Climate Change Uncertainties Opportunity for Business Innovation?

1. Climate Change UncertaintiesOpportunity for Business Innovation? Possibilities of Offsetting Carbon March 27, 2008 George F. Hoguet Director of Product Marketing

2. “Climate change is a real problem. ... If we do business as usual ... by the year 2030 we will hit the [amount greenhouse gas emissions] that scientists say is the threshold of catastrophic climate change ... which means we have to get going now.”Ray AndersonFounder & Chairman, Interface, Inc.

3. 2025 16.5 Kyoto 13.2 10.0 6.7 3.3 2.2 World GHG Emissions Reduction Scenario 60% Reduction from World 1990 Levels by 2050 0.0 Center for Energy and Environmental Policy 1990 +37% 25.0 +20% Annex I 20.0 1990 Non-Annex I 15.0 -20% 1990 Annex I Benchmark World CO2e Per Capita -40% 10.0 -60% 5.0 3.3 -80% 0.0 -100% 1980 2000 2020 2040 2060 2080 2100 After John Byrne et al (2004)“Reclaiming the atmospheric commons: Beyond Kyoto.”

4. Legislation Is Clearly Needed

5. US Market Is Evolving Compliance coming as RPS and CO2 cap – Utilities. Heavy industry later. Voluntary green power and carbon offset market for consumers and other businesses growing at 100+% Starting point is a GHG Inventory – determining Carbon Footprint

6. Sources of Carbon Footprint Yogurt Ag Methane Fuels Electricity – Heating Fuels Refrigeration Mitigations Digesters Biofuels Efficiency– Process Consolidate New Systems “Beano” Go Local Solar Co-Generation Biofuels  Efficiency

7. Do Offsets Have A Place? “ Offsets are designed to ensure that emissions do not continue to rise. They do not, however, decrease emissions, which is essential to addressing climate change drivers. When offsets are coupled with corporate efforts to concurrently decrease total emissions, they can become an essential part of corporate climate strategy.” Offsetting Emissions: A Business Brief on the Voluntary Carbon Market Business for Social Responsibility December 2006

8. GHG Protocol – Scopes of Emissions

9. Offsets in Business Brand Identity (Interface, ClifBar, Ben & Jerry’s, Stonyfield, GMCR) Stakeholder Relations - Employees (Timberland, Mohawk Paper) - Customers (Aveda, ClifBar, Stonyfield, GMCR) Enhance Reduction Project ROI vs Offset Costs Strategic Value Gaining Carbon Market Experience Corporate GHG reduction or Green Power commitment - GPP, Climate Leaders, CCX, GPMDG Regulatory Requirement - EU/CA/RPS

10. U.S. Is Mostly Voluntary Today Global Compliance Global Voluntary Market $29.9 B (USD) $91 MM (USD) 2006 