exhibit 54 -...

EXHIBIT 54

Carbon Market Analyst

US Offset Markets in 2010: The Road Not Yet Taken

TO THE POINT CONTENT

UPCOMING REPORTS

POINT CARBON RESEARCH All rights reserved © 2010 Point Carbon

RESEARCH

North America

2 Executive summary

3 Introduction

3 Setting the scene

6 US offset market size

9 Carbon prices

10 Supply of US offsets

12 Demand for US offsets

13 2010 forecast

15 Conclusion

• Carbon 2010: Revenge of the

States

• After Copenhagen: Outlook for

International Negotiations

• US Financial Regulatory Reform

and its Impact on Carbon Markets

In 2009, the total US offset market was worth $74 million, with 19.4 million metric tons of CO2 equivalents (CO2e) in traded volumes. Transactions involving credits from the Climate Action Reserve made up 65% of the total market value.

Prices of various types of offsets in the US market fell, particularly for those credits issued by the Chicago Climate Exchange, as buyers continued to wait for more policy certainty. However, forward contracts of the Climate Action Reserve-issued credits held steady for most of the year.

The supply of credits in 2009 reached 29 Mt CO2e, a 13% rise from 2008 and a 63% rise from 2007. This supply is based on information from Point Carbon’s Carbon Project Manager North America database of projects.

Point Carbon forecasts growth of 263% in trading volumes in 2010 if cap-and-trade legislation passes, but a leveling off of growth if the legislation fails to pass.

March 1, 2010

Disclaimer

The data provided in this report were prepared by Point Carbon’s Trading Analytics and Research division. Publications of Point Carbon’s Trading Analytics and Research division are provided for informational purposes only. Prices are indicative and Point Carbon does not offer to buy or sell or solicit offers to buy or sell any financial instrument or offer recommendations to purchase, hold or sell any commodity or make any other investment decision. Other than disclosures relating to Point Carbon, the information contained in this publication has been obtained from sources that Point Carbon believes to be reliable, but no representation or warranty, express or implied, is made as to the accuracy or completeness of this information. The opinions and views expressed in this publication are those of Point Carbon and are subject to change without notice, and Point Carbon has no obligation to update either the opinions or the information contained in this publication.

Point Carbon’s Trading Analytics and Research division receives compensation for its reports. Point Carbon’s Trading Analytics and Research division reports are published on a subscription basis and are not issued at the request of any client of Point Carbon.

Carbon Market Analyst North America

2 All rights reserved © 2010 Point Carbon

CMA March 1, 2010

While federal cap-and-trade legislation faces an unclear future in the US, a growing number of American offset projects are moving ahead and generating carbon credits from greenhouse gas (GHG) reduction projects. These credits originate from a wide array of project types and locations, with the help of verifiers and registries who certify the credits to one of a handful of standards.

Transactions of credits from US offset projects reached 19.4 million metric tons of CO2 equivalent (Mt CO2e) in 2009, worth $74 million (see Table 1). To put this number in perspective, the size of the total US carbon market, including allowance volumes under the Regional Greenhouse Gas Initiative (RGGI) and the Chicago Climate Exchange, was 841 Mt CO2e, valued at $2.7 billion. Policy uncertainty at the federal level, and consequently a lack of a compliance-driven appetite for carbon credits, continued to hold the US offset market back.

The delay in climate legislation at the federal level also had an effect on credit prices on the spot markets. The Chicago Climate Exchange, Voluntary Carbon Standard, and Climate Action Reserve saw spot prices drop 91 percent, 44 percent, and 29 percent respectively over the course of 2009. On the other hand, forward

contracts for Climate Action Reserve 2009 vintage credits actually gained 13 percent during the year.

Supplies of offset credits continued to grow unabated. In 2009, 29 Mt CO2e in reductions came from US offset projects, according to Carbon Project Manager North America, Point Carbon’s North American offset product which features a database of offset projects in North America. This supply represents a growth of 13 percent from 2008, and a 63 percent growth from 2007. Methane-based reductions comprised the largest share of supply—49 percent of the total pipeline—with forestry taking up 6 percent. The four major offset standards together shared the bulk of the reductions, with no single standard accounting for a majority of the reductions in 2009.

On the demand side, Point Carbon surveyed a small but influential group of players who possess a good view of both the sell side and the buy side. Based on the responses, “pre-compliance” purchases made up 65 percent of the total primary market. The remaining purchases were “voluntary,” where the buyers wished to simply reduce their carbon footprint. When these findings are applied to the size of the US market, Point Carbon finds that the US pre-compliance market traded $48 million worth of credits in 2009, compared to $26 million for the voluntary market.

That same research also uncovered that carbon funds and aggregators were the main buyers of primary offsets credits, with 39 percent of transactions. They were followed closely by financial intermediaries at 30 percent, and then emitters at 25 percent. Far behind them were individual and organizational retail buyers, who provided only 6 percent of the primary demand.

Looking forward to 2010, we break down our growth forecast into two different scenarios, one where cap-and-trade passes in June of 2010, and the other where it does not. In the first scenario, Point Carbon forecasts 263 percent growth in volume and 321 percent growth in value year to year. In the other scenario, we see trading volumes stay flat and market value starting to level off at 31 percent growth.

Executive summary

Volumes (Mt CO2e)

Value ($M)

Exchange Based

CCX CFIs 6.4 $5.8

CAR 0.8 $4.0

Subtotal 7.2 $9.8

OTC and Bilateral Markets

CAR 7.2 $48.2

VCS 2.1 $9.7

ACR 1.8 $3.5

Other 1.1 $2.4

Subtotal 12.2 $63.8

Total 19.4 $73.6

Table 1: Size of the US offset market in 2009



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A cap-and-trade program is a market-based mechanism designed to reduce the release of greenhouse gases (GHGs) by implementing an emissions cap. The system administrator issues allowances that are usually denominated in tons of carbon dioxide, which altogether add up to the targeted emissions totals. Allowances can be allocated freely or auctioned.

For each ton of CO2e that a company emits, it must turn in one allowance (known as “true-up”). To meet their cap, regulated entities can choose to reduce emissions internally or purchase additional allowances. If a facility over-achieves its target, it can sell its excess allowances. In this way, the system allows the entities with the lowest marginal cost of GHG abatement to benefit, allowing others with higher costs to purchase allowances on the market.

