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Management 1

Presentation to the Annual Meeting of Presentation to the Annual Meeting of Host Country Committee on Carbon Host Country Committee on Carbon

FinanceFinance

Pricing, Risks and CostsPricing, Risks and Costs

Richard RosenzweigNatsource LLC

February 2005

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Management 2

Overview of PresentationOverview of Presentation About Natsource

– Greenhouse gas (GHG) emissions experience

Greenhouse Gas Credit Aggregation Pool (GG-CAP) Greenhouse Gas Market Overview

– 2004 market overview

– Demand trends

– Instruments for compliance

Project-Based Reductions: Price and Risk– Current pricing

– Three types of risk

– Delivery risks associated with project-based reductions

– Managing risk

Appendix 1: 2004 Market Summary

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Management 3

About NatsourceAbout Natsource

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Management 4

GHG Emissions ExperienceGHG Emissions ExperienceGHG Asset Management:

Development of the Greenhouse Gas-Credit Aggregation Pool (GG-CAP)– Fund manager has contracted for millions of tons of GHG reductions

Representation of World Bank Carbon funds and Dexia-FondElec funds in Asia

Manage account for Fortune 100 Company in North American and UK Markets

Emissions Brokerage and Project Structuring Experience:

In 2004, brokered multi-million tonne transaction of candidate CERs from a project with a baseline methodology approved by the CDM executive board

In 2001, brokered the first transactions of U.K. and Danish national allowances

– Brokered the first forward swap of national allowances

In 2000, brokered early transatlantic and transpacific transactions

Strategic Services:

Provide market intelligence and policy expertise to assist asset managers, Fortune 500 multi-national energy and manufacturing firms and governments

Advisors to Fortune 500 multi-national energy and manufacturing firms in assessing emissions risk and developing risk management strategies

Advisors to developers on project structure

GHG project screening and portfolio modeling

Advisors to governments on emissions trading system design

Staff developed the first project-based mechanism designed to reduce GHG emissions and participated in the negotiations to develop the rules governing the project-based mechanisms in the Kyoto Protocol

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Management 5

Environmental Finance 2004 Market SurveyEnvironmental Finance 2004 Market Survey Winner Runner Up

Renewable Energy Certificates

Best Broker- RECs- UK X

Best Broker- RECs- US X

Conventional Air Pollutants

Best Broker- U.S. NOx Allowances X

Best Broker- Houston Galveston Allowances X

Best Broker- U.S. SO2 Allowances X

Best Broker- U.S. Emission Reduction Credits X

Best Broker- California RECLAIM X

GHG Brokerage

Best Broker- UK Emission Trading Scheme X

Best Broker- North American Markets X

Best Broker- EU Emissions Trading Scheme X

Best Broker- Kyoto Project Credits (JI and CDM) X

GHG Consultancy/ Advisory

Best North American Consultancy X

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Management 6

Greenhouse Gas Credit Greenhouse Gas Credit Aggregation PoolAggregation Pool

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Management 7

Natsource Greenhouse Gas Natsource Greenhouse Gas Credit Aggregation Pool (GG-CAP)Credit Aggregation Pool (GG-CAP)

$200 million fund target

Organize a ‘buyers group’ of entities to purchase a large pool of project-based emission reductions (ERs)

Natsource Asset Management Corp. (NAM) would be the pool manager and originate, contract for and manage delivery of Kyoto compliant ERs from 15-30 contracts over the 2005-2012 year period

NAM would structure, execute and manage contracts with legal, measurement and verification, and other service providers over the 9-year period

A ‘pooled fund’ model would be used whereby buyers’ capital secures their ownership of a % of the ERs in proportion to their % investment in the pool

NAM acts only as the Buyers’ agent in the transactions

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Management 8

GGGG--CAP – CAP – OverviewOverview

Allows buyers to purchase tonnes collectively Large portfolio, extensive risk management Minimum level for voting rights is 1 m. tonnes (8/9 yrs) Maximum price set by Members

