleet fuel economy Credits for exceeding target, alternative fuel vehicles Since 1983 more than $618 million paid in penalties AVERAGING, BANKING AND TRADING Applies to emissions from engine families Use of standard factors such as mileage and engine life LESSONS LEARNED: Use of fleet averages + standardized factors Credits earned for actions apart from meeting direct targets CAFE: Lack of trading + penalties = failure to meet target ABT: Few participants = no liquidity = ineffective market Disconnect from other sectors restricts flexibility + liquidity Precedents in the US Auto Sector

8. 8 1.Inclusion of multiple emission sources with different mitigation costs 2.Minimal transaction barriers 3.Certainty over rules, targets and compliance value of traded instrument 4.Liquidity (necessary for actual transactions and risk management) CONCLUSION: LINK TO GLOBAL CARBON MARKETS Key Design Principles

9. 9 Trading Scenario % Improvement per $1,000 of Sales Manufacturer A 2010 Vehicle Sales:1,000,000 Baseline Emissions:200 g/km 2010 Emission Target:188 g/km (-6%) 2010 Actual Emissions:192 g/km (-4%) Manufacturer B 2010 Vehicle Sales:500,000 Baseline Emissions:150 g/km 2010 Emission Target:141 g/km (-6%) 2010 Actual Emissions:129 g/km (-14%)

10. 10 Calculating Compliance Positions % Improvement per $1,000 of Sales Difference between fleet average and target Number of vehicles sold Mileage multiplier Manufacturer A -4 g/km 1,000,000 160,000 km.9 -576,000 tonnes CO2 -0.576 tonnes per vehicle -€11,520,000 -€11.52 per vehicle Manufacturer B 12 g/km 500,000 160,000 km.9 864,000 tonnes CO2 1.728 tonnes per vehicle € 17,280,000 €34.56 per vehicle Carbon intensity of fuel CO2 = €20 per tonne

11. 11 Example of a Transaction % Improvement per $1,000 of Sales Manufacturer A Total Liability = 576,000 Manufacturer B Total Credit = 864,000 €9.52 million Carbon credits = 476,000 tonnes of CO2 388,000 tonnes CO2 banked 100,000 tonnes CO2 credits for alternative actions The Global Carbon Market

12. 12 Design Options % Improvement per $1,000 of Sales Target: Existing voluntary targets? Absolute or relative targets? Credits: Reward for early action? Credits for scrapping most polluting vehicles or other activities? Banking: Unlimited? Time limits? Absolute limits? Flow control? Borrowing? Mileage Multiplier: 1 year or entire vehicle life? Relation to Global Carbon Market: Problem 1:Auto sector demand for credits increases burden on other sectors Answer 1:Set achievable targets that enable leaders to earn credits Problem 2:Rising sales offsets efficiency gains - auto sector earns credits while emissions increase Answer 2:Tightened targets to account for fleet growth or “gateway”

13. 13 Conclusion % Improvement per $1,000 of Sales Using carbon markets to achieve a product standard is an innovative regulatory approach Clear regulatory metric: emissions per kilometre Cost-effective, high compliance levels Provides incentives to exceed targets Flexibility on how to achieve goal: e.g. manufacturing, consumer marketing and education, credits for other actions, reducing carbon intensity of fuels Need not be in conflict with use of carbon market to cap transport emissions