1. www.kestrelmanagement.com Management Systems Risk and Liability Management Process Improvements ©Copyright 2007 Kestrel Management Services, LLC Carbon Trading: Opportunities and Cautions Philip Trowbridge Kestrel Management Services Email: ptrowbridge@kestrelmanagement.comptrowbridge@kestrelmanagement.com Direct Phone: (512) 795-9119

2. Presentation Overview ©Copyright 2008 Kestrel Management Services, LLC Emissions trading overview Purpose Explanation History Policy & regulatory development Kyoto EU US & regional Climate change program considerations Exchange vs brokerage

3. Emissions Trading Overview ©Copyright 2008 Kestrel Management Services, LLC

4. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy Source: McKinsey Global Survey December 2007

5. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy 61% - climate change impact profits positively Source: McKinsey Global Survey December 2007

6. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy 61% - climate change impact profits positively 61% - regulation likely Source: McKinsey Global Survey December 2007

7. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy 61% - climate change impact profits positively 61% - regulation likely 47% - carbon tax likely Source: McKinsey Global Survey December 2007

8. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy 61% - climate change impact profits positively 61% - regulation likely 47% - carbon tax likely 49% - cap & trade likely Source: McKinsey Global Survey December 2007

9. Climate Change Importance ©Copyright 2008 Kestrel Management Services, LLC McKinsey surveyed nearly 2200 Executives 60% - climate change important to strategy 61% - climate change impact profits positively 61% - regulation likely 47% - carbon tax likely 49% - cap & trade likely Source: McKinsey Global Survey December 2007 However, only 30% of companies incorporate climate change into their corporate strategy

10. Emissions Trading Goal: Reduce emissions Often referred to as “Cap & Trade” ©Copyright 2008 Kestrel Management Services, LLC

11. Emissions Trading Goal: Reduce emissions Often referred to as “Cap & Trade” Market forces reward reductions ©Copyright 2008 Kestrel Management Services, LLC

12. Emissions Trading Goal: Reduce emissions Often referred to as “Cap & Trade” Market forces reward reductions Alternative to: Voluntary measures ©Copyright 2008 Kestrel Management Services, LLC

13. Emissions Trading Goal: Reduce emissions Often referred to as “Cap & Trade” Market forces reward reductions Alternative to: Voluntary measures Command and control ©Copyright 2008 Kestrel Management Services, LLC

14. Emissions Trading Goal: Reduce emissions Often referred to as “Cap & Trade” Market forces reward reductions Alternative to: Voluntary measures Command and control CO 2 tax ©Copyright 2008 Kestrel Management Services, LLC

15. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions ©Copyright 2008 Kestrel Management Services, LLC

16. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions Government either gives away or auctions emission allowances ©Copyright 2008 Kestrel Management Services, LLC

17. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions Government either gives away or auctions emission allowances Permits issued within limits ©Copyright 2008 Kestrel Management Services, LLC

18. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions Government either gives away or auctions emission allowances Permits issued within limits Reduction goals included in regulatory limit ©Copyright 2008 Kestrel Management Services, LLC

19. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions Government either gives away or auctions emission allowances Permits issued within limits Reduction goals included in regulatory limit Purchased offsets are retired ©Copyright 2008 Kestrel Management Services, LLC

20. What is a Cap & Trade System? Cap – emissions limit Limit at or below current emissions Government either gives away or auctions emission allowances Permits issued within limits Reduction goals included in regulatory limit Purchased offsets are retired Trading occurs between companies/continents Market forces drive price ©Copyright 2008 Kestrel Management Services, LLC

21. How Cap & Trade Works Image Credit: Union of Concerned Scientist ©Copyright 2008 Kestrel Management Services, LLC

22. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments ©Copyright 2008 Kestrel Management Services, LLC

23. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading ©Copyright 2008 Kestrel Management Services, LLC

24. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” ©Copyright 2008 Kestrel Management Services, LLC

25. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” Lessons learned ©Copyright 2008 Kestrel Management Services, LLC

26. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” Lessons learned Flexibility provided by ‘banking credits’ ©Copyright 2008 Kestrel Management Services, LLC

27. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” Lessons learned Flexibility provided by ‘banking credits’ Allowances allocated at no cost ©Copyright 2008 Kestrel Management Services, LLC

28. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” Lessons learned Flexibility provided by ‘banking credits’ Allowances allocated at no cost Monitoring & enforcement ©Copyright 2008 Kestrel Management Services, LLC

29. Cap & Trade History Established in U.S. through 1990 Clean Air Act Amendments SO 2 & NOx trading Allowances are “free” Lessons learned Flexibility provided by ‘banking credits’ Allowances allocated at no cost Monitoring & enforcement Limited regulatory involvement ©Copyright 2008 Kestrel Management Services, LLC

30. Policy & Regulatory Developments ©Copyright 2008 Kestrel Management Services, LLC

31. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents ©Copyright 2008 Kestrel Management Services, LLC

32. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents Emissions trading ©Copyright 2008 Kestrel Management Services, LLC

33. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents Emissions trading Clean Development Mechanisms (CDMs) ©Copyright 2008 Kestrel Management Services, LLC

34. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents Emissions trading Clean Development Mechanisms (CDMs) Joint Implementation ©Copyright 2008 Kestrel Management Services, LLC

35. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents Emissions trading Clean Development Mechanisms (CDMs) Joint Implementation CDM’s 15 sectoral scopes ©Copyright 2008 Kestrel Management Services, LLC

36. Kyoto Protocol Kyoto Protocol (1997) Established mechanisms for trading CER’s between countries/continents Emissions trading Clean Development Mechanisms (CDMs) Joint Implementation CDM’s 15 sectoral scopes Project verifier approved per scope ©Copyright 2008 Kestrel Management Services, LLC

37. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations

38. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry

39. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry Other industries to be added

40. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry Other industries to be added Covered only CO 2 initially

41. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry Other industries to be added Covered only CO 2 initially Allowances (EUA’s) are “free”

42. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry Other industries to be added Covered only CO 2 initially Allowances (EUA’s) are “free” First phase (2005-2007) plagued with over allocation

43. EU Emissions Trading Scheme Largest emission trading system in world Covers 10,000 installations Includes variety of heavy industry Other industries to be added Covered only CO 2 initially Allowances (EUA’s) are “free” First phase (2005-2007) plagued with over allocation Second phase (2008-2012) to limit allowances

44. U.S. Policy Overview Seven Cap & Trade proposals introduced in U.S. Congress in 2007 ©Copyright 2008 Kestrel Management Services, LLC

45. U.S. Policy Overview Seven Cap & Trade proposals introduced in U.S. Congress in 2007 Most recent – Lieberman/Warner bill made it out of committee – Died June ‘08 ©Copyright 2008 Kestrel Management Services, LLC

46. U.S. Policy Overview Seven Cap & Trade proposals introduced in U.S. Congress in 2007 Most recent – Lieberman/Warner bill made it out of committee – Died June ‘08 Expect some harmonization with EU Emission Trading Scheme (ETS) ©Copyright 2008 Kestrel Management Services, LLC

47. U.S. Policy Overview Seven Cap & Trade proposals introduced in U.S. Congress in 2007 Most recent – Lieberman/Warner bill made it out of committee – Died June ‘08 Expect some harmonization with EU Emission Trading Scheme (ETS) States actions include voluntary reporting of CO 2 emissions and emission reduction targets ©Copyright 2008 Kestrel Management Services, LLC

48. U.S. Policy Overview Seven Cap & Trade proposals introduced in U.S. Congress in 2007 Most recent – Lieberman/Warner bill made it out of committee – Died June ‘08 Expect some harmonization with EU Emission Trading Scheme (ETS) States actions include voluntary reporting of CO 2 emissions and emission reduction targets Regional initiatives formed for registry and cap and trade systems (WCI, RGGI) ©Copyright 2008 Kestrel Management Services, LLC

49. U.S. Policy Overview – continued Carbon trading program considerations Economy-wide program – regulated “upstream” ©Copyright 2008 Kestrel Management Services, LLC

50. U.S. Policy Overview – continued Carbon trading program considerations Economy-wide program – regulated “upstream” Multiple GHG’s – beyond CO 2 ©Copyright 2008 Kestrel Management Services, LLC

51. U.S. Policy Overview – continued Carbon trading program considerations Economy-wide program – regulated “upstream” Multiple GHG’s – beyond CO 2 Auctioned allowances ©Copyright 2008 Kestrel Management Services, LLC