Risk

Management

GG CAP

Pool Member

Pool Member

Pool Member

Seller 1

Seller 2

Seller 3

Seller 4

Seller 5

Seller 6

More sellers

Pool Member

Risk

Management

GG CAP

Pool Member

Pool Member

Pool Member

Seller 1

Seller 2

Seller 3

Seller 4

Seller 5

Seller 6

More sellers

Pool Member

Risk

Management

GG CAP

Pool Member

Pool Member

Pool Member

Seller 1

Seller 2

Seller 3

Seller 4

Seller 5

Seller 6

More sellers

Pool Member

GG CAP

Pool Member

Pool Member

Pool Member

Seller 1

Seller 2

Seller 3

Seller 4

Seller 5

Seller 6

More sellers

Pool Member

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Management 9

GG-CAP Status and TimelineGG-CAP Status and Timeline Current Status:

– 6 Companies committed represents 130% of minimum volume (Japan, Europe and Canada)

– 6 Companies engaged in final due diligence represents additional 60% of minimum volume

– Under consideration by 5 Japanese, 10 European and 3 Canadian entities

Anticipate First Close in first quarter of 2005– Purchase and Management Agreement frozen

– Management Committee meets to consider key matters

– Contracting to begin

Operations and supply network in place

Screening, scoring and pricing of projects begun

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Management 10

Greenhouse Gas Market Greenhouse Gas Market OverviewOverview

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Management 11

Market Development Through April 2004Market Development Through April 2004 Traded volume more than doubled from 02-03 to 78 million tonnes

On target for another doubling to over 150 million tonnes traded in 2004

Buyers purchasing high quality, potential compliance instruments

– Pre-compliance instruments trading for $3.00-$6.50 per tonne

– Weighted average is $4.00-$5.00

HFC destruction projects created 31% of traded reductions

Reductions created by power sector projects account for 50% of traded volume

30% of traded ERs are created by renewable projects

Over 75% of traded ERs created by projects in Latin America and Asia

Japanese private sector has become most prominent market participant

* Lecocq, F. (2004) “State and trends of the carbon market 2004,”

Washington, DC: World Bank, based upon data and analysis provided by Natsource

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Management 12

Potential Demand in the Potential Demand in the GHG MarketGHG Market

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Management 13

Current Demand Trends in GHG MarketCurrent Demand Trends in GHG Market

Market driven by Kyoto Protocol entry into force

– Requires developed countries to reduce their GHG emissions below 1990 levels by 2008-2012

– Much of obligation will be devolved to private firms

Over 3 billion tons of demand in 2008-2012

– Japan is estimated to be short by approximately 1 billion tons during the five year commitment period

– Canada is estimated to be short by over 1.2 billion tons during the five year commitment period

– Europe is estimated to be short by approximately 800 million tons during the five year commitment period

Modest demand in Europe from 2005-2007

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Management 14

Instruments for ComplianceInstruments for Compliance

Internal reductions

Assigned Amount Units (AAUs)

European Union Allowances (EUAs)

Project-based reductions (CERs, ERUs)

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Management 15

Project-Based Reductions: Project-Based Reductions: Price and RiskPrice and Risk

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Management 16

Prices For Market InstrumentsPrices For Market Instruments

•CERs = 2000-2012 CDM credits ERUs = 2008-2012 JI Credits

•2005 EUAs = 2005 Delivery EU Allowances 2006 EUAs = 2006 Delivery EU Allowances 2007 EUAs = 2007 Delivery EU Allowances

*All prices as of February 11, 2005

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Management 17

Relationship Between Price and RiskRelationship Between Price and Risk

EUAs trade for significantly higher prices than project-based reductions

Premium for allowances is based on risks associated with forward-delivery of project-based reductions

– Less risk in allowances being delivered (credit)

Risks are associated with delivery of project-based reductions on a forward-basis

