1. Essential strategies for effective emissions trading and offsetting Practical information from leading companiesExecutive Summary The full report is available at www.ethicalcorp.com/emissionstrading Ethical Corporation2008

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ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING Contents Introduction ........................................................................................................................................................6 Terminology ......................................................................................................................................................8 Glossary ..............................................................................................................................................................9 Section 1: The emissions trading and offsetting process, step-by-step Chapter One: Introduction to the regulated markets and their implications for voluntary trading1.1 Introduction............................................................................................................................................101.2 Introduction to the compliance markets ..............................................................................................101.3 Introduction to the Clean Development Mechanism (CDM) andJoint Implementation (JI) ............................................................................................................................121.4 The Clean Development Mechanism (CDM) ..........................................................................................121.5 The Joint Implementation (JI) ................................................................................................................151.6 Common perceptions of the CDM and JI ..............................................................................................161.7 The EU Emissions Trading Scheme (EU ETS) ........................................................................................171.8 The UK Carbon Reduction Commitment (CRC) ......................................................................................211.9 The New Zealand Emissions Trading Scheme (NZ ETS) ........................................................................231.10 The Australia National Emissions Trading Scheme (AETS) ..................................................................251.11 The emerging North American cap and trade schemes ......................................................................27 Chapter Two: Things to consider before getting started on trading or offsetting emissions2.1 Introduction ........................................................................................................................................302.2 Typical reasons for buying or selling carbon credits ............................................................................312.3 Reducing your carbon footprint in a cost effective way ......................................................................322.4 What is the difference between the various carbon credits available?................................................322.5 Where are emissions reductions or carbon credits generated? ..........................................................362.6 How to make sure that the credits you buy are additional ................................................................372.7 Understanding vintages in the context of the carbon markets............................................................382.8 Controversy associated with some projects that generate carbon credits ..........................................392.9 Getting to grips with voluntary offset standards ................................................................................422.10 Things to consider when deciding which type of carbon credits to buy ..........................................44 Chapter Three: Where to buy and sell carbon credits3.1 Introduction ........................................................................................................................................473.2 An overview of carbon exchanges ......................................................................................................473.3 Who trades emissions reductions on these exchanges? ....................................................................513.4 How to make the most of trading on an exchange ............................................................................523.5 Buying offsets over-the-counter ..........................................................................................................533.6 Buying credits from non-regulated offset providers ............................................................................56 Chapter Four: Reporting emissions-reduction transactions4.1 Introduction ........................................................................................................................................ 604.2 Reporting emissions reductions under the Kyoto Protocol ................................................................ 604.3 Reporting emissions transactions voluntarily .................................................................................... 604.4 How do the companies responding to the Ethical Corporation questionnaire report theiremissions transactions? .............................................................................................................................. 61 3. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING Section 2: Case studies How companies are managing emissions trading and offsetting Introduction ......................................................................................................................................................64 Aggregate Industries ........................................................................................................................................64 Alliance Boots ..................................................................................................................................................66 The Co-operative Bank ......................................................................................................................................67 Deutsche Post World Net ..................................................................................................................................68 EDF Energy ........................................................................................................................................................70 Ford Motor Company ........................................................................................................................................72 HSBC..................................................................................................................................................................73 Kuoni Travel Holding ........................................................................................................................................74 Land Securities ..................................................................................................................................................76 Man Group ........................................................................................................................................................77 Simmons & Simmons ........................................................................................................................................79 