52. U.S. Policy Overview – continued Carbon trading program considerations Economy-wide program – regulated “upstream” Multiple GHG’s – beyond CO 2 Auctioned allowances Mechanism to limit price risk ©Copyright 2008 Kestrel Management Services, LLC

53. U.S. Policy Overview – continued Carbon trading program considerations Economy-wide program – regulated “upstream” Multiple GHG’s – beyond CO 2 Auctioned allowances Mechanism to limit price risk International trading ©Copyright 2008 Kestrel Management Services, LLC

54. Western Climate Initiative Formed: February 2007 Partners: NM, AZ, CA, OR, WA, MT, UT, BC, MAN ©Copyright 2008 Kestrel Management Services, LLC

55. Western Climate Initiative Formed: February 2007 Partners: NM, AZ, CA, OR, WA, MT, UT, BC, MAN Goal: 15% reduction by 2020 (2005 baseline) ©Copyright 2008 Kestrel Management Services, LLC

56. Western Climate Initiative Formed: February 2007 Partners: NM, AZ, CA, OR, WA, MT, UT, BC, MAN Goal: 15% reduction by 2020 (2005 baseline) All Partners members of The Climate Registry ©Copyright 2008 Kestrel Management Services, LLC

57. Western Climate Initiative Formed: February 2007 Partners: NM, AZ, CA, OR, WA, MT, UT, BC, MAN Goal: 15% reduction by 2020 (2005 baseline) All Partners members of The Climate Registry Expect Cap & Trade proposal August 2008 ©Copyright 2008 Kestrel Management Services, LLC

58. Western Climate Initiative Formed: February 2007 Partners: NM, AZ, CA, OR, WA, MT, UT, BC, MAN Goal: 15% reduction by 2020 (2005 baseline) All Partners members of The Climate Registry Expect Cap & Trade proposal August 2008 Point of Regulation – tbd Allocation of allowances Reporting ©Copyright 2008 Kestrel Management Services, LLC

59. Regional Greenhouse Gas Initiative Formed: August 2003 Partners: CT, DE, ME, NY, VT, MD, ©Copyright 2008 Kestrel Management Services, LLC

60. Regional Greenhouse Gas Initiative Formed: August 2003 Partners: CT, DE, ME, NY, VT, MD, Reduction Goal: Developed by each state ©Copyright 2008 Kestrel Management Services, LLC

61. Regional Greenhouse Gas Initiative Formed: August 2003 Partners: CT, DE, ME, NY, VT, MD, Reduction Goal: Developed by each state Action Plan Launch Cap & Trade system by 2009 Cap set relative to 2000; 10% cap reduction by 2019 ©Copyright 2008 Kestrel Management Services, LLC

62. Regional Greenhouse Gas Initiative Formed: August 2003 Partners: CT, DE, ME, NY, VT, MD, Reduction Goal: Developed by each state Action Plan Launch Cap & Trade system by 2009 Cap set relative to 2000; 10% cap reduction by 2019 Allowances auctioned ©Copyright 2008 Kestrel Management Services, LLC

63. Corporate Climate Change Program Considerations ©Copyright 2008 Kestrel Management Services, LLC

64. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) ©Copyright 2008 Kestrel Management Services, LLC

65. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) Establish appropriate levels of commitment and priority at all levels (BOD, CEO, & others) ©Copyright 2008 Kestrel Management Services, LLC

66. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) Establish appropriate levels of commitment and priority at all levels (BOD, CEO, & others) Participate/Influence policy development ©Copyright 2008 Kestrel Management Services, LLC

67. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) Establish appropriate levels of commitment and priority at all levels (BOD, CEO, & others) Participate/Influence policy development Shift thinking from business risk to business opportunity ©Copyright 2008 Kestrel Management Services, LLC

68. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) Establish appropriate levels of commitment and priority at all levels (BOD, CEO, & others) Participate/Influence policy development Shift thinking from business risk to business opportunity Overcome short-term solution tendency ©Copyright 2008 Kestrel Management Services, LLC

69. Corporate Strategic Response Considerations Strategic timing – understand why taking action now is the right time (leader, close follower, laggard) Establish appropriate levels of commitment and priority at all levels (BOD, CEO, & others) Participate/Influence policy development Shift thinking from business risk to business opportunity Overcome short-term solution tendency Systematic approach to program development – including direct and indirect source emissions ©Copyright 2008 Kestrel Management Services, LLC

70. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices ©Copyright 2008 Kestrel Management Services, LLC

71. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices Demonstrates commitment to climate change strategy ©Copyright 2008 Kestrel Management Services, LLC

72. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices Demonstrates commitment to climate change strategy Potential leadership recognition ©Copyright 2008 Kestrel Management Services, LLC

73. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices Demonstrates commitment to climate change strategy Potential leadership recognition Gain knowledge of carbon trading platform/practice ©Copyright 2008 Kestrel Management Services, LLC

74. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices Demonstrates commitment to climate change strategy Potential leadership recognition Gain knowledge of carbon trading platform/practice Experience to help drive policy development ©Copyright 2008 Kestrel Management Services, LLC

75. Benefits of Participating in Carbon Trading Today Development & maturity of GHG accounting practices Demonstrates commitment to climate change strategy Potential leadership recognition Gain knowledge of carbon trading platform/practice Experience to help drive policy development U.S. has experience with SO 2 trading ©Copyright 2008 Kestrel Management Services, LLC

76. Carbon Trading Cautions C&T is a redistributive system – net reductions? ©Copyright 2008 Kestrel Management Services, LLC

77. Carbon Trading Cautions C&T is a redistributive system – net reductions? Voluntary market limits participation ©Copyright 2008 Kestrel Management Services, LLC

78. Carbon Trading Cautions C&T is a redistributive system – net reductions? Voluntary market limits participation Additionality principle ©Copyright 2008 Kestrel Management Services, LLC

79. Carbon Trading Cautions C&T is a redistributive system – net reductions? Voluntary market limits participation Additionality principle Carbon restrictions impact economic growth ©Copyright 2008 Kestrel Management Services, LLC

80. Carbon Trading Cautions C&T is a redistributive system – net reductions? Voluntary market limits participation Additionality principle Carbon restrictions impact economic growth Due diligence ©Copyright 2008 Kestrel Management Services, LLC

81. Carbon Trading Cautions C&T is a redistributive system – net reductions? Voluntary market limits participation Additionality principle Carbon restrictions impact economic growth Due diligence Point of regulation ©Copyright 2008 Kestrel Management Services, LLC

82. Exchange vs Brokerage ©Copyright 2008 Kestrel Management Services, LLC

83. Chicago Climate Exchange (CCX) Launched 2003 (+300 members) Voluntary, legally binding Trades six GHG’s (CO 2, N 2 O, HFCs, PFCs, CH 4, SF 6 ) Carbon Financial Instruments (CFI’s) issued annually (CFI’s = 100 metric tons priced/ton) Offset project verification Initial and annual third party verification Reports reviewed by CCX and FINRA Reduction targets - 3% existing members; 6% new members ©Copyright 2008 Kestrel Management Services, LLC

84. Chicago Climate Exchange (CCX) ©Copyright 2008 Kestrel Management Services, LLC Source: www.chicagoclimatex.com 06/10/08www.chicagoclimatex.com

85. Cantor CO 2 e Provide professional brokerage services to the energy and environmental commodity markets in U.S. & EU Headquarters: London & San Francisco Began emissions trading in 1992 Trade CO 2, NO x, SO x, VOC’s, REC’s, Carbon related services include: Support for “carbon neutral” – corporate and consumer Market carbon offsets ©Copyright 2008 Kestrel Management Services, LLC

86. Trading: Exchange Member or Broker? Annual membership fee $5K to $35K Transaction fee $5 per trade Audits reviewed by NASD to ensure conformance ©Copyright 2008 Kestrel Management Services, LLC

87. Trading: Exchange Member or Broker? Annual membership fee $5K to $35K Transaction fee $5 per trade Audits reviewed by NASD to ensure conformance No membership fee No Master Agreement Brokerage fee 3% to 5% No reduction target requirement Rigorous due diligence process ©Copyright 2008 Kestrel Management Services, LLC

88. Conclusion U.S. has a history of cap & trade Carbon trading will likely be part of climate change regulation solution Preparation depends on part you want to play Market participation may help better prepare you for future Economics may help resolve whether to use brokerage or exchange ©Copyright 2008 Kestrel Management Services, LLC

89. Thanks! ©Copyright 2008 Kestrel Management Services, LLC