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ENVIRONMENTALFINANCIALPRODUCTSLLC©2001AliceLeBlancEnvironmentalFinancialProductsLLCSeniorEconomistCOPYRIGHT2001ENVIRONMENTALFINANCIALPRODUCTSL.L.C.TheChicagoClimateExchange:CreatingaMarketforGHGReductionCreditsFromBrazilianForestsENVIRONMENTALFINANCIALPRODUCTSLLC©2001ExamplesofGHGEmissionsTradingActivityInternationalAgencyInitiativesEmergingPlurilateralTradingGroupsInitiativesforNationalGHGEmissionsTradingProgramsortheCDMWorldBankCarbonFundUmbrellaGroupUnitedStatesUNCTADGlobalPolicyForumJapan,US,Canada,Australia,NewZealand,Iceland,Norway,Russia,UkraineUnitedKingdomOECDWorkshops&ResearchCanadaInternationalEnergyAgencyEuropeanUnionAustraliaUNEPScandinaviaNorwayUNDPDenmarkUNIDONetherlandsEuropeanCommissionNewZealandNordicCouncilRussiaEBRDBrazilCostaRicaCentralAmericaSlovakia32hostcountrieswithCDM/AIJofficesofprojectsENVIRONMENTALFINANCIALPRODUCTSLLC©2001ExamplesofGHGEmissionsTradingActivity(Cont’d)Provincial,State,LocalProgramsCorporateInitiatives&ExchangeActivityExamplesofTradingActivityUnitedStatesBP-AmocoEnvironmentalFinancial&CostaRicaOregonShellOilOntarioPower-ZahrenAlternativePowerNewJerseyDupontGEMCO-IGFInsuranceCaliforniaFordMotorCo.BP-Amoco-TheNatureConservancyOntarioPowerArizonaPublicService-NiagaraMohawkStatementofUSMayors:TransAltaSuncorEnergy-NiagaraMohawkWashington,DCSuncorEnergySumitomo-UnitedEnergySystems(Russia)DenverAESPacificPowerAustralia-NewSouthWalesSanFranciscoEnvironmentalFinancialProducts/CCXTesco-UgandaforestAtlantaDutchElectricityBoard(FACEFoundation)WasteManagementInc.-EnronChicagoEdisonElectricInstitute(Utilitree)AmericanElectricPower-TheNatureConservancyAustraliaPew(21corporatemembers)Central&Southwest-TheNatureConservancyNewSouthWalesWorldResourcesInstitute(3corporatemembers)Illinova-U.S.ReforestationWesternAustraliaCantorFitzgerald/PWCConsorcioNoruego-CostaRicaNatsource/AccentureToyota-NewSouthWalesCanadaEnvironmentalResourcesTrustPERT(Ontario)GMOForestryGERT(BritishColumbia)HancockNaturalResourcesGroupBritishColumbiaInternationalPetroleumExchangeChicagoBoardofTradeInternationalInternationalCouncilofLocalEnvironmentalInitiativesENVIRONMENTALFINANCIALPRODUCTSLLC©2001!Startingtoemerge—initsinfancy!The“commodity”isnotstandardized!Multiplemarkets!Eachtradeisdifferent!Noorganizedexchanges!Noclearmarketprice!SupplyoutstripsdemandStateoftheGHGEmissionsMarketENVIRONMENTALFINANCIALPRODUCTSLLC©2001!SimpleandstandardizedLowtransactionscostsUniformInstrumentsPredictable!Transparent,don’tpoliticize!OptionsforsmallprojectsHow“CDM”RulesCanHelpAttractInvestmentENVIRONMENTALFINANCIALPRODUCTSLLC©2001!EarlyReductionCreditProposals!“FourPollutant”BillsElectricpowersectorTonnagecaponCO2Tradingallowedorspecified!Carbonsequestrationinbiomassandsoils!RegulationofGHGsfromothersectors!StateLevelInitiativesU.S.LegislativeandRegulatoryOutlookENVIRONMENTALFINANCIALPRODUCTSLLC©2001!Thecommodityisnotyetwelldefined.!RegulationslimitingGHGsarenotyetinplace.!Lackofuniformstandardsformonitoring,verificationandcertification.!Lackoforganizedmarkets.BarrierstoTrading:HighTransactionCostsENVIRONMENTALFINANCIALPRODUCTSLLC©2001CCXOverviewTheChicagoClimateExchangeisavoluntarypilotgreenhousegastradingprogramtargetingemissionsourcesandoffsetprojectsinNorthAmerica,withlimitedoffsetprojectsinBrazil.ENVIRONMENTALFINANCIALPRODUCTSLLC©2001Objectives!Proofofconcept:cappedGHGemissionstradingsystem,supplementedbyoffsets!Developmarketinfrastructureandskills!Pricediscovery!PredictableGHGreductionschedule!Startsmallandgrowovertime,provideamodelENVIRONMENTALFINANCIALPRODUCTSLLC©2001StandardizedReductionTimetable!2002:Reduceemissionsto2%below1998levels!2003-2005:targetfallsadditional1%peryear(from1998)!RealisticemissionlimitsfornewfacilitiesCCXEmissionReductionSchedule92%93%94%95%96%97%98%99%100%19982002200320042005ENVIRONMENTALFINANCIALPRODUCTSLLC©2001MarketImplementation2001200220032004LAUNCHPHASE1PHASE2PHASE3Systemlaunchistargetedforthesecondhalfof2001.Reductioncommitmentstakenbyparticipantsinseven-stateMidwestregion.CommitmentsandtradingbyparticipantsintheentireUnitedStates,CanadaandMexico.ChicagoClimateExchangeSMexpandedtoincludeinternationalparticipants.ENVIRONMENTALFINANCIALPRODUCTSLLC©2001InitialRegionofFocus!SevencentralU.S.states(IL,IN,IA,MI,MN,OH,WI)!DiverseeconomyLargeindustrialbase,includingautomakersMajortransportsectorDiverseenergysectorPharmaceutical,electronics,andresourceindustriesAgriculturalandforestland!RepresentativeoftheU.S.economyENVIRONMENTALFINANCIALPRODUCTSLLC©2001Seven-StateMidwestRegionPopulation=~52million(~UnitedKingdom)20%ofUSLandArea~1millionsq.km.(~Germany+UK+France)11%ofUSGHGEmissions=~1100MMTCO2/yr(~France+UK)20%ofUSGDP~$1.8trillion(~UK+Netherlands)19%ofUSENVIRONMENTALFINANCIALPRODUCTSLLC©2001MarketEstablishment:12Steps!Clearlydefinethecommodity!Establishmarketoversight!Definebaselines!Setemissiontargets,allocatepermitsandmonitoremissions!Establishuniformallowances,defineeligiblecredits!Developanallowanceclearinghouse!Employexistingexchangesandtradingsystems!Developauctions!Refineanddevel