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California Carbon Markets update:An overview of the regulations, market and trading activity

Presented by:David Nussbaum

July 2011

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Evolution Markets Overview

Evolution Markets is the Intersection of Environment, Energy, and Finance™

Complete Financial Services for Green Markets and Clean Energy Sector- Commodity Brokerage

- Market Execution Platforms

- Structured Transactions

World’s Largest Environmental Brokerage

- More than 60 Professionals Worldwide

- More than $150 billion in Transactions

Formed in May 2000

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Evolution has offices on three continents and has completed environmental transactions in more than 30 countries

New YorkSan Francisco

London

Beijing

Evolution Markets Overview

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Evolution covers all major environmental and energy markets

• Renewable Energy Credits• GHG Credits, Allowances, Derivatives• SO2 Emissions Allowances

• NOX Emissions Allowances– Houston/Galveston NOX

– RECLAIM (L.A. NOX & SOX)

• Emissions Reduction Credits (ERCs)• Biomass• Energy Efficiency Credits• Water Rights• Weather Derivatives

• Green Power Transactions• Biofuels

– Ethanol– Biodiesel

• Coal– OTC Physical & Derivatives

• Natural Gas– Options, Swaps, & Calendar Spread

Options– West Physical Basis Index

• Nuclear Fuels– Physical & Futures

Energy MarketsEnvironmental Markets

Environmental and Energy Markets

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Annual Customer Survey

Best Broker, Options (EUAs, CERs)

Best Broker, Spot & Futures (EUAs, CERs)

Best Primary Originator Kyoto Project Credits

Best Broker, Secondary Market Kyoto Project Credits

Best Broker, North American Mandatory Markets (e.g. RGGI)

Best Broker, SO2

Best Broker, NOx (Reclaim)

Best Broker, NOx

Best Broker ERCs

Best Broker, Renewable Energy Certificates, North America

Best Broker, Weather Risk Management, North America

Best Broker, Weather Risk Management, Europe

Best Broker, Weather Risk Management, Asia

Best Broker, Catastrophe Risk Management, Global

*category runner-up

Best Broker, U.S. Coal

Best Broker, Asia Coal

Best Broker EUA Options

Best Broker, CER Options

Best Broker, CERs – Secondary (CDM)

Best Broker, CERs - Primary (CDM)

Best Broker, US SO2 & NOx

Best Broker, US Weather Derivatives

Best Broker, European Weather Derivatives

Leadership in the Markets We Serve

2010

House of the Year: U.S. Coal (2010)

Specialist Broker of the Year (2008)

House of the Year: European Emissions (2007)

House of the Year: Weather / Emissions (2004)

Since Evolution Markets was founded in 2000, we have received more than 100 awards for excellence in brokerage. Below you will find a sample of our most recent awards from 2010. For the full list our awards, please visit www.evomarkets.com

2010

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Annual Commodity Rankings

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Annual Awards

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Overview of California Carbon Program

General Information• Program administered by the California Air Resources Board (CARB)• Program required to reduce emissions to 1990 levels by 2020• Covered Sources: 85% of State’s greenhouse gas emissions• Covered Facilities are those with annual emissions equal or greater than 25,000 MtCo2e• Start Date

–First allowance auction: August 15, 2012

–Compliance obligations: 2013

Timeline

December 2010: Final ratification of AB-32July 2011: Updated cap-and-trade regulations released by CARB October 2011: Anticipated approval of cap-and-trade regulation

by CARB board

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Covered Cap in million MtCo2e

2013: 162.8 Compliance Period I (2013 - 2014)2014: 159.7

2015: 394.5 2016: 382.4 Compliance Period II (2015 – 2017)2017: 370.4

2018: 358.3 2019: 346.3 Compliance Period III (2015 – 2017)2020: 334.0

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Auction

Timing & Quantity• First auction set for August 2012

– 2013 allowances will be auctioned, as well as 2015 allowances (three-year forward)– First time physical allowances will enter marketplace

