www.kestrelmanagement.com

Management Systems • Risk and Liability Management • Process Improvements

©Copyright 2007 Kestrel Management Services, LLC

Carbon Trading: Opportunities and Cautions

Philip TrowbridgeKestrel Management Services

Email: ptrowbridge@kestrelmanagement.comDirect Phone: (512) 795-9119

Presentation Overview

©Copyright 2008 Kestrel Management Services, LLC

• Emissions trading overview• Purpose• Explanation• History

• Policy & regulatory development• Kyoto• EU • US & regional

• Climate change program considerations• Exchange vs brokerage

Emissions Trading Overview

©Copyright 2008 Kestrel Management Services, LLC

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

• McKinsey surveyed nearly 2200 Executives• 60% - climate change important to strategy

Source: McKinsey Global SurveyDecember 2007

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

Source: McKinsey Global SurveyDecember 2007

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

Source: McKinsey Global SurveyDecember 2007

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

Source: McKinsey Global SurveyDecember 2007

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

Source: McKinsey Global SurveyDecember 2007

Climate Change Importance

©Copyright 2008 Kestrel Management Services, LLC

Source: McKinsey Global SurveyDecember 2007

However, only 30% of companies incorporate climate change into their corporate strategy

Emissions Trading

• Goal: Reduce emissions • Often referred to as “Cap & Trade”

©Copyright 2008 Kestrel Management Services, LLC

Emissions Trading

©Copyright 2008 Kestrel Management Services, LLC

Emissions Trading

©Copyright 2008 Kestrel Management Services, LLC

Emissions Trading

©Copyright 2008 Kestrel Management Services, LLC

Emissions Trading

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

• Cap – emissions limit • Limit at or below current emissions

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

©Copyright 2008 Kestrel Management Services, LLC

What is a Cap & Trade System?

©Copyright 2008 Kestrel Management Services, LLC

How Cap & Trade Works

Image Credit: Union of Concerned Scientist©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

• Established in U.S. through 1990 Clean Air Act Amendments

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

• Established in U.S. through 1990 Clean Air Act Amendments• SO2 & NOx trading

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Cap & Trade History

©Copyright 2008 Kestrel Management Services, LLC

Policy & Regulatory Developments

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

Kyoto Protocol (1997)• Established mechanisms for trading CER’s between

countries/continents

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

©Copyright 2008 Kestrel Management Services, LLC

Kyoto Protocol

©Copyright 2008 Kestrel Management Services, LLC

EU Emissions Trading Scheme

• Largest emission trading system in world• Covers 10,000 installations

EU Emissions Trading Scheme

• Largest emission trading system in world• Covers 10,000 installations• Includes variety of heavy industry

EU Emissions Trading Scheme

EU Emissions Trading Scheme

EU Emissions Trading Scheme

EU Emissions Trading Scheme

EU Emissions Trading Scheme

U.S. Policy Overview

• Seven Cap & Trade proposals introduced in U.S. Congress in 2007

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview – continued

• Carbon trading program considerations• Economy-wide program – regulated “upstream”

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview – continued

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview – continued

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview – continued

©Copyright 2008 Kestrel Management Services, LLC

U.S. Policy Overview – continued

©Copyright 2008 Kestrel Management Services, LLC

Western Climate Initiative

• Formed: February 2007• Partners: NM, AZ, CA, OR, WA, MT, UT, BC,

MAN

©Copyright 2008 Kestrel Management Services, LLC

Western Climate Initiative

©Copyright 2008 Kestrel Management Services, LLC

Western Climate Initiative

©Copyright 2008 Kestrel Management Services, LLC

Western Climate Initiative

©Copyright 2008 Kestrel Management Services, LLC

Western Climate Initiative

©Copyright 2008 Kestrel Management Services, LLC

Regional Greenhouse Gas Initiative

• Formed: August 2003• Partners: CT, DE, ME, NY, VT, MD,

©Copyright 2008 Kestrel Management Services, LLC

Regional Greenhouse Gas Initiative

©Copyright 2008 Kestrel Management Services, LLC

Regional Greenhouse Gas Initiative

©Copyright 2008 Kestrel Management Services, LLC

Regional Greenhouse Gas Initiative

©Copyright 2008 Kestrel Management Services, LLC

Corporate Climate Change Program Considerations

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

• Strategic timing – understand why taking action now is the right time (leader, close follower, laggard)

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

©Copyright 2008 Kestrel Management Services, LLC

Corporate Strategic Response Considerations

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

• Development & maturity of GHG accounting practices

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

©Copyright 2008 Kestrel Management Services, LLC

Benefits of Participating in Carbon Trading Today

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

• C&T is a redistributive system – net reductions?

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

©Copyright 2008 Kestrel Management Services, LLC

Carbon Trading Cautions

©Copyright 2008 Kestrel Management Services, LLC

Exchange vs Brokerage

©Copyright 2008 Kestrel Management Services, LLC

Chicago Climate Exchange (CCX)

• Launched 2003 (+300 members)• Voluntary, legally binding• Trades six GHG’s (CO2, N2O, HFCs, PFCs, CH4, SF6 ) • Carbon Financial Instruments (CFI’s) issued

annually (CFI’s = 100 metric tons priced/ton)• Offset project verification

• Initial and annual third party verification• Reports reviewed by CCX and FINRA

• Reduction targets - 3% existing members; 6% new members

©Copyright 2008 Kestrel Management Services, LLC

Chicago Climate Exchange (CCX)

©Copyright 2008 Kestrel Management Services, LLC

Source: www.chicagoclimatex.com 06/10/08

Cantor CO2e

• Provide professional brokerage services to the energy and environmental commodity markets in U.S. & EU

• Headquarters: London & San Francisco• Began emissions trading in 1992• Trade CO2, NOx, SOx, VOC’s, REC’s, • Carbon related services include:

• Support for “carbon neutral” – corporate and consumer

• Market carbon offsets

©Copyright 2008 Kestrel Management Services, LLC

Trading: Exchange Member or Broker?

• Annual membership fee $5K to $35K

• Transaction fee $5 per trade

• Audits reviewed by NASD to ensure conformance

©Copyright 2008 Kestrel Management Services, LLC

Trading: Exchange Member or Broker?

• No membership fee• No Master Agreement• Brokerage fee 3% to 5%• No reduction target

requirement• Rigorous due diligence

process

©Copyright 2008 Kestrel Management Services, LLC

Conclusion

• U.S. has a history of cap & trade• Carbon trading will likely be part of climate change

regulation solution• Preparation depends on part you want to play• Market participation may help better prepare you

for future• Economics may help resolve whether to use

brokerage or exchange

©Copyright 2008 Kestrel Management Services, LLC

Thanks!

©Copyright 2008 Kestrel Management Services, LLC