A third option allows covered entities in a cap-and-trade program to use carbon offset credits to meet their commitments in place of allowances. Offset credits originate from project-based activities in uncapped sectors, and represent GHG emission reductions additional to what would happen in a business as usual scenario. This is known as “additionality.” An offset credit is a tradable carbon instrument equal to one metric ton of CO2 equivalent emission reductions (CO2e). Retiring an offset effectively reduces emissions, and therefore reduces the obligation to purchase one incremental allowance.

Introduction: the path ahead Proponents of a US Climate Bill could be forgiven for being a little discouraged. Though still convinced that sweeping legislation will eventually pass, many have already battled through bitter debates, horse trading, and political theater to come to what is now a muddled midpoint.

Challenges have come from both the political right—who fear higher energy costs, government intrusion, and a silencing of scientific dissent—as well as the political left, who contend that the leading bills are too weak and bend too closely to Wall Street.

Across party lines, many players are keenly fixed on one mechanism within the leading cap-and-trade bills: carbon offsets. Offsets represent a reduction of GHG emissions that would not have happened otherwise. Offset credits are allowed in most GHG cap-and-trade systems as a substitute for an emissions allowance.

Offsets have also become a flashpoint for debate and criticism. Opponents question whether the reductions are “real”, or above and beyond business as usual. Others also see offsets as a modern day indulgence, and would prefer emitters internally reduce their own emissions.

In contrast, supporters point to the benefits of offsets and argue that they help achieve emission reductions at a lower overall cost. They do so across many countries and industries, many of which are otherwise uncapped. They help fund clean technology development and address complex emissions sources such as forestry and agriculture.

Despite so much attention, offsets are also one of the least understood aspects of US carbon trading. Often transacted in private over-the-counter

(OTC) bilateral or brokered contracts, US-generated offset credits are difficult to track and analyze. Carbon allowances in emissions trading schemes, on the other hand, usually trade on open financial exchanges. Publically available research into offsets has generally taken an international approach, focusing on global voluntary offset markets or the Clean Development Mechanism, rather than on the US market exclusively.

This report endeavors to fill that information gap. Point Carbon has combined the data from Carbon Project Manager North America, our database of North American offset projects, with the market expertise from leading players to provide the most accurate, complete, and concise overview of the offset market for US projects available.

Setting the scene: The landscape of US offset projectsIn the face of policy uncertainty, organizations have begun to develop and market offset credits in the US. These credits originate from a wide array of project types and locations, with the help of verifiers and registries that certify the credits to one of a handful of standards. Buyers, who range from utilities to financial traders to individual retail buyers, purchase credits either to reduce their carbon footprint voluntarily, or to purchase with the hopes that they can be used in the future for compliance in a future US cap-and-trade program (see Textbox 1). Generally, the former are called “voluntary buyers” and the latter are called “pre-compliance buyers.”

Textbox 1: Cap-and-trade programs and the role of offsets



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A diversity of types and standards

In the US, buyers making an offset purchase decision have to sift through a wide selection of credits. One of the most important considerations is the type of project. In the US, methane capture projects originating from landfills, agricultural livestock, or coal mines are among the most common. However, forests also play a central role in the US offset market by sequestering atmospheric carbon. Other active categories include destruction of industrial gases, enhanced oil recovery (EOR), soil sequestration, renewable energy, and energy efficiency (see Textbox 2).

Buyers also navigate through the many different standards organizations which provide often unique methodologies for calculating, monitoring, and certifying offset credits (see Table 2). Leading standards organizations in the US include the Climate Action Reserve (CAR), Voluntary Carbon Standard (VCS), Chicago Climate Exchange (CCX), American Carbon Registry (ACR), and The Gold Standard (GS). The Regional Greenhouse Gas Initiative (RGGI) standard at the time of this report had not issued any tons.

Market players: A supporting ecosystem emerges

There are a number of organizations that play a role in bringing offsets into the hands of final buyers. The most crucial role is that of developer. A project developer generally oversees installation of the emission reduction activity, and is the original owner of the offset credits. The role of developer can overlap with other roles, such as the entity that owns the site of the reductions (such as a landfill owner), or an aggregator that buys and packages offsets together from many different projects, to then sell the credits to buyers. A verifier acts as

Carbon capture and storage: Projects that capture CO2 and inject it underground in subsurface geologic formations for long-term storage. In this stage of the market, enhanced oil recovery (EOR) is the only form of CCS that has generated offsets. EOR involves the injection of CO2 into an oil field to increase extraction of the crude, sequestering the CO2 under the ground.

Coal mine methane: Projects that reduce the GHG emissions associated with released methane during the coal mining process. The methane can be flared, combusted for energy generation, or piped out as natural gas after purification.

Energy efficiency: Projects that reduce the overall demand for energy, typically achieved by using more efficient products or processes. Examples include energy-efficient buildings and installation of compact fluorescent light bulbs.

Forestry: Projects that enable sequestration and storage of atmospheric carbon dioxide in the biomass of a growing forest stand and its soils. Forestry projects include afforestation, reforestation, avoided deforestation, and forest management. Afforestation is the process of converting land that has not been forested for at least a generation to forested land. Reforestation is the process of restoring forests on land that previously was forested. Avoided deforestation (also known as conservation, or REDD—reduced emissions from deforestation and degradation) is the protection of existing forests. Forest management is more generally based on harvesting techniques and restoration which increase the carbon stock of a forest.

Industrial processes: Projects that capture and destroy industrial pollutants such as hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and ozone depleting substances (ODS), each of which have a global warming potential hundreds or thousands of times greater than CO2.

Landfill methane: Projects that capture the methane emitted by the decomposition of waste in landfills. The biogas, which contains large amounts of methane, can be flared, combusted for energy generation, or piped out as natural gas after purification.

Livestock methane: Projects that capture the methane from livestock manure, typically from cattle or swine. The methane can be flared, combusted for energy generation, or piped out as natural gas after purification.

Renewable energy: Projects that displace fossil fuel-based electricity and energy with generation from renewable sources. Examples include wind power, solar power, hydroelectric power, and biofuels.

