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The Evolving International Greenhouse Gas Emissions Trading Market

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					ASSESSING & MANAGING CLIMATE CHANGE RISK

Greenhouse Gas

The Evolving International Greenhouse Gas Emissions Trading Market
Presentation to “Reconstructing Climate Policy: Moving Beyond the Kyoto Impasse” Duke University
Rich Rosenzweig, Managing Director May 12, 2003
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Overview


Status of Kyoto Protocol  Developments in Implementation of Trading Programs  Recent Greenhouse Gas (GHG) Market Activity and Pricing  Future Market Trends and Issues to Consider  Natsource Experience
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Greenhouse Gas

Kyoto Protocol & Developments in the Global GHG Market

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Russia Must Ratify for Entry into Force
55 Parties Need to Ratify Representing 55% of Annex I Parties’ 1990 CO2 Emissions
Source: UNFCCC as of May 7, 2003

Greenhouse Gas

100 90 80 45 70 60
Poland = 3.0% Canada = 3.3% Japan = 8.5%

55 50

Russian Federation? = 17.4%

Current Total: 108

40 35 30

55
50 40 30 20 10 0 Annex 1 (31) Non-Annex 1 (77)

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20
EU = 24.2%

15 10 5
Other Annex 1 = 4.7%

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Kyoto Compliance Drives Demand and System Development
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Greenhouse Gas

National trading programs implemented
– –

United Kingdom program provides incentives for meeting reduction targets Denmark program caps CO2 emissions from power sector through 2003 European Union system covers emissions from key sectors, equaling 46% of all EU CO2 emissions in 2010
  

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Regional programs under development
–
European Council released finalized common position in March 2003; allocation plan has yet to be decided National allocation plans must be presented in March 2004 System to be up and running in 2005

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Other EU countries waiting for finalized EU system rules before implementing domestic trading systems Canada likely to implement trading system through covenants Japan developing Kyoto implementation strategy Norway implementing national emissions trading program in 2005 Netherlands has contracted through ERUPT and CERUPT programs Finland’s tender for small-scale CDM projects closed in March 2003 Denmark purchased ERUs from Romania in March 2003 Austria, Norway, and Sweden developing tenders for CERs and ERUs 5

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National trading programs under development outside of EU
– – –

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Government tenders for project-based reductions issued
– – – –

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GHG Market Is Evolving
Japan:
Canada: Ratified Kyoto Protocol; Trading system under development; Provincial GHG requirements implemented Norway and Sweden: Plans to issue tenders for CDM and JI projects United Kingdom: 500 trades under UK Emissions Trading Scheme involving 1.6 to 1.7 million allowances; 4 mmt reduced through reverse auction Netherlands: Purchased 25.2 million GHG reductions for $138 million from ERUPT and CERUPT; 1 more ERUPT issued; Transactions outside tender process executed Denmark: GHG cap in power sector, 2001-2003; Purchased ERUs from Romania in March 2003 Ratified Kyoto Protocol; GHG trading simulations in 2002; Implementation of domestic measures

European Union:
Ratified Kyoto Protocol; GHG trading system operational in 2005 Other EU Countries: Planning to implement domestic trading programs in 2005 to conform to EU plan

Austria: Plans to issue tender worth 36 million EUR for CDM and JI projects Finland: Tender for small-scale CDM project issued; Expected to yield 500,000 Mt CO2e

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Greenhouse Gas
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Activity in National Markets
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– – –

World Bank estimates that 60-70 mmt was traded in GHG market in 2002; only 55 mmt traded between 1996 and June 2001  UK GHG trading program
Natsource brokered first transaction in UK allowances between DuPont and Mieco; first trade in compliance instruments Auction held to provide companies with funds to reduce emissions below a baseline; $305 million allocated, 4 mmt of reductions committed Approximately 500 trades have occurred and 1.6 to 1.7 million allowances traded Natsource brokered first transaction in Danish allowances between Entergy and Elsam Initial cap on CO2 of 23 million tons in 2000 is reduced 1 million tons per year through end of 2003 Approximately 10 trades have occurred and 500,000 allowances traded



