1. Regulatory Platforms for CO2 trading regulation Last Week Discussion of Agencies, Purpose and How Operate that may be in charge of Carbon Trading at the US Federal Level CFTC, FERC, SEC? Really two (3?) separate components Primary, Secondary

2. Last Week Particular Focus on CFTC Control of Market Manipulation Focus of Concern in Carbon Trading Secondary Market

3. Primary Market Definition Allocation Monitoring for Fraud Enforcement – Surrender of Allowances

4. Focused on Federal Agencies But Could it be Accomplished by Private Sector? – Definition, Monitoring

5. Environmental Protection Agency Created by the CAA 1970 Rulemaking/ Implementation Monitoring Enforcement With States – Joint Federalism

6. EPA and SO2 Legislation Implementation History

7. Legislation Permanent Cap on SO2 emissions that may be emitted nationwide at about 50% of 1980 total (by 2008 and thereafter). Two phases – phase I – 1995; phase II- 2000 Phase I – 263 units at 110 highest emitting facilties Allocated for free based on emission rate of 1.20 lb/MMbtu and historic utilization

8. Legislation cont. Phase II – added 3,456 units Allocations under phase II effectively halved Some allowances held back for auction – 5% for new sources Early reduction credits if reduce beyond what was required in compliance section\ Allowances for other uses (renewable energy, etc... ) Banking allowed

9. Tracking 40 CFR 73.30, 73.31, 73.32 Tracking System Accounts Alternate account representative Can be bought by anyone in the primary market

10. Penalties $2000/ton, adjusted for inflation from 1990 dollars assessed for excess emissions In 2007, $3,042/ton

11. History 35% reduction in SO2 from 1990 to 2005 In 2005, 9.5 million new allowances granted Between 1995-2004, sources had emitted less than their allowances, so there were an additional 6.8 million unused allowances available Thus, 16.4 million SO2 allowances available for 2005 or any year thereafter In 2005 sources emitted 10.2 million tons, subtracting from the surplus

12. Market Activity In 2005, nearly 5,700 private SO2 allowance transfers involving 19.9 million allowances recorded in the EPA’s tracking system After initiation, price dropped from $400+ to ~$175 2004/2005 reaction to future emission reduction by CAIR; $700 - $1,550… Why? What would be reduced Back to $600 at end of June 2006

13. Monitoring Each Affected Source (those that must surrender emissions allowances at the end of the year) must have continuous emissions monitoring

14. Trading and The Market EPA delegated authority to conduct auction and trades to the Chicago Board of Trade But trades can occur privately CFTC has jurisdiction over trading in the SO2 futures market (without explicit legislative authority) The EPA did not have allowance and tracking program ready when first sales and auction with through.

15. RGGI Auction RGGI representatives emphasize need for market monitor – fair, transparent, competitive

16. 16 RGGI Auction Results September 08December 08March 09 States participating 610 Allowance Price$3.07$3.38$3.51 Allowances sold12.5 million31.5 million Qualified Bidders59 entities69 entities50 entities Winning bidders44 entities46 entities42 entities Total proceeds$38.6 million$106.5 million$117 million