Soil sequestration: Projects that remove GHGs from the atmosphere by capturing and storing those GHGs in soils. No-till agriculture is the primary way this has been employed in the US.

Textbox 2: Offset project types



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a third party auditor to ensure proper reduction measurement is performed, and that the project is eligible for offset creation.

On the financial side, liquidity providers like brokers and exchanges bring buyers and sellers together, while traders typically buy and sell on an exchange.

Along the way, the process is aided by lawyers, consultants, and information providers that offer expert analysis and advice. Registries also bring transparency and legitimacy to the offsets markets, by registering projects and ensuring that double counting does not occur. For more on roles of market participants, see our 2008 report, Business Opportunities in the Carbon Market.

The architecture of credit trading

For the offset market, one can either purchase credits through an exchange such as the Chicago Climate Futures Exchange (CCFE), or purchase them “off exchange” on the over-the-counter (OTC) market.

Table 2: Prominent offset standards in the US

Gold Standard Voluntary Carbon

Standard Climate Action

Reserve

Chicago Climate

Exchange

American Carbon Registry

Climate, Community & Biodiversity

Accounting Methodology

CDM

methodologies

CDM

methodologies

10 CAR specific

project protocols,

1 forthcoming

10 CCX

specific project

protocols

ACR, CDM, VCS,

EPA Climate

Leaders protocols

17 Criteria

Registry Administered

by APX

Administered by APX,

Markit Environmental,

Caisse des Dépôts

Administered by

APX

Not available to

public

Administered by

ACR

Administered

by CCBA

Credits issued for 2008 Reductions in US (Mt) (as of 2/22/10)

0 0.7 1.4 5.3 7.9 Does not

issue credits

Credits issued for 2009 Reductions in US (Mt) (as of 2/22/10)

0 1.3 0.5 1.9 2.9 Does not

issue credits

Sources: Carbon Project Manager North America, APX, Markit Environmental, Caisse des Dépôts, CCBA, Gold Standard, VCS, CCX, ACR

Exchange traded markets: In these markets, credits are purchased either by traders, or by brokers who act on behalf of buyers and sellers. Exchanges typically publicly disclose volume and pricing information for the standardized contracts. The exchange itself guarantees that orders will be filled if the counterparty is unable to fulfill the order.

Over-the-counter (OTC) markets: OTC transactions are not performed on an exchange, but rather can be executed bilaterally through two different counterparties, or brought together by a third party such as a broker. These transactions cater to small or non-uniform markets, which cannot easily conform to a standardized exchange contract.

Spot contracts: These contracts can be sold on or off exchange, allowing buyers to purchase issued credits with cash, and have it delivered immediately.

Futures contracts: A standardized and fungible contract that is traded on an exchange, which obligates the buyer to deliver the credits at a pre-determined time in the future and at a pre-determined price.

Forward markets: A non-standardized contract negotiated OTC which obligates the seller to deliver the credits at a pre-determined time in the future at a pre-determined price to the buyer.

Option contracts: These contracts can be sold on and off exchange, and allow the buyer the right—but not the obligation—to buy or sell a credit at a pre-determined price, by a pre-determined time in the future. While the buyer pays a premium for this right, the seller has the obligation to fulfill the order at that price if the buyer exercises the option. An option to buy a commodity is called a “call,” while an option to sell is called a “put.”

Textbox 3: Market structure definitions



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The Chicago Climate Exchange (CCX) is a hybrid organization that contains a voluntary but legally binding cap-and-trade system. As in a traditional emissions trading scheme, emitters can either reduce internally or purchase allowances called Carbon Financial Instruments (CFIs), which are denominated in metric tons of CO2. Offsets can also be issued by the CCX, and they are also called CFIs. However, the CFI is unique in that it can represent either an offset or an allowance. Only members can trade CFIs on the CCX, and the CCX only offers spot contracts for CFIs.

The Chicago Climate Futures Exchange (CCFE) offers futures and options contracts for CFIs, alongside a number of other contracts on a trading platform. Unlike CCX, it does not feature a captive emissions scheme. The Green Exchange/CME Group offers a similar suite of derivative contracts for environmental commodities, though it does not include any contracts for offsets or CFIs.

Many buyers prefer to transact in the OTC market, so that they specify the exact characteristics of the credits they are purchasing (for instance, 2008 reductions for CAR-certified California Forestry). On the other hand, exchange contracts tend to be standardized, without the flexibility to target specific types of credits. Brokers play a strong role in these OTC markets, by structuring transactions and bringing buyers and sellers together, receiving in payment a percentage of the transaction value. Bilateral purchases, where the offset owner sells privately and directly to the buyer, are also prominent. In the OTC market, purchases are typically arranged through an emissions reductions purchase agreement (ERPA). These can take a variety of forms, but usually stipulate the price of the reductions, the volumes expected, and delivery timeframe.

The Regional Greenhouse Gas Initiative (commonly known as RGGI –pronounced “Reggie”) is a regional cap-and-trade regime which formally began January 1, 2009. The scheme includes 10 US states in the Northeast United States which have collectively committed to stabilize emissions from electricity generation by 2014, and thereafter to reduce emissions 10 percent below 2009 levels by 2018. Though managed on a state-by-state level, an overarching organization (RGGI Inc.) administers much of the infrastructure across the scheme.

Offsets are allowed in RGGI, with limits of 3.3 percent of total allowance obligations on a per year basis, rising to 10 percent if allowances prices rise to $10/short ton. The RGGI system allows five project types, with some limitations on location of activity and start date. In practice, there are very few offsets applying for RGGI certification, since RGGI allowance prices are too low to incentivize demand for offsets.

It is also important to note that RGGI is denominated in short tons, not metric tons.

Textbox 4: The Regional Greenhouse Gas Initiative (RGGI)

Offsets: The sun also rises in AmericaWith support from offset project developers and other market players, transactions for credits from US offset projects reached 19.4 million metric tons of CO2 equivalents (Mt CO2e) in 2009, worth $74 million. US offset volumes were roughly divided between exchange transactions (37 percent) and OTC transactions (63 percent). Table 3 displays US offset market volumes and values by standard, exchange, and type of transaction.

