Eec0808 Ccx Overview

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    August 8, 2008Stephen McComb

    Chicago Climate Exchange, Inc. 2007

    conom s

    312-229-5134

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    In r i n X

    Structure of the Market

    Example revenue Risk management and project finance

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    Proven, least-cost, and comprehensive tool for managing emissions:

    Environmental stewardship that rewards environmental innovationand strate ic lannin

    Flexibility, market efficiencies

    Multiple successes: US SO2, lead phase-out (gasoline), NOx, ETS

    Establish value to scares resource

    Reveals true cost of emissions

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    Chicago Climate Exchange (CCX) , , , ,

    European Climate Exchange (ECX) FSA-regulated futures market for European CO2 Allowances Launched April, 2005 accounts for 80-90% of total exchange traded volume in the EU ETS

    Chicago Climate Futures Exchange (CCFE) CFTC-regulated futures exchange for U.S. SO2 allowances

    Launched in December 2004, worlds first environmental derivatives exchange

    Montreal Climate Exchange (MCeX) Joint venture with the Montreal Bourse To host Canadian GHG trading, other environmental markets

    Multi-Commodit Exchan e MCX

    Agreement with MCX to trade European Carbon Financial Instruments in India

    Insurance Futures Exchange (IFEX) Catastrophic event linked futures Launched in 2008

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    What is Chicago Climate Exchange?prem er an un que nanc a ns u on es gne o a vance us ness, env ronmen a an soc a goa s.

    Chicago Climate Exchange (CCX) is the worlds ,

    legally binding integrated trading system to reduceemissions of all six greenhouse gases, with offset

    worldwide.

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    To create shareholder value

    To limit threats to shareholder liability

    To demonstrate corporate and environmental

    transparency

    To obtain first-mover advantage in emissions trading

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    CCX

    Members are leaders in their sectorsA Selection:

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    400

    540

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    nsCO2

    Live Market

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    237

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    174

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    Market in development

    Under discussion

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    Chicago Climate Exchange, Inc. 2007

    20122003 start 2009

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    Chicago Climate Exchange, Inc. 2007

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    Phase I: Members made legally binding commitments to reduce or trade 1% per year from 2003-2006,

    for a total of 4% below baseline.

    Baseline = Avg. emissions from 1998-2001, emissions in 2000 (Phase II)

    Phase II: Members make a legally binding commitments to reduce to 6% below baseline by 2010.

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    CCX employs independent verification throughout itsgreen ouse gas re uct on an tra ng system to

    guarantee transparency, rigor and integrity, and to provideMembers with standardized procedures for managing

    .

    Corporate Inventories: et o o og es FINRA Verification

    set ro ects: Accepted Methodologies (CCX, CDM etc.) Approved Expert Verification

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    CCX Comprehensive Market Structure

    Electronic Market Registry Comprehensive Rules System

    Emitters: Standard baseline,multi-year allowance stream

    Offset Providers (project credits) Emission audits, project verification Liquidity Providers Associate Members

    Web-

    accessibleElectronic

    Trading

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    Verified offset ro ects se uester or eliminate GHGs to

    earn CFI contracts sold on CCX electronic platform toCCX Membership.

    Current pre-defined offset categories:

    Methane destruction: Landfills, agricultural operations

    Carbon sequestration: forests, soils (conservation tillage,grassland planting, rangeland management)

    Energy efficiency Renewable energy

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    t ers case y case

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    Methane Emissions in Context: US 2006 CO2

    qu va en m ss ons n on e r c ons

    CH4; 555.3; 8% N20; 367.9; 5%

    HFC, PFC, SF6;

    147.8; 2%

    CO2; 5983.1; 85%

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    Landfill, coal mine and agricultural methane capture and combustion

    Projects operational on or after January 1, 1999

    Voluntary installation that is not required by law

    Crediting Rate: 18.25 mt CO2 per mt CH4 destroyed

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    Afforestation Avoided Deforestation

    ,or degraded

    Commitment 15 years agreement

    Deforestation and Forest Degradation)

    Forest loss accounting for 20% of globalwarming / GHG emissions

    Offsets for increase in carbon 2003- 2010period

    Above and below ground biomass

    Increases in soil carbon

    Must occur in tropical, developing countrywith inadequate institutional support

    Must account for leakage incurred by

    Quantification based tables (DOE 1605btables)

    Maintain 20% of earned offsets reserve pool

    installation of project

    Must have biodiversity and communitybenefits

    reversals

    Verification:

    10% in-field sample of both acreage

    Crediting for counterfactual emissions rateof what would occur had project not been

    implemented

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    an enro men

    Beginning, end and periodicverification

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    Managed Forests Long Lived Wood

    Baseline stock 2002 or 2006

    Proof of sustainable forest management

    Some carbon remains sequestered in wood

    products after harvest

    Credit for the fraction of stored carbon after, ,

    Offsets issued: Growth Harvest + Long Lived

    Wood

    100yrs

    Proof of sustainable forest management PEFC:ATF, SFI, FSC

    Annual quantification based on CCX approvedmodel

    Carbon rights must be retained through salescontract,

    dispositions, harvesting and catastrophic losses

    20% of issuance place into reserve pool

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    Long term maintenance of land under forestry

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    Ozone Depleting Substance

    Eligibility: n y t ose p ase -out o

    production

    Offset Issuance: Based in the GWP of the ODS (high

    GWP between 144 and 10,720)

    Resides with party paying for

    destruction

    Verification: Destruction in the U.S. in compliance

    with CAAA and RCRA requirements

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    Value of Landfill Gas Capture and

    Hypothetical landfill: 500 scfm or ~0.75 mmcf/da

    50% methane

    2,779 metric tons methane annually* , me r c ons 2 equ va en es roye

    $203,000 annually at a $4.00/metric ton CO2

    *

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    ase on a cu a or

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    Same H othetical Landfill

    1.4 MW generation capacity 90% Capacity factor

    11,038 MWh/year

    4,415 tons of CO2 awarded Power Revenue ~ $552,000 (at $50/MWh)

    Carbon Revenue ~ $18,000 (at $4.00/mtCO2)

    Carbon revenue increases total return on power projectb 3%

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    Risk: Risk Mana ement at CCX:

    1. Market Rules Volatility 1. Standardized, published-

    approval, known

    verification

    2. Market Volatility 2. Use of Futures and

    . ro ec eve opmenCosts

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    Hypothetical Project online December 2009 ~ ~ , First full year of verified tons end December 2009

    Toda ou can: Sell short (promise to deliver) 50 futures contracts (each 1,000t) Lock in a price of $4.35 pe