1. Challenges and Opportunities for Addressing Global Climate Change February 2006

2. Slide 1 – Outline Global Energy Outlook Global Energy Outlook Status and Trends of the Carbon Market Status and Trends of the Carbon Market Short Term Challenge: is there enough supply to meet Kyoto commitments? Short Term Challenge: is there enough supply to meet Kyoto commitments? Long-Term Challenge: market continuity given post 2012 uncertainty Long-Term Challenge: market continuity given post 2012 uncertainty Scaling Up Scaling Up

3. Slide 2 - Historical GHG Emissions

4. 80 % of global emissions are from burning of fossil fuels; energy sector largest contributor to GHG With no significant change in current energy policies: world energy needs will be 60 % higher in 2030; two thirds of increase from developing countries Global CO2e emissions on course to increase by 1.7 % per year until 2030; 70 % of which from developing countries Fossil fuels will continue to dominate the global energy mix, accounting for 85 % of increase in overall energy use until 2030 Renewable Energy: share of renewable energy will decrease slightly from 20 % in 2002 to 18 % in 2030 renewable energy consumption (including large hydro) could increase by 60 % share of non-hydro renewable energy in electricity generation could triple from 2 % in 2002 to 6 % in 2030 Slide 3 - Global Energy Outlook (IEA 2004) Markets have to be part of solution

5. Slide 4 - Current Demand Trends in Carbon Market Market driven by Kyoto entry into force: Market driven by Kyoto entry into force: Requires developed countries to reduce emissions by 5.2% below 1990 levels in 2008-2012Requires developed countries to reduce emissions by 5.2% below 1990 levels in 2008-2012 Total demand about 5.5 billion tons of CO2eTotal demand about 5.5 billion tons of CO2e Much of the obligation devolved to private firms, in particular in Europe with coming into force of European Emissions Trading Scheme in January 2006Much of the obligation devolved to private firms, in particular in Europe with coming into force of European Emissions Trading Scheme in January 2006 Demand for international credits in the order of 3 billion tons Demand for international credits in the order of 3 billion tons Japan short by 1 billion tonsJapan short by 1 billion tons Canada short by 1.2 – 1.5 billion tonsCanada short by 1.2 – 1.5 billion tons Europe short by 800 million tons -1.3 billion tonsEurope short by 800 million tons -1.3 billion tons Modest demand by European private sector in 2005-2007 Modest demand by European private sector in 2005-2007

6. Slide 5 - Structure of the Carbon Market Allowance Markets UK ETS EU Emission Trading Scheme Chicago Climate Exchange New South Wales Certificates Project-Based Transactions JI and CDM Voluntary Retail Other Compliance

7. Slide 6 - Eligibility Issues Eligibility Demonstrated through: Eligibility Demonstrated through: Barrier analysis: project faces barriers that prevent its implementationBarrier analysis: project faces barriers that prevent its implementation Investment analysis: project is economically or financially less attractive than other alternativesInvestment analysis: project is economically or financially less attractive than other alternatives Relatively simple for project which generate no financial or economic benefit other than the sale of emission reductions Relatively simple for project which generate no financial or economic benefit other than the sale of emission reductions For other projects, use financial indicator such as IRR, NPV, etc. to compare alternatives For other projects, use financial indicator such as IRR, NPV, etc. to compare alternatives Common Practice: project is likely eligible if project is not common practice Common Practice: project is likely eligible if project is not common practice

8. Slide 7 - Total Value of Contracts over 1 b$ (data in million U.S.$, nominal) (Jan-Apr)

9. Slide 8 -Main Buyers: European Governments & Firms In percent of volume purchased From Jan.04 to Apr.05

10. Slide 9 - Supply Concentrated in Middle-Income Countries In percent of volume sold from January 2004 to April 2005

11. Slide 10 – Non-CO 2 Gases Dominate In percent of volume purchased from Jan.04 to Apr.05

12. Technology  IRR financial Hydro, Wind, Geothermal 0.5-2.5% 2- 4 % Crop/Forest Residues3-7% Municipal Solid Waste5-15+% Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO 2 e Slide 11 - Carbon Economics Gas Flaring