CAR transactions accounted for 65

percent of the US offset market value in 2009

Offsets certified to the CCX and CAR standards made up most of the volumes. CFIs (which are issued against the CCX standards) cleared through either the CCX or CCFE exchanges, and made up 33 percent of the total volumes in 2009.

Plummeting CFI prices however kept a lid on the value of those trades, since CFI transactions were only worth 8 percent of the total market. These numbers include privately negotiated transactions in addition to trades where prices were determined on the exchange.

CAR and VCS featured prominently in the OTC market. CAR credits (known as Climate Reserve Tonnes, or CRTs) accounted for 37 percent of total volumes, and 65 percent of market value, reflecting the premium that CRT prices command in the market. VCS, though small in terms of volumes, made up 11 percent of the value of US offsets.

Once allowances are added to the offset numbers, the overall US carbon market expands to 841 Mt CO2e, worth $2.7 billion. Table 5 shows the breakdown of US volumes and values, with allowance trades from the CCX, CCFE, and the Green Exchange/CME Group.

From a global perspective, the US-based offset market is a drop in the bucket. International carbon trading



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totaled $136 billion (€94 billion) in 2009, with offset markets making up $26 billion (€18 billion) of that amount. US offsets were worth only 0.2 percent of the global compliance offset market. (For more on the global carbon market, please see our report Carbon 2010).

Obstacles to progress

Trading volumes from US projects have a long way to go before meeting the market potential. A number of specific issues have held the market back:

Policy uncertainty. Most problematic is the simple issue of policy uncertainty, particularly for buyers of compliance-quality offset credits. Without a clear knowledge of the rules and targets, most buyers—particularly utilities and industrials—are content to wait rather than risk purchasing credits that may prove worthless down the road. Speculative financial buyers that tolerate higher risk have picked up some of the slack.

Lack of transparency. In the complex US market where the value of an offset credit differs greatly from project to project, over-the-counter (OTC) markets tend to dominate. One cannot easily shoehorn a US offset credit into a generic exchange contract, but OTC markets are hard to track. To find pricing and volume information for US offsets, market participants have to rely on information providers or brokers.

Lack of oversight. While offset registries such as the Climate Action Reserve and the Voluntary Carbon Standard have helped provide guidance, lack of government oversight has allowed concerns over offset quality to persist. In particular, buyers want to be sure the credits that they buy are not being sold twice, and that the credits represent real reductions from projects that go beyond business as usual.

Illiquidity. The factors listed have

Table 3: 2009 US offset market volumes and values

Volumes (Mt CO2e) Value ($M)

Exchange based

CCX CFIs 6.4 $5.8

CAR 0.8 $4.0

Subtotal 7.2 $9.8

OTC and bilateral markets

CAR 7.2 $48.2

VCS 2.1 $9.7

ACR 1.8 $3.5

Other 1.1 $2.4

Subtotal 12.2 $63.8

Total 19.4 $73.6

Table 4: 2009 volumes by type of contract (Mt CO2e)

Spot markets Futures/Forwards/Options Total

Exchange based

CCX CFIs 4.6 1.8 6.4

CAR -- 0.8 0.8

Subtotal 4.6 2.6 7.2


CAR 1.8 5.3 7.2

VCS 1.2 0.9 2.1

ACR 1.6 0.2 1.8

Other 0.8 0.4 1.1

Subtotal 5.4 6.7 12.2

Total 10.0 9.4 19.4

Table 5: 2009 total US carbon market

Volumes (Mt CO2e) Market Value ($M)

Regional Greenhouse Gas Initiative

Exchanges 627 $2,192

Auctions 116 $349

Options 22 $21

Subtotal 765 $2,563

CCX (CFI spot) 45 $42

CCFE (CFI Futures, CAR, etc) 19 $21

OTC offsets market 12 $64

Subtotal 76 $127

Total 841 $2,690

Sources: Carbon Project Manager North America, CCX, CCFE

Sources: Carbon Project Manager North America, CCX, CCFE

Sources: Carbon Project Manager North America, CCX, CCFE, Green Exchange/CME



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Textbox 5: Methodology and sources

There are many assumptions and calculations behind the volume and value figures presented in this report. Below are the most significant.

Exchange-traded information: The Chicago Climate Exchange and the Green Exchange/CME Group provided raw data. To calculate the portion of offsets traded in CFI contracts (since CFIs can either be allowances or offsets), we assume that 15 percent of total spot, futures, and options trades were for offset transactions. This is based on the statement that 15 percent of reductions by capped CCX members were achieved through the purchase of offsets (as stated by Stockholm Environment Institute).

To further narrow the offsets volumes down to those only originating from US-based offsets, we multiply the total CFI offset volume by 68 percent, proportion of US offsets in the total CCX offset pool in 2009.

Prices for spot and futures contracts were based on the average daily price for 2009. For futures, we averaged the prices of all contracts with 2009 and 2010 settlement dates. Since option prices vary depending on strike price, length of time, and whether a call or put, Point Carbon took the price (averaged over the year) of the most commonly traded contract for each unique underlying carbon instrument (CFI, CRT, etc).

For CCX and CCFE options data, we multiplied the volumes by a “delta equivalent” factor to account for the difference between current price and strike price, which determines how likely it is that the option will be exercised.

OTC information: Our OTC volume calculations combine “bottom-up” and “top-down” approaches. The bottom-up approach is based on the pipeline of projects in the Carbon Project Manager North America (CPMNA) database, broken down by standard (CAR, VCS, and others).

For the spot markets, we assume a certain percentage of issued tons traded, (For example, 50%-80% depending on standard and year of issuance), and the turnover of each of those tons (1.2-1.5 times). We define turnover as the number of times a specific credit has changed hands over the year. Statistics on American Carbon Registry credits come from the group’s website.

For the forward market, we assume a percentage of 2009 reductions (based on the CPMNA pipeline) that were purchased as part of a forward contract, then applied a weighted average number of years of the forward strip (usually between 2 or 3 years). OTC prices are derived from CPMNA’s monthly price reports. For forward contracts, we include all volumes for the contract. For example, a three-year strip of 10,000 tons delivered annually, signed in 2009, was counted as 30,000 in volume for the year 2009.