Unilever ............................................................................................................................................................80 Westpac Banking Corporation ..........................................................................................................................82 Summary and conclusion ..................................................................................................................................84 References ........................................................................................................................................................87 Tables, figures and boxes Table 1: Annex I and Annex II countries as defined by the UNFCCC ................................................................10 Table 2: CDM projects grouped by type ............................................................................................................14 Table 3: Emissions caps of the EU nations ......................................................................................................18 Table 4: Credits and their Features ..................................................................................................................35 Table 5: Summary of the major exchanges covered in chapter three ..............................................................54 Table 6: Summary of transaction reporting practice of companies responding to the Ethical Corporation questionnaire ................................................................................................................................62 Table 7: Case Study Comparison ......................................................................................................................84Figure1: Structure of the international carbon market ....................................................................................12 Figure2: CERs from registered projects by host ..............................................................................................13 Figure3: CDM project type by sector, April 2008..............................................................................................15 Figure4: JI project locations, April 2008 ..........................................................................................................16 Figure5: JI project type by sector, April 2008 ..................................................................................................16 Figure6: Example of credit strategy decision making ......................................................................................30Box 1: An NGOs perspective on the CDM ........................................................................................................17 Box 2: An NGO's perspective on the EU ETS ....................................................................................................20 Box 3: An NGOs perspective on the CRC..........................................................................................................23 Box 4: An NGOs perspective on additionality ..................................................................................................38 Box 5: An NGOs perspective on controversial carbon credit sources ..............................................................41 Box 6: An NGOs perspective on voluntary offset standards ............................................................................44 Box 7: What are the transaction fees relating to hundreds of thousands of tonnes of CO2e ........................47 Box 8: An NGO perspective on reporting emissions transactions ....................................................................63 4. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING Foreword thical Corporation readers have indicated a strongalso intended for those who anticipate that they will E need for a comprehensive but accessible report that guides executives and sustainability ocers soon face mandatory involvement in the carbon markets and need to plan accordingly. through the complexities of the carbon markets.It is important to note that although Section 1Despite the wealth of information about theattempts walk the reader through the carbon markets carbon markets currently in circulation, there is noin a step-by-step fashion, Section 2 highlights the simple overview that describes the practicalities ofconsiderable exibility that the markets oer. The the various aspects of the carbon markets as they case studies in this second section highlight the relate to companies trading or considering tradingdierent motives that companies have for their emissions reductions (carbon credits). This need is current approach to the carbon markets. They also reinforced by an increasing number of regional anddemonstrate that companies buying or selling carbon national emissions trading schemes. The emergence credits can have as much or as little involvement as of new regulations means that more companies will they wish in the generation of those credits. be required to trade emissions in the near future andWe hope that the guidelines presented in this will need to start strategising now. Finally, this report report will provide readers with some solid footholds is driven by the increasing complexity of the carbonfor navigating the carbon markets. It will also markets. Corporations call for guidance on thehighlight the huge array of options available to those various credit types available, the number of dierentwishing to buy or sell carbon, provide inspiration, exchanges on which it is possible to trade, and the and suggest the best approach for your company. means by which the dierent schemes and credit Ethical Corporation is grateful to all those who types interlink.have oered guidance on the production of thisThe document is therefore intended as a compre-report and to those who were kind enough to provide hensive guide for those considering trading emissions us with the facts and opinions included in the body reductions or wishing to expand or amend theirof the report and for the case studies in Section 2. current emissions trading or osetting strategy. It is Ethical Corporation Acknowledgements We would like to thank Magpie Links Ltd for leading this research and the companies that collaborated with us on the case studies. These include Aggregate Industries, Alliance Boots, The CarbonNeutral Company, Climate Exchange Ltd, Combined Heat and Power Association, The Co-operative Bank, Deutsche Post World Net, EDF Energy, Ford Motor Company, HSBC, Kuoni Travel Holding, Land Securities, Man Group, Simmons & Simmons, Unilever and Westpac Banking Corporation.In addition, we wish to thank Anglo American plc, Aviva plc, BT Group plc, Enel SpA, GlaxoSmithKline plc, Hennes & Mauritz AB, HBOS plc, HSBC plc, Iberdrola, KBC Group NV, Munich Re and WWF for providing valuable insight and assisting us with our research. 5. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING Introduction his report is intended to help companies make place through the European Union's Emissions T informed and eective decisions about their companys greenhouse gases (GHG) emissions trading Trading Scheme (EU-ETS), with 1.6 billion tonnes of carbon emissions, worth 28bn, changing hands in and osetting strategy. It is designed primarily forthe bloc. companies wishing to get involved in the voluntary The UN-administered Clean Development Mecha- emissions trading market. It is also designed for nism (CDM), which allows companies to meet part of companies not currently covered by the compliance their emission reduction targets by nancing carbon- carbon trading market but that may be aected withincutting projects in the developing world, accounted the next three years by emerging regulations. Thisfor a further 947m tonnes of carbon dioxide, worth guide also meets the needs of companies that quali 12bn. for the compliance markets but that wish to expand Voluntary markets, where companies or individ- their trading and osetting strategy voluntarily. uals concerned about their carbon footprint canIt might be considered unusual to discuss carbon choose to buy emission credits, are also starting to trading in its classic sense alongside non-regulatedgrow; the largest being the US-based Chicago Climate osets in the same report. But we feel that any Exchange, where trading volume doubled in 2007 to distinction drawn between them will be arbitrary and22.9m tonnes. that by considering both together we can more eec- tively outline the options available to companies. We Report structure and methodology can thereby enable them to make more informed The information included in the report has been decisions about reducing their own emissions beyond sourced om a variety of public sources and om what can be achieved operationally. discussions with individuals active in the industry. We explain the origin and current structure of the Setting the scene compliance market at the beginning of this report. The principle underlying the market for carbonAlthough this report is primarily aimed at companies credits is as follows: under the Kyoto Protocol,that are not currently obliged to participate in carbon governments establish annual targets, or caps, for thetrading, the mechanisms developed by this market reduction of GHG emissions in their respectiveare fundamental to an understanding of the volun- countries. These targets set a limit on emissions,tary market, and it is impossible to take advantage of measured in millions of tonnes of carbon dioxidevoluntary trading opportunities without an under- (CO2).standing of the regulatory eld. In addition, as weThis national target is divided among all the majordescribe later, developments in the compliance emitters in the economy so that each industry sectormarket mean that an increasing number of compa- has an allocation of the number of tonnes it can emit.nies will be aected in the near future. Emission allowances are issued to cover all or part of The report has two sections. In Section 1 we these amounts. Each allowance confers the right toprovide guidelines, over the course of four chapters, emit one tonne of carbon dioxide, or the combined on everything om whether trading or osetting will global warming equivalent of other greenhouse gases,work for you, to how and where to report the trans- into the atmosphere. Trading schemes establish aactions you are making. Section 2 features 14 case market for these permits, allowing emitters and other studies involving companies currently involved in organisations to buy and sell them. The system is emissions trading schemes or which are buying known as cap-and-trade. osets. These case studies outline how they make their most important decisions and why their partic- An expanding market ular strategy has worked for them. Information on The market is growing exponentially. The Worldthe companies interviewed is included in Section 2. Business Council for Sustainable Development As well as the companies in Section 2, we wish to highlights research by analysts Point Carbon that acknowledge the input into Section 1 provided by the indicates growing enthusiasm for the carbon trading following based on our discussions with them: industry among companies and investors worldwide. Point Carbon found the value of the global carbon Lisa Ashford, Associate Director, Head of Commer- market went up by 80% in 2007, with some 2.7cialisation Europe, Ecosecurities; billion tonnes of carbon credits, worth 40.4bn, Kirsty Clough, Climate Change Policy Ocer, changing hands. Around 60% of this trading took WWF-UK; 6. ESSENTIAL STRATEGIES FOR EFFECTIVE EMISSIONS TRADING AND OFFSETTING Robert Rabinowitz, Director, Climate Exchange (Europe) Ltd; Bill Sneyd, Director Advisory Services, The CarbonNeutral Company and Peter Smith, Research and Communications Manager, Combined Heat and Power Association (CHPA).WWF We have included WWFs comments on many of the topics raised in this report as they provide insight into the perspective of a leading NGO that is focused on sustainability issues and on the scientic addressing of climate change. WWF is actively engaged with the business community in this regard. WWF is the world's largest and most experienced independent conservation organisation and oversees a global network working in more than 90 countries. 7. Ethical Corporation report centre Recent publications cover topics such as anti-corruption, voluntary initiatives in CSR, emerging market issues, and managing carbon emissions. You can also visit Ethical Corporations website and download some free research papers: www.ethicalcorp.com/reports Anti-corruption, ethics and compliance in Russia Practical information to develop local compliance strategies and overcome corruption challenges. For more information, current prices or online ordering, visit: www.ethicalcorp.com/russia Anti-corruption, ethics and compliance in China and Counter corruption in your supply chain in China Learn more about the issues critical to your operational security, ethical management and success in China. For more information, current prices or online ordering, visit: www.ethicalcorp.com/china Best practices for designing effective ethics programmes Find out which ethics and compliance training is most effective and productive. For more information, current prices or online ordering, visit: www.ethicalcorp.com/ectraining How to manage carbon reduction, and make it pay A hands-on management briefing on real-life ways big UK companies cut carbon, and their costs. Order online or obtain more information at: www.ethicalcorp.com/crc Corporate greenhouse gas emissions reporting Learn how your competitors are calculating and verifying their GHG emissions and discover which metrics and verification standards will work for you. For more information, current prices or online ordering, visit: www.ethicalcorp.com/greenhousegas Guide to industry initiatives in CSR Get the inside track from some of the worlds key industry-based initiatives. For more information, current prices or online ordering, visit: www.ethicalcorp.com/initiatives Job-specific guides for embedding CSR throughout your company Winning methods for integrating sustainability into operational departments including communications, finance and facilities. For more information, current prices or online ordering, visit: www.ethicalcorp.com/csr Essential strategies for effective emissions trading and offsetting With practical information from the leading companies, this report is everything you need to develop your companys emissions trading and offsetting strategy. Including case studies from 15 companies across industry. For more information, current prices or online ordering, visit: www.ethicalcorp.com/emissionstrading The must-have guide to water ethics, footprinting, programmes and supply security Learn how water risks factor into your operations, and what you should do to ethically manage water use. 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