Danish power sector cap & trade program
– – –

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First swap of UK and Danish allowances brokered by Natsource in 2002 between Shell and Elsam  Swaps of Danish allowances for VERs have occurred

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Sources of Demand
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Greenhouse Gas
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Government participation increasingly driving demand
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Dutch have purchased at least 36 mmt of compliance instruments
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Dutch government purchasing through tenders and third parties including IFC, development banks, and Rabobank

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Other European countries are also active in GHG market (tenders, transactions) – European countries signing MOUs with JI and CDM countries for reductions 

World Bank PCF continues to be major player
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14 emission reduction purchase contracts signed through August 2002; additional contracts under negotiation – World Bank has also lauched Community Development Carbon Fund and BioCarbon Fund  

CDM Executive Board estimates 200 projects will seek approval in 2003 Oregon Climate Trust has purchased $5 million worth of reductions from 6 projects through second round of funding

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GHG Market Pricing
GHG Prices by Commodity and Vintage (U.S.$ per ton CO2e)

Greenhouse Gas

Verified Emission Reductions ("VERs") Annex B VERs 1991-2007 Annex B VERs 2008-2012 CDM VERs 2000-2012 Dutch ERUs 2008-2012 Dutch CERs 2003-2012 Compliance Tools UK allowances - offer 2003 UK allowances - last trade 2002

0.30-2.00 1.50-3.00 3.00-6.00 4.40-7.99 5.10* 4.80 4.80

Source: Natsource, May 2003
*Price estimated based on average CER price of EUR 4.7 in 78 Expressions of Interest submitted to Dutch CERUPT. Source: JI Quarterly, April 2003.

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Outlook & Key Issues

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Future Market Trends & Issues to Consider
Future Market Trends
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Volume traded to increase when Kyoto Protocol enters into force EU allowances and candidate CERs likely to provide first market clearing price

Issues to Consider
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System designs are different Ability to transact across rate- and cap-based trading systems Multinational firms’ compliance strategies based upon location of assets Inclusion of project-based trading in EU system Impact of government participation in the market
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Impacts of Ongoing Policy Development
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System designs are different (e.g., UK, Denmark, EU)
– – – – – –

Voluntary vs. mandatory programs Absolute vs. rate-based trading Different gases and sectors are covered No rules for interchange of tradable units Different compliance programs UK likely has to change system to conform to EU

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Fragmentation is likely for foreseeable future  Fragmentation and complexity can result in increased costs and reduced performance
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NSR and OTC trading experience

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Market will force convergence – will happen at a cost

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Greenhouse Gas

Natsource LLC

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Greenhouse Gas

Natsource Experience
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Assist multinational energy and manufacturing firms assess and manage risk Conducted first transactions in UK and Danish markets and first swap of UK and Danish allowances Additional areas of expertise in GHG markets
– –

Design of emissions trading systems International GHG market analysis
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Major reports conducted for World Bank, Pew Center, Environment Canada, and EU

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CDM project development New York, Washington, Calgary, Ottawa, London, Oslo, Tokyo

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Global reach
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Major Environmental Commodity Broker
Rated as Top GHG Broker (Environmental Finance Magazine Survey, Dec. 2002, 2001 & 2000) – Rated as Top REC Broker (Environmental Finance Magazine Survey, Dec. 2002 & 2001)
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Contact Natsource
Global Environmental Brokerage Natsource LLC 140 Broadway, 30th Floor New York, NY 10005
Michael Intrator mintrator@natsource.com +1.212.232.5305

Global Strategic Advisory Services Natsource LLC 1120 19th Street, NW Suite 730 Washington, DC 20036
Rich Rosenzweig rrosenzweig@natsource.com +1.202.496.1423

www.natsource.com
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