In the top-down approach, Point Carbon surveyed leading participants to find information on the OTC market. The participants responded to four questions, the first of which asked about the 2009 market size for US based projects trading on the OTC market. Responses broke down trading volumes by standard. The survey also required the participants to break those volumes down by spot vs. forward markets. Point Carbon targeted the handful of participants that would be able to provide a “total view” of the marketplace. There were a total of 6 participants, which includes among others, TerraPass, CantorCO2e, and Environmental Credit Corp. The remaining three participants indicated to Point Carbon that they wished to remain anonymous. Like in the bottom-up approach, OTC prices were taken from the monthly price reports from the CPMNA product.

The results from both processes were equally weighted with regards to the OTC market (outside of ACR and CCX, which have publically listed volume data).

Key differences in approaches: The bottom-up and top-down approaches yielded similar results, except for the OTC spot volumes for CAR and VCS. Point Carbon’s calculations found larger spot volumes than the survey showed. This difference may arise from the fact that spot credits are more likely to transact in the bilateral market and not through intermediaries, therefore not as easily in view of the respondents. Looking at the total issued credits during 2009 and 2008, we assumed a percentage of that amount would be transacted in 2009.



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conspired to hold back demand. On the other side of the transaction, sellers have been hesitant to drop their prices, betting that they can fetch more value after cap-and-trade passes. Consequently, buyers and sellers have had trouble meeting in the middle and agreeing on a transaction price, and bid and ask spreads have been wide.

Prices in the US offset marketsBolstered by the emergence of a variety of new protocols, offset registries, and federal cap-and-trade bills, US offset markets were set for a strong year in 2009. Unfortunately, the positive momentum stopped short as the year progressed. A tough economic climate and weakening chances for a federal cap-and-trade bill diminished enthusiasm and demand.

Consequently, it was a mixed market. Prices on the spot market fell for US offset credits in 2009. As Table 6 illustrates, the mid-market price for the CAR credits fell 29 percent over the 12 months. VCS credits fell even more steeply, at 44 percent. CCX CFIs dropped a staggering 91 percent in 2009 on the exchange (from $1.65/t to $0.15/t for Vintage 2008 CFIs).

On the other hand, some forward and future markets fared better. The forward prices for a 2009 vintage credit from the Climate Action Reserve—known as Climate Reserve Tonnes (CRTs)—rose during the year, for both landfill and livestock methane projects. On the CCFE, CRT contracts for reductions taking place in 2009 (known as vintage 2009) also rose in value to $7.70 in their initial introductory price of $6.50 in the spring. For OTC prices, Table 6 shows a breakdown by quarter in 2009. Two prominent bills gave 2009 vintage offsets preference in terms of eligibility versus earlier years, which explains why 2009 vintage forwards

Table 6: Over-the-counter US offset prices throughout 2009

OTC spot market $/t

(vintage 2008 and earlier)

OTC forward market $/t (2009 vintage CAR credits)

CAR VCS Landfill methane

Livestock methane

California livestock methane

California forestry

Average mid-market price

1Q09 $7.3 $5.0 $6.3 $6.7 $7.5 --

2Q09 $6.0 $4.6 $6.4 $6.7 $7.3 --

3Q09 $5.1 $3.9 $6.6 $7.1 $8.0 $8.3

4Q09 $5.2 $2.8 $7.2 $7.4 $7.5 $7.8

Source: Carbon Project Manager North America

Standards Project type Location Vintage year

Eligibility into a mandatory cap-and-trade regime

High CAR, RGGI Forestry, Livestock Methane, Coal Mine Methane, Landfill Methane

California 2009+

Medium VCS, CCX, ACR, Gold Standard, CDM

Soil Sequestration, Small scale Energy Efficiency, Fuel Switching, Industrial Gases

Rest of the country

2001-2009

Low Project-Specific Standards

Renewable Energy, Large Scale Energy Efficiency, Carbon Capture and Storage

-- Pre-2001

rose while vintage 2008 spot prices declined. For more on policy, see Textbox 6.

Along similar lines, CCX prices fell further than other standards, as it was unclear whether CFIs would be eligible for early action credits in a federal cap-and-trade scheme. Low CCX prices then gave way to a two-tiered market for CFIs in the second half of the year, allowing US offset projects to sell their CFIs in a “privately negotiated” deal at a slight premium to the official exchange price. The premium ranged from

$0.20 to $1.00 beyond the exchange price. Though prices were negotiated off-exchange, contracts cleared on-exchange and appeared in the exchange volume numbers.

Price determinants

Buyers took great care in valuing projects in 2009. This is especially true for those hoping to purchase credits that will be eligible for future compliance. For pre-compliance credits, there are four main factors that determine value: the project standard, project type, its location,

Prices are for US based projects. Price ranges are aggregated from transaction information provided by buyers, sellers, brokers, and traders of offsets in the US, reported on a monthly basis. These prices reflect a primary market price, meaning that the offsets are sold directly from the project. Point Carbon uses a mid-market price here.


Table 7: Four determinants of offset eligibility



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and the year in which the reduction took place (also known as vintage). Table 7 explains eligibility of projects as determined by policy.

Standards. Certain standards, based on language in existing federal bills, would be grandfathered into the scheme. For instance, the Climate Action Reserve (CAR) standard is recognized as eligible in both the Kerry-Boxer and Waxman-Markey bills. Therefore, CAR tends to trade at the highest prices.

Project types. The congressional bills specifically mention eligible project types, and with the momentum of many projects getting off the ground currently, projects such as forestry and methane capture from landfills, livestock waste, and coal mine are at the top of the list. Table 6 shows that forestry commands the highest prices followed by livestock methane and then landfill methane. Forestry provides other environmental services (biodiversity, etc) which helps it sell at a higher value, especially in the voluntary markets. Landfill methane, on the other hand, trades at a discount since it may be regulated by the EPA in the future. This would render it ineligible for offset creation.

Location. During the year, price tiers developed between California projects and those from other states. Buyers perceived California offsets as a backstop, since the state government would fall back on its state-level climate legislation if federal level policy failed. All else equal, this created a $0.50-$1.00/t premium in the forward market.

