California Offsets Workshop Current State of the California

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California Offsets Workshop Current State of the California Carbon Market June 21, 2011 Josh

California Offsets Workshop Current State of the California Carbon Market June 21, 2011 Josh Margolis jmargolis@cantorco 2 e. com 415 -296 -9359 1 © Copyright Cantor. CO 2 e 2011

Agenda § § § § 2 Who are these guys? Litigation Market mechanics Market

Agenda § § § § 2 Who are these guys? Litigation Market mechanics Market size Allowances & offsets Transaction types Market color Actions to take now © Copyright Cantor. CO 2 e 2011 Cantor. CO 2 e Sound and Fury signifying? what, when, how $3 - $128 billion $6 - $70 spot, stream, options, hedge its complicated assess, prepare, hedge

Who is Cantor. CO 2 e? n California roots o o o Auction agreements

Who is Cantor. CO 2 e? n California roots o o o Auction agreements with >300 companies Los Angeles San Francisco n Brokerage, strategy, advisory, marketing, and regulatory assistance n Subsidiary of Cantor Fitzgerald, global financial services firm n > $10 billion environmental & energy transactions o o o n 3 Since 1992 (and before) Most credits brokered CEC Climate Change Advisory Committee CARB CRTs & CAs GHG VERs RGGI CERs VCUs SO 2 EAs RECLAIM RECs/ROCS EU EAs ATUs NOx SIP Call HGA Biomass Wastewater ERC DERs VERs Helping companies develop and implement successful offset/carbon management strategies © Copyright Cantor. CO 2 e 2011 Environment Energy Markets Compliance Voluntary Innovation Finance Securitization Technology Renewables

Litigation from Market’s Perspective • Key dates • Roller coaster – – – What’s

Litigation from Market’s Perspective • Key dates • Roller coaster – – – What’s EJ got to do with it? it’s all over/we agree with them? just show your homework the sun’s coming up tomorrow the other shoe • Betting on: – program what’s creditable – start date next lawsuit • Just give me certainty • Pricing uncertainty • Prohibition on speculation © Copyright Cantor. CO 2 e 2011

* Potential Value of Traded Credits Allowances 2, 700, 000 Auction Amt Auctioned (est)

* Potential Value of Traded Credits Allowances 2, 700, 000 Auction Amt Auctioned (est) Low (est) 5% High (est) 60% Offsets Low (est) High (est) Unit Price (est) $10 $70 Total Value $1, 350, 000 $113, 400, 000 216, 000 Total Value $2, 160, 000 $15, 120, 000 Unit Price (est) Times Sold $10 1 $70 4 Total Est Value of Allowances & Offsets Low High $3, 510, 000 $128, 520, 000 * Excludes value of freely allocated emission allowances © Copyright Cantor. CO 2 e 2011

AB 32: Cap vs. Allocations + Offsets 1 2 3 450 Million Metric Tonnes

AB 32: Cap vs. Allocations + Offsets 1 2 3 450 Million Metric Tonnes 400 350 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 § Net Cap § Offset forecast § The amount of allowances that CARB will remove from each year’s cap and set aside for the Allowance price Containment Reserve • BAU emissions forecast 6 © Copyright Cantor. CO 2 e 2011

Declining Emissions Checkbook © Copyright Cantor. CO 2 e 2011

Declining Emissions Checkbook © Copyright Cantor. CO 2 e 2011

Single Year Trade 400 300 Buys 100 allowances from seller Sells 100 allowances to

Single Year Trade 400 300 Buys 100 allowances from seller Sells 100 allowances to buyer 200 Seller © Copyright Cantor. CO 2 e 2011 Buyer

Multiple Year Trade 300 Required obligation 250 200 Surplus saleable reduction 150 100 50

Multiple Year Trade 300 Required obligation 250 200 Surplus saleable reduction 150 100 50 2012 2013 © Copyright Cantor. CO 2 e 2011 2014 2015 2016 2018 2019 2020 Actual emissions

Transaction Types § Spot § Stream § Swaps § Options § Firm delivery §

Transaction Types § Spot § Stream § Swaps § Options § Firm delivery § Unit contingent § Guaranteed CARB § Offsets § Allowances © Copyright Cantor. CO 2 e 2011

Transaction Types § Spot Transaction o Verified, issued offsets or allowances • Pros: POD,

Transaction Types § Spot Transaction o Verified, issued offsets or allowances • Pros: POD, low quantity/delivery risk, seamless transaction • Cons: Some buyers looking for future vintages § Stream Transaction o Multiple years of created, prospective offsets/EAs • Pros: Lock in future year price, establish cash flow/cost • Cons: Locked price eliminates ability to transact at better price • Hedge: Structure a floor/ceiling profit share 11 © Copyright Cantor. CO 2 e 2011

Transaction Types § Firm Delivery o Supplier guarantees delivery at set date/price • Pros

Transaction Types § Firm Delivery o Supplier guarantees delivery at set date/price • Pros Higher price • Cons Penalties for non-delivery, credit? § Unit Contingent o Delivery of credits when/if issued • Pros No non-delivery penalty if not issued • Cons Likely to be priced lower 12 © Copyright Cantor. CO 2 e 2011

Transaction Types § Swaps o Non cash transaction § Options o Risk management o

Transaction Types § Swaps o Non cash transaction § Options o Risk management o Right, not obligation • Calls right to buy at set level over set term • Puts right to sell at set level over set term 13 © Copyright Cantor. CO 2 e 2011