– Risks that a portion of project-based reductions will not be delivered

Buyer assess risk when determining willingness to pay

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Management 18

Three Types of RiskThree Types of Risk

International regulatory risk

Country risk

Project risk

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Management 19

Rules Regarding International Regulatory Rules Regarding International Regulatory Risk Becoming More CertainRisk Becoming More Certain

19 baseline methodologies have been approved by CDM Executive Board

Baseline methodologies are replicable around the world

Case by case approach is troublesome

Retrospective look at approved methodologies hurts the market

Project Type Number of Approved

Methodologies Biomass 2 Cogeneration 1 Energy Efficiency 1 Fuel Switch 1 Fugitive Emissions 1 Geothermal 1 HFC Decomposition 1 Hydropower 1 Landfill Gas 5 Methane Capture and Combustion 2 Oil and Gas 1 Waste water 1 Wind 1

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Management 20

Elements of Country and Project RiskElements of Country and Project Risk

Counterparty Risk -- relates to credit worthiness of ER sellers

Regulatory Risk-Country -- relates to country policies governing crediting and transferring of project-based ERs to buyers

Performance Risk-Country -- relates to the investment climate in host country

Performance Risk-Carbon -- relates to the technology and extent to which generation, creditability and ownership of ERs is affected by the particular type of technology

Performance Risk-Technology -- relates to the operational and/or commercial aspects of technologies utilized in ER projects (based on actual data)

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Management 21

Country Risk Can Be MinimizedCountry Risk Can Be Minimized

Sovereigns are competing for carbon finance

Developers evaluate country risk prior to investing

Buyers evaluate country risk prior to purchasing

Countries can take steps to attract CDM investment by reducing CDM investment risk

– stable investment regime

– transparent, certain approval processes

– predictable tax regime for CERs

– process for conflict resolution

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Management 22

Project Risks Can Be MitigatedProject Risks Can Be Mitigated Several elements of risk distinct from country risk affect delivery and

price

These include but are not limited to:

– credit risk

– performance risk higher with certain technologies (e.g., wind vs. fuel switch)

Several risk management techniques can mitigate these risks and increase CER price for future delivery

– seller guarantees CERs if project under delivers

– seller develops a diverse portfolio with reserve margins

– options

– insurance

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Management 23

Further InformationFurther Information

www.natsource.comwww.natsource.com

Rich Rosenzweig1120 19th Street, NW

Suite 730Washington D.C.,

U.S.A. 200361 202 496 1423

1 202 496 1416 faxEmail:

rrosenzweig@natsource.com

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Management 24

Appendix 1: 2004 Market Appendix 1: 2004 Market SummarySummary

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Management 25

Trading Has Increased SignificantlyTrading Has Increased Significantly

Trading more than doubled between 2002 and 2003 Market on track to double again in 2004

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Management 26

Buyers Purchasing Higher Buyers Purchasing Higher Quality ERs Quality ERs

Buyers purchasing for compliance – 95% of reductions likely to count Projects with approved baselines reduce uncertainty

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Management 27

Prices for Project-Based Reductions Prices for Project-Based Reductions Have Remained StableHave Remained Stable

Compliance instruments trading between $3 and $6.50 / tonne Weighted average between $4 and $5 Prices may increase if Russia ratifies Protocol

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Management 28

Significant Opportunities Significant Opportunities in the Power Sectorin the Power Sector

Projects with approved methodologies are biggest sellers of reductions (e.g. HFC destruction, LFG)

50% of traded reductions created by power sector projects

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Management 29

Asia and Latin AmericaAsia and Latin AmericaLead in Hosting ProjectsLead in Hosting Projects

50% of traded reductions created by projects in Asia 27% of traded reductions created by projects in Latin America

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Management 30

Japanese Private Firms Are Now Japanese Private Firms Are Now Largest Buyers in MarketLargest Buyers in Market

Japanese buyers purchased 41% of reductions in 2004 Governments and World Bank Carbon Finance Business (CFB)

remain large purchasers