Vintage. The preferred vintages were 2009 and beyond, since both pieces of federal legislation allow those vintages to be grandfathered into the scheme on a 1:1 basis. For CAR, this partly explains why forward markets gained while the spot markets (which predominately traded pre-2009

Textbox 6: Federal cap-and-trade policy and the treatment of offsets

The “Waxman-Markey” Bill: The American Clean Energy and Security Act (H.R. 2454), also known as the Waxman-Markey Bill, passed out of the House of Representatives on June 26, 2009, and contained a number of provisions regarding offsets. For project types, it explicitly lists eligible categories, but grants final decision-making power to the Environmental Protection Agency and the US Department of Agriculture. The bill stipulates that the EPA would regulate all significant sources of methane, which includes most large landfill methane and coal mine methane projects, taking away their eligibility as offset projects.

The bill also specifies that standards created through state government action would be eligible, which included CAR and RGGI standards. There is no explicit guarantee that the VCS, CCX, ACR, or the Gold Standard would be eligible.

The text indicates that early action emission reductions which took place after January 1, 2009 would be eligible for a 1:1 compliance under a federal scheme in 2012. The projects would need to have started after January 1, 2001. Offsets created before 2009 but after 2001 could be exchanged for monetary value, based on average value of credits from 2006 – 2009.

The Kerry-Boxer Bill: The Clean Energy Jobs and American Power Act (S. 1733), also known as the Kerry-Boxer bill, passed out of the Senate Environment and Public Works Committee in November. Like H.R. 2454, it lists eligible project types, but it also stipulates that many sources of landfill and coal mine methane would not be directly regulated by law, allowing those projects to continue to reduce emissions as offset projects.

The Kerry-Boxer bill keeps the same eligibility requirements for offset standards and vintages. For pre-2009 credits, Kerry-Boxer specifically sets aside allowances to compensate those that purchased those credits, which Point Carbon estimates would be close to $525 million dollars.

vintages) fell.

Rising supplies for an American appetiteThe Waxman-Markey and Kerry-Boxer bills allow up to 2 billion tons of offsets to be used for compliance each year, much of it coming from domestic sources. Though the US supply is growing, it is still far below limits spelled out in federal legislation.

Growth in supply

According to Point Carbon’s database, carbon offset projects produced 29 Mt CO2e in 2009. For project types

likely to be eligible for compliance under the federal proposals, volume of supply from projects amounted to 22 Mt CO2e.

The project pipeline in the CPMNA database (see Chart 1) shows growth at approximately 3 million metric tons CO2e per year from 2009 to 2012. Funded by forward-thinking project developers and carbon funds, the largest year-to-year growth happened between 2007 and 2008 as these players began to enter the market.

Project types: Methane and beyond

Methane capture projects make up roughly half of the CPMNA database



CMA March 1, 2010

pipeline in 2009. Landfill gas projects in particular were most prolific, reducing 9 Mt CO2e in 2009, or 34 percent of the total reductions that year. In addition, projects which capture methane from livestock waste or coal mines both produced roughly 2 Mt CO2e respectively in 2009.

New protocols from CAR, VCS, and ACR helped build supply for forestry projects as well. The 2009 supply of forestry provided less than 2 tons of credits to market, 6 percent of the total.

A significant portion of supply volume in 2009 came from enhanced oil recovery projects, though their applicability for future cap-and-trade schemes is still in question. Industrial gases and soil sequestration projects have the ability to greatly expand the supply and bring it closer to the limits set out by legislation, though they are relatively small at the moment.

Standards: Headed for consolidation?

In 2009, carbon offset standards in the US exhibited a tendency for both consolidation and expansion. For compliance-ready offsets, buyers displayed increased preference for the Climate Action Reserve, as reflected in its growth. However, Voluntary Carbon Standard, Chicago Climate Exchange, and American Carbon Standard continued to play a strong role in the market. In addition, a number of standards gained a foothold, including Green-e climate, GHG Services, Canadian Standards Association (ISO 14064) and Climate Community ad Biodiversity Alliance (CCBA).

For the four main standards in the US, 2009 was a pivotal year:

Climate Action Reserve. CAR accounted for roughly 7 Mt CO2e of the 2009 reductions. As of Feb 22,

Chart 1: Supply of US-based offset reductions, Vintage years 2005 to 2010

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010

Mt C

O 2e

Other

Energy Efficiency

Renewable Energy

Enhanced Oil Recovery

Forestry

Industrial Gases

Agricultural Methane

Soil Sequestration

Coal Mine Methane

Landfill Methane

Project types above the dotted line are not likely to be eligible for Federal Cap-and-Trade

Chart 2: 2009 reductions by project type

Landfill Methane, 34%

Coal Mine Methane, 8%

Livestock Methane, 7%

Industrial Gases, 6%

Forestry, 6%

Renewable Energy, 4%

Energy Efficiency, 3%

Other, 0%

Landfill Methane, 34%

Enhanced Oil Recovery, 17%

Soil Sequestration,

14%

Coal Mine Methane, 8%

Livestock Methane, 7%

Industrial Gases, 6%

Forestry, 6%

Renewable Energy, 4%

Energy Efficiency, 3%

Other, 0%

2010, 0.5 Mt of credits were issued for vintage 2009 offsets, including forest management, landfill gas capture/combustion, and livestock methane. There were 161 projects listed on the CAR registry managed by APX. Chart 3 displays the issued vs. pipeline volume for CAR for vintage years 2008 through 2010.

Chicago Climate Exchange. The

CCX had the largest volume and the second largest number of projects, with 8 Mt of CO2e of domestic offset reductions in 2009. The largest volume within CCX came from soil sequestration projects. A number of projects have moved from CCX to CAR to take advantage of the higher prices for CAR project credits.

Voluntary Carbon Standard. VCS has





CMA March 1, 2010

the fourth largest volume with 2 Mt CO2e total reductions. The VCS works with three registries – APX, Markit Environmental, and Caisse des Dépôts - to list its US and international projects. Chart 3 displays the issued vs. pipeline volume for VCS for years 2008 through 2010.

American Carbon Standard. The standard associated with the American Carbon Registry recently became a part of Winrock International. The ACR pipeline features enhanced oil recovery projects generating most of the credits, with reforestation projects bringing in some additional supply of late.

Location: Where does the supply come from?