Transaction Types § Guaranteed CARB Offset or Allowance § Terms § Program in force

Transaction Types § Guaranteed CARB Offset or Allowance § Terms § Program in force § Dec 12, 13, 14 (one year delay? ) § Allowances/offsets issued/blessed by CARB § Issues § Credit § Policy/legal 14 © Copyright Cantor. CO 2 e 2011

Offsets § § 216 MMTCO 2 e through 2020 limit 8% of compliance obligation

Offsets § § 216 MMTCO 2 e through 2020 limit 8% of compliance obligation Location – CA, North America… for now ARB Protocols o Forestry protocol v 2. 1, 3. 0 -3. 2 o urban forests protocol v 1. 0 -1. 1 o US ODS protocol v 1. 0 o Livestock manure protocol v 1 -3 15 © Copyright Cantor. CO 2 e 2011

Potential Offsets What’s next (maybe? ) § CAR Ag o Cropland Management o Nutrient

Potential Offsets What’s next (maybe? ) § CAR Ag o Cropland Management o Nutrient Management o Rice Cultivation § § 16 VCS REDD CAR Nitric Acid CAR Mexico Livestock LFG? © Copyright Cantor. CO 2 e 2011

Allowances vs Offsets 17 Allowances Offsets Available from CARB Yes No Third Party Market

Allowances vs Offsets 17 Allowances Offsets Available from CARB Yes No Third Party Market Yes* Yes Available Outside Auctions Limited Yes Holding Limit Yes No Price Limit No No Forward Buys Yes* Yes Charismatic (Carbon with a Story) No Yes Risk of Reversal No* Yes Due Diligence Importance Limited Very © Copyright Cantor. CO 2 e 2011

Price Indications Recent Bid/Ask for Carbon Instruments (6/20/11) Product Type Quantity Vintage Bid/Ask CAR

Price Indications Recent Bid/Ask for Carbon Instruments (6/20/11) Product Type Quantity Vintage Bid/Ask CAR Forestry 2. 1 25, 000 spot 6. 50/7. 25 CAR Forestry 3. 1 25, 000 2005 -12 6. 75/7. 50 CAR – Dom ODS - Domestic 25, 000 2010 -2011 7. 75/8. 50 CAR Ag Methane 20, 000 2010 -13 7. 25 /7. 50 CAR ODS – Article V 25, 000 >2005 2. 50/4. 00 CAR N 2 O 100, 000 >2005 2. 00/3. 50 CCO Offset 25, 000 - 10. 50/11. 50 CCA Forward DEC-12 Allowance 25, 000 - 14. 75/16. 00 CCA Forward DEC-13 Allowance 25, 000 - 15. 75/16. 50 © Copyright Cantor. CO 2 e 2011

Price Indications Source: Reuters graph ic/Stephen Culp via Point Carbon © Copyright Cantor. CO

Price Indications Source: Reuters graph ic/Stephen Culp via Point Carbon © Copyright Cantor. CO 2 e 2011

Price Indications Indicative Price Trend for CARB-Approved CAR Project Types and CARB Carbon Allowance

Price Indications Indicative Price Trend for CARB-Approved CAR Project Types and CARB Carbon Allowance $ 16. 00 $ 14. 00 Settlement Price $ 12. 00 Forestry $ 10. 00 Livestock ODS $ 8. 00 DEC-12 CCA $ 6. 00 20 Fe ne Ju ay M Ap ril ch ar M br ua ry y nu ar Ja De ce m be be m ve No to Oc © Copyright Cantor. CO 2 e 2011 r r r be em pt Se Au gu st $ 4. 00

Market Color • • Herky jerkey Traders mostly, fewer permit holders now – Depth

Market Color • • Herky jerkey Traders mostly, fewer permit holders now – Depth of market - > millions of tons – Traders, permit holders with trading desks, compliance sources • • Mostly OTC, for now CARB’s green curtain – Rules – Methodologies/prospective • Forecast – – – • • 21 Offset re-verification Policy (go/no go, start date, allocations, trading rules, buyer beware) Speculation Credit (offered/taken) Control, manufacturing, allocation/offset planning Cost curves – capital costs vs. offsets and allowances vs. hybrid Options Portfolio Remember CEQA/Voluntary © Copyright Cantor. CO 2 e 2011

Know Who You are Talking To Motivations, products, and costs between: § Brokers §

Know Who You are Talking To Motivations, products, and costs between: § Brokers § Traders § Marketers § Retail offset provider § Exchanges 22 © Copyright Cantor. CO 2 e 2011

Actions to Take Now § § Appreciate policy challenges/opportunities Quantify current and expected 12

Actions to Take Now § § Appreciate policy challenges/opportunities Quantify current and expected 12 – 20 emissions AB 32, CEQA, voluntary Build portfolio of solutions o Onsite controls, efficiency improvements, biomass o Identify control cost curve o Managing carbon liabilities § Create CARB offsets if possible § Define and resolve expected net short position o Participate in 3 rd party projects o Offset due diligence (reversals, delivery, PR risk) § OTC Transactions o Price and terms o Swap (ERC, RTC for carbon) o Trade clearing © Copyright Cantor. CO 2 e 2011

Thank You Josh Margolis CEO 415. 296. 9359 jmargolis@cantorco 2 e. com www. emissionstrading.

Thank You Josh Margolis CEO 415. 296. 9359 jmargolis@cantorco 2 e. com www. emissionstrading. com © Copyright Cantor. CO 2 e 2011