The Business of Carbon

1. The business of carbon Energy Institute breakfast briefing 1 October 2009 BRAVE Partners LLP Business Risk Analysis – Visionary Execution

2. Overview The carbon markets Origin of carbon markets Current carbon trading schemes USA carbon market Business opportunities arising out of carbon markets 2

3. The origin of carbon markets Initial research performed between 1967 and 1970 by the US National Air Pollution Control Administration (predecessor of the United States Environmental Protection Agency’s Office of Air and Radiation) Computer simulations suggested that: A cap-and-trade market produced the lowest cost reduction of CO2 emissions. The projects that produced the most efficient carbon reduction were not those that an administrative authority would choose. In 1970 the USA concluded that carbon dioxide emissions were best reduced by entrepreneurial activity spurred on by a market for emissions. 3

4. Carbon emission markets Kyoto Protocol EU Emissions Trading Scheme Launched in 2005 Mandatory for 37 developed nations Not ratified by USA, so excludes it Targets a 5% reduction from 1990 emission levels by 2008 – 2012 Expires in 2012, but due to be replaced in December 2009 Rich countries cut greenhouse gases at home or buy emissions rights from each other -- if one country stays within its target it can sell the difference to another emitting too much. Alternatively, they can buy carbon offsets from projects in developing countries under Kyoto's clean development mechanism. Launched in 2005 Mandatory for all 27 EU member states Covers nearly half of all EU carbon emissions Targets a 21% cut below 2005 levels by 2020 Member states allocate a quota of carbon emissions allowances to 11,000 industrial installations. Companies get most permits free now but many electricity generators will have to pay for all these from 2013. Companies can buy carbon offsets from developing countries if that works out cheaper than cutting their own emissions. 4

5. Carbon emission markets NE US Regional Greenhouse Gas Initiative (RGGI) Japan's voluntary carbon market Launched January 2009 Covers carbon emissions from power plants in 10 NE states Targets a 10% cut below 2009 levels by 2018 Launched October 2008 Covers carbon emissions from energy production 2008-2012 Companies exceeding their voluntary targets can buy carbon allowances from others which stay under their’s, or from small companies to help them fund efficiency gains, or buy carbon offsets. 5

6. Other carbon trading proposals 6

7. Proposed Federal USA carbon market The American Clean Energy and Security Act Passed the House of Representatives June 26, 2009 Still to pass the Senate Opencongress.org registers just 13% support for the bill Launch 2012 Targets a 17% cut below 2005 levels by 2020 Industry would get most allowances for free initially. Companies could offset up to 2 billion tons of their emissions annually by paying for "green" projects. The bill would pre-empt any similar scheme from U.S. states from 2012-17 but leaves them the option to resume trade after that. 7

8. Analysis of US Federal proposals Clear floor prices for the emission certificates: Reserve price of $10 Increased at 5%+CPI Strategic allowance reserve Minimum price of $28 in 2009 dollars Cap and trade program Starts in 2012. Cap at 97% of 2005 levels. Reduces over time 2020 (83%); 2030 (58%); 2050 (17%) Renewable Electricity Standard (RES) Retail suppliers must produce an increasing percentage of their load from renewable sources and efficiency savings Commences in 2012 with a 6% target. Increases over time 2020 (20%) Renewable generators will be given renewable energy credits (RECs) 8

9. Distribution of US carbon credits 15% auctioned Proceeds to help low income families with increased energy costs 85% given away 35% electric utility 15% carbon intensive industry (steel, cement) 10% states renewable energy and efficiency investments 9% local natural gas 5% tropical deforestation projects 3% automakers for advanced technology development 2% domestic adaptation to climate change 2% international adaptation and clean tech. transfer 2% carbon capture and storage 2% oil refineries 1.5% programs for helping home heating oil and propane users 1% for clean energy innovation centers for R&D funding 0.5% for job training 9

10. Business opportunities:Emissions trading Emissions trading platforms Climate Exchange Carbon 350 $125bn market in 2008 Market should be seen as a byproduct of carbon trading. The 1970 objective was to spur entrepreneurial activity to identify and develop the most cost effective methods for reducing carbon dioxide emissions. 10

11. Map of carbon business 11 Certainty of delivering carbon savings Flagship businesses Genuine alternatives Entrepreneurial engine “Taking the petrol” Reliance on carbon credits for economics

12. Entrepreneurial engine Biofuels Many competing “technologies” Corn Jatropha Algae Unresolved issues Competition with food crop Energy yields Blocked filters on trucks (known about since the 1970s) Resource needed to fund (need resources of the majors – financial and infrastructure) Majors backing (and switching) horses 12

13. Genuine alternatives Wind Perhaps the most established alternative US Mid West is described as the “Saudi Arabia of wind energy” – original Pickens Plan Issues around the distribution network Micro Watermill Economically viable at some sites in the UK Solar Traditionally uneconomic but technology developing fast and energy prices rising Nuclear An alternative from a carbon perspective – other issues 13

14. Some ideas “Take the petrol” Kinetic plate that generates electricity from the energy of cars driving over it. Any engineer will tell you that the energy out must come from the car. If the car is powered by fossil fuel then so is the electricity generated by the kinetic plate. The product is, in the view of BRAVE Partners, an inefficient mechanism for generating electricity from fossil fuel. 14

15. Flagship business Businesses that have a genuine economic rational. The carbon saving comes from increased efficiency Gas Technologies LLC Developing a new process for converting methane into methanol Small scale plant, no need for high temperatures and pressures. No catalyst, so can take sulphur contaminated methane Initial application is to reduce flaring on remote oil platforms Methanol can be mixed with oil and piped Many other applications – including waste to methane Saving hot water Are there genuine economics – or is this one also “taking the petrol”? 15

16. BRAVE Partners objectives BRAVE Partners seeks to advise both alternative energy businesses and investors in such businesses. BRAVE Partners is building a brand as an objective advisor that will assist both parties in maximising value. Engineering training and skill assists companies in identifying and developing an optimum investor base. 16

17. Suggested commentary Available from www.bravepartners.com “I do care if the sun don’t shine”. Insurers are happy if the earth does not shake or the wind does not blow. Wind farms are less happy if the wind does not blow, but insurers can help them with that risk. “Winds of change for alternative energy projects”. Green energy is great! At BRAVE Partners we get a sales pitch through the door every other day. Problem is - no one can tell us if it is worth the money. Oh - and what do you do with a ROC? Answers here. “It’s not easy being green”. BRAVE Partners analyses whether the USA is serious about a cap-and-trade carbon policy “Got the price of a cup of tea?”. BRAVE Partners looks at the state of the carbon emissions market. It concludes that the current government intervention in the market was not envisioned and favours small entrepreneurs over larger projects. “Energy drinks in Lime Street”. BRAVE Partners reviews the close connections between the target sectors of the firm: Energy and Insurance. “First to be second”. BRAVE Partners looks at the financing of biofuels and draws conclusions about entrepreneurial strategy. “Taking the petrol”. BRAVE Partners relives a great British comedy to review kinetic roadplate technology. 17

18. Contact BRAVE Partners LLP Dr. Veronica Cloke-Browne E-Mail: veronica@bravepartners.com Phone: +44 7882 063356 Dr. Christopher Cloke-Browne E-Mail: chris@bravepartners.com Phone: +44 7882 063356 Web: www.bravepartners.com Consultants in: Risk – Strategy – M&A – Financing To the insurance and energy sectors 18