Figure 1 shows that there are a number of states that stand to benefit from carbon offsets. For instance, states with oil resources have generated offsets from enhanced oil recovery. Texas is home to nearly 4 Mt CO2e reductions in 2009, most of the volume coming from five enhanced oil recovery (EOR) projects. Over 3 Mt CO2e being generated from Wyoming in 2009, but similar to Texas, 97 percent of the state’s reductions are attributable to three EOR projects.

Another notable source of projects is California, where expectations of state-level cap-and-trade have cultivated a sustainable appetite for early action projects. Because landfills will likely be regulated as a stationary source in California, only six projects in the state derive reductions from landfill methane capture. California has the largest concentration of dairy waste and forestry projects.

Mid-western states have a number of soil and grassland sequestration projects, while the states of the Mississippi Alluvial Valley have many opportunities for forestry projects.

Chart 3: Issued versus pipeline reductions for CAR and VCS by vintage year

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Mt C

O2e

Pipeline

Issued

V2008 V2009 V2010

CARVCS CARVCS CARVCS

Sources: Issued credits are provided by CAR and VCS registries. Pipeline numbers are sourced from Carbon Project Manager North America. Numbers sourced as of 2/22/10.

Figure 1: Map of US with offset volumes in 2009

0.5 - 1.0 Mt CO2 3.0 - 4.0 Mt CO2

2.0 - 3.0 Mt CO2

1.0 - 2.0 Mt CO2

0 - 0.5 Mt CO2

Demand for offsets: Funds do the heavy liftingBuyers, ranging from utilities to hedge funds to carbon neutral travelers, are a crucial part of the US offset market. With many sellers and fewer purchasers, they hold unusual

sway over pricing and transaction volumes.

However, the demand side is not well understood. Aside from registries such as the American Carbon Registry, which list buyers and credits transferred, that side of the transaction is often unknown. This section of the report intends to shed




CMA March 1, 2010

more light on demand by providing input from surveyed players who see all sides of the transactions.

Who are the buyers?

Emitters. This category includes utilities, industrials, refiners, and manufacturers who are the largest sources of greenhouse gases.

Financial intermediaries. Hedge funds, commodity funds, traders, and banks all fit into this category.

Carbon project developers and aggregators. These companies include project developers, carbon aggregators, and carbon funds. This group focuses specifically on the carbon market.

Retail buyers. Included in this category are organizations or individuals that hope to reduce or eliminate their relatively small carbon footprints.

Our survey asked for the relative proportion of purchases made in the primary market by players from each of these categories. Primary transactions are defined as purchases coming directly from the project itself, when the ownership of the credits has changed hands for the first time. This is opposed to secondary transactions, which occur after the initial purchase has been made.

According to our survey respondents, the leading buyers in the primary market were carbon funds and developers. They collectively made up 39 percent of transactions, followed closely by financial intermediaries at 30 percent, and then emitters at 25. Far behind them were retail buyers, who provided only 6 percent of the primary demand (see Chart 4).

The respondents indicated that emitters have thus far played a relatively minor role. Given that many emitters are risk-averse by nature, and may also not have in-house trading

Chart 4: Who were the primary market buyers in 2009?

Carbon aggregators &

project developers,

39%

Liquidity Providers, 30%

Emitters, 25%

RetailBuyers,

6%

expertise, this is not too surprising. Once policy is in place, their role is expected to grow considerably.

Retail buyers accounted for only 6 percent of demand, a relatively small piece of the pie. The primary markets are not suited for buyers with relatively small appetites. They may be better served by purchasing through an aggregator or website.

Why are they buying?

Our targeted survey asked participants to provide a view of the buyers’ motivations, dividing purchases of US-based offset credit into pre-compliance versus voluntary transactions. For greater granularity, the survey separated the answers by standard.

Based on the responses, presented in Chart 5, purchases of Climate Action Reserve and the Chicago Climate Exchange tons were primarily driven by pre-compliance buyers. Meanwhile, the VCS and the American Carbon Registry saw greater demand from voluntary buyers for US-based projects.

One surprise was the high level of pre-compliance buying for CCX projects. This may be driven by bargain hunters who see the relatively low prices as an opportunity to buy an offset that has a chance for compliance down the road.

Table 8 shows that in 2009, pre-compliance volumes were roughly 59 percent of the total volumes and 66 percent of the market in 2009.

2010: Two roads diverged2010 is expected to be a watershed year for North American offset markets. As US federal cap-and-trade policy approaches a make-or-break showdown in the Senate, North American offset markets will react accordingly. Passage will lead to growth in supply and trading, while failure of such legislation will dampen activity.

Any discussion of a forecast for US-based offset markets in 2010 is inevitably a policy discussion. There are four policy questions that will determine the future of offset

Source: Survey



CMA March 1, 2010

markets:

Will cap-and-trade pass? Though most media outlets have written its epitaph, cap-and-trade is not dead. Lindsey Graham (R-SC), Joseph Lieberman (I-CT), and John Kerry (D-MA) continue to work towards a bipartisan climate bill, and have shown no intention of stopping. However, legislative priorities—such as financial reform, job creation, and health care—will take up much of the Senate calendar, meaning that time is short. Point Carbon maintains a forecast of 20 percent that a cap-and-trade program will pass in Congress in 2010.

If a bill passes, what will it look like? A compromise that manages to pass would likely set lower targets than the Waxman-Markey bill. Offsets would also have a strong role in most scenarios, given their ability to benefit agricultural interests. It may possibly morph into a hybrid system with components of a carbon tax, incorporating ideas from “cap-and-dividend” proposals. The most likely outcome, though, is a simple cap-and-trade program limited to the power sector.

Will the Environmental Protection Agency (EPA) regulate GHGs? The EPA is under a legal mandate to proceed via the Clean Air Act with GHG regulation unless Congress steps in. EPA regulation may be stopped by Congress or delayed due to legal challenges. Either way, we anticipate the EPA will continue to be at the heart of the debate, but that the actual regulation would still be far off.