13. Slide 12 - Short Term Challenge: Is there enough supply in the carbon market? Domestic efforts: at least 50 percent of effort will come from domestic efforts (2.5 to 3 billion tons) Domestic efforts: at least 50 percent of effort will come from domestic efforts (2.5 to 3 billion tons) Clean Development Mechanism: reduction of CO2 and CH4 assets (from energy, waste management and agro-forestry): not likely to be much more than 400 Mt for 2012 delivery Clean Development Mechanism: reduction of CO2 and CH4 assets (from energy, waste management and agro-forestry): not likely to be much more than 400 Mt for 2012 delivery Clean Development Mechanism: reduction of industrial gases such as HFC23 and N20 (primarily from China) could supply 1 billion tons Clean Development Mechanism: reduction of industrial gases such as HFC23 and N20 (primarily from China) could supply 1 billion tons Joint Implementation will be small, no more than 50 Mt Joint Implementation will be small, no more than 50 Mt Remainder must come from Emissions Trading with Economies in Transition, but greening will be required – implies about $30 billion of new investment over the next 4-5 years Remainder must come from Emissions Trading with Economies in Transition, but greening will be required – implies about $30 billion of new investment over the next 4-5 years

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15. Slide 14 – Longer Term Challenge Long-term viability of carbon market is not assured Long-term viability of carbon market is not assured Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure; Bank Carbon Funds uniquely purchases beyond 2012 Most energy-sector projects, need 10 years of secure carbon revenues for projects to reach financial closure; Bank Carbon Funds uniquely purchases beyond 2012 Without a commitment of governments to limit GHG emissions beyond 2012, the carbon market will remain soft and the private sector is unlikely to enter in a meaningful manner Without a commitment of governments to limit GHG emissions beyond 2012, the carbon market will remain soft and the private sector is unlikely to enter in a meaningful manner The real challenge is set a long-term stabilization target for atmospheric concentrations of GHGs, which would equate to an emissions target – the challenge would be to agree on intermediate emissions targets, allocations of emissions rights, and long term stable market mechanisms to ensure economic efficiency and resource transfers to support low- carbon growth paths The real challenge is set a long-term stabilization target for atmospheric concentrations of GHGs, which would equate to an emissions target – the challenge would be to agree on intermediate emissions targets, allocations of emissions rights, and long term stable market mechanisms to ensure economic efficiency and resource transfers to support low- carbon growth paths

16. Slide 15 - Scaling Up Opportunity: Carbon Market has potential to be larger than ODA flows between 2013 - 2050 Opportunity: Carbon Market has potential to be larger than ODA flows between 2013 - 2050 Potential to use the carbon market as a mechanism to catalyze high volumes of transactions and investments Potential to use the carbon market as a mechanism to catalyze high volumes of transactions and investments However, we need to move from current project-by-project approach to programmatic and sectoral approaches > Need to lower regulatory risk to monetize carbon revenues and cover the incremental cost and risk of lower carbon development However, we need to move from current project-by-project approach to programmatic and sectoral approaches > Need to lower regulatory risk to monetize carbon revenues and cover the incremental cost and risk of lower carbon development

17. Slide 16 - Standardization of Carbon Assets in Energy Sector Some technologies are amenable to global tests of eligibility: off-grid renewable power (diesel standard), composting and recycling of solid waste Some technologies are amenable to global tests of eligibility: off-grid renewable power (diesel standard), composting and recycling of solid waste Other technologies will require national standards: on-grid renewable power, use of efficient equipment depending on national common practice Other technologies will require national standards: on-grid renewable power, use of efficient equipment depending on national common practice Public-incentive schemes / regulations should be eligible for carbon finance Public-incentive schemes / regulations should be eligible for carbon finance

18. Challenges and Opportunities for Addressing Global Climate Change February 2006