• Quarterly auctions begin in 2013– Each auction will auction 25% of that year’s annual budget + 10% of future vintage year

allowances

Participation• Covered entities, voluntary associated entities (i.e. banks, funds, etc.)• Any party with a Holding Account with allowances can sell at the general auction

and receive the clearing auction price for their allowances• Entities must register 30 days prior to the auction with the ARB • Single entity can purchase maximum of 25% of the total auctioned future vintage

allowances

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Allocations

Utility/Power Allocation• Starting 2012, the Electric Distribution Utilities (EDUs) will receive 90% of 2008 sector level

emissions, declining linearly to 85% in 2020 (roughly 97.7MM to start, declining to 83MM in 2020)

• Independent Power Producers (IPPs) will receive no free allowances under AB 32

• IOUs must sell 100% of allocation at auction; POUs can trade or retire allocations

Industrial Allocation• Largest sectors include up/downstream petroleum, cement, manufacturing, mining & minerals,

paper & pulp

• Industrial sectors will receive a majority of their required allowances for free from the outset and will continue to be freely allocated for the entire program

–Can retire or trade allocations

• Individual sector/facility-level allocations aren’t yet known

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The “Four Buckets” of CA Carbon Products

Early Action CreditsEarly action credits subject to re-verification to meet AB 32

compliance requirements

Indicative Pricing: 7/21/11

$16.75 bid / $17.25 offer

$10.75 bid / $11.75 offer

ODS $8.50 bid / $9.50 offerForestry $6.00 bid / $8.00 offerLivestock (dairy) $7.75 bid / $9.75 offer

$2 bid / $4 offer

Guaranteed ARB-compliant OffsetsFirm delivery of offsets guaranteed to meet AB 32 compliance

requirements

California Carbon Allowances (CCAs)Forward delivery of California Carbon Allowances

Potential Early Action CreditsARB is expected to approve additional methodologies from Offset Standard Bodies such as the Climate Action Reserve,

American Carbon Registry and potentially others

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California Carbon Allowance

Overview

– First trade executed in early November

– CCA contracts deliver in December each year (first auction set for August 2012)

– OTC market and standard forward contracts have begun trading for early hedging and trading purposes

– Exchange-based products are currently being developed with one expected to launch September 2011

– Liquidity currently less than that of the offsets but expected to pick-up as power marketers and traders digest this program and as additional covered entities implement risk management strategies.

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Guaranteed ARB-compliant Offsets/Early Action Credits

Guaranteed ARB Offsets

– Project specific or non project-specific with term out to five years

– Product guarantees firm forward delivery of offsets useable for compliance with AB 32 (onto an ARB-approved registry)

– Generally offered by secondary sellers with strong credit

Early Action Credits

– Climate Reserve Tonnes (CRTs) CAR-approved protocols include: • Livestock Methane (U.S.)• Forestry & Urban Forestry• Ozone Depleting Substances (ODS)

– Criteria for inclusion• Vintages 2005-2014• Location: Domestic United States• Project start date prior to January 1, 2013

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• Compliance buyers• Energy companies• Commodity trading shops• Financials• Hedge funds• Industrials

• Buyer liability• EAC ARB offset conversion• Proposed regulatory changes• Potential future legal action

FactorsParticipants

Market Participants and Factors

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Current Transaction Structures

• Fixed price for allowances and forward settlement

• Fixed price for ARB-guaranteed offsets (where seller takes all delivery and eligibility risk – this may or may not be project-specific)

• Fixed price for project-specific ARB approved Early Action offsets where volume is not guaranteed

• Floating Price for ARB-approved offsets linked to a forward allowance or offset price

• Floating Price for non ARB-approved offsets linked to a forward allowance or offset price

• Fixed price for offsets that are currently not ARB approved (Advantage: Lower Price / Risk: eligibility may or may not happen)

• Numerous options structures on any of the above products

• Spread trading between allowances and offsets

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Historical Pricing

3/1/11 – 7/1 /11

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David NussbaumDirectorEvolution Markets Inc.

10 Bank Street 4th FloorWhite Plains, New York10606

tel. +1.914.323.0265mob. +1.917.816.2255email dnussbaum@evomarkets.com website www.evomarkets.com

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