Will the regional programs step up? RGGI and the Western Climate Initiative had originally positioned themselves as a viable alternative to federal action under the previous administration. However, state legislators are to a large extent experiencing the same qualms

Table 8: Pre-compliance versus voluntary in 2009

2009 Pre-compliance 2009 Voluntary

Volumes (Mt CO2e)

Market value ($M)

Volumes (Mt CO2e)

Market value ($M)

Exchange based

CCX: CFI Contracts

3.8 $3.5 2.6 $2.3

CAR: CRT Contracts

0.6 $3.0 0.2 $1.0

Subtotal 4.5 $6.4 2.8 $3.3


CAR 5.3 $35.7 1.9 $12.5

VCS 0.9 $4.1 1.2 $5.6

ACR 0.4 $0.9 1.3 $2.7

Other 0.2 $0.5 0.9 $1.9

Subtotal 6.9 $41.2 5.3 $22.6

Total 11.3 $47.6 8.1 $26.0

about cap-and-trade as their federal counterparts, and might not support a program that could potentially put their state at a competitive disadvantage. Nevertheless, if regional programs do go ahead, we expect their borders will be re-drawn and narrowed down to a

core group of states.

For more information, please see Point Carbon’s North American research reports, including Will the EPA Go All the Way and Plan B - Going it Alone: Regional Programs in North America,

Source: Carbon Project Manager North America, survey

Chart 5: Pre-compliance vs. voluntary purchases by offset standard

74%

42%

60%

25%

26%

58%

40%

75%

0% 20% 40% 60% 80% 100%

Climate Action Reserve

Voluntary Carbon Standard

Chicago Climate Exchange

American Carbon Registry

Pre-compliance Voluntary

Source: Survey



CMA March 1, 2010

which can be found at http://www.pointcarbon.com/research/cmana.

Market volumes and value in 2010

Based on the input from the targeted survey, Point Carbon has two separate forecasts for 2010, one based on a scenario where cap-and-trade is passed in June of 2010, and the other assuming it does not pass. This is further broken down by standard. Point Carbon assumed 2009 prices to remain the same in 2010, adding only cost-of-carry.

The two scenarios represent two divergent paths that the market could take. In scenario one, tremendous growth will come with policy certainty and demand from natural buyers, resulting in 263 percent growth in volume and 321 percent growth in value. In scenario two, trading volume will stay flat with market value beginning to level off at 31 percent growth. See Table 9 for detail on this forecast.

Conclusion: The road not yet takenThe year 2009 began with optimism. US Offset supplies were growing, RGGI allowances had begun trading in earnest, and Congress was seriously taking up climate legislation. Unfortunately, the optimism soon gave way to uncertainty and a measure of frustration, when Senators began to prioritize other

Table 9: 2010 for two different scenarios

2010 scenario 1 2010 scenario 2

Volumes (t CO2e)

Market value ($)

Volumes (t CO2e)

Market value ($)

Exchange based

CCX: CFI contracts 19 $17 3 $3

CAR: CRT contracts 4 $20 1 $6

Subtotal 23 $37 4 $9

YTY growth 223% 279% -40% -10%


CAR 35 $237 11 $72

VCS 4 $21 3 $12

ACR 3 $5 1 $2

Other 5 $10 1 $1

Subtotal 47 $273 15 $88

YTY growth 287% 328% 24% 38%

Total 70 $310 19 $97

YTY growth 263% 321% -0% 31%

legislative initiatives.

In the backdrop of tremendous policy uncertainty, the next five months will define the future of cap-and-trade in the US. If legislation falters, volumes will slide and developers will look to consolidate in order to survive. If it succeeds, the offset market will more than triple size in our estimation, with the early actors able to enjoy the spoils of their investments. Emitters will move aggressively, both

as buyers and developers, and the market will flourish with renewed vigor.

Therefore, in the year ahead, anything from top to bottom is possible. With so much still hidden behind the mist, US offset players could be compared to pioneers who have “taken a road less traveled.” It remains to be seen whether the country will follow in their footsteps, for that will make all the difference.

Source: Carbon Project Manager North America, survey



CMA March 1, 2010

ACR American Carbon Registry

CAR Climate Action Reserve

CCBA Climate, Community and Biodiversity Alliance

CCFE Chicago Climate Futures Exchange

CCS Carbon Capture and Storage

CCX Chicago Climate Exchange

CDM Clean Development Mechanism

CFI Carbon Financial Instrument (credits from the Chicago Climate Exchange)

CMM Coal Mine Methane

CO2e CO2 Equivalent

CPMNA Carbon Project Manager North America

CRT Climate Reserve Tonne (credits from the Climate Action Reserve)

EOR Enhanced Oil Recovery

ERPA Emissions Reductions Purchase Agreement

GHG Greenhouse Gas

GS The Gold Standard

HFC Hydrofluorocarbon

KB Kerry-Boxer bill; The Clean Energy Jobs and American Power Act

ODS Ozone Destroying Substances

OTC Over-The-Counter

PFC Perfluorocarbon

RGGI Regional Greenhouse Gas Initiative

VCS Voluntary Carbon Standard

WCI Western Climate Initiative

Acronym List

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Website

www.pointcarbon.com

Contacts


CMA March 1, 2010

A Point Carbon publicationCopyright © 2010, by Point Carbon.

All rights reserved. No portion of this publication may be photocopied, reproduced, scanned into an electronic retrieval system, copied to a database, retransmitted, forwarded or otherwise redistributed without prior written authorization from Point Carbon. See Point Carbon’s “Terms and Conditions” at www.pointcarbon.comThe data provided in this report were prepared by Point Carbon’s Trading Analytics and Research division. Publications of Point Carbon’s Trading Analytics and Research division are provided for information purposes only. Prices are indicative and Point Carbon does not offer to buy or sell or solicit offers to buy or sell any financial instrument or offer recommendations to purchase, hold or sell any commodity or make any other investment decision. Other than disclosures relating to Point Carbon, the information contained in this publication has been obtained from sources that Point Carbon believes to be reliable, but no representation or war-ranty, express or implied, is made as to the accuracy or completeness of this information. The opinions and views expressed in this publication are those of Point Carbon and are subject to change without notice, and Point Carbon has no obligation to update either the opinions or the information contained in this publication.Point Carbon’s Trading Analytics and Research division receives compensation for its reports. Point Carbon’s Trading Analytics and Research division reports are published on a subscription basis and are not issued at the request of any client of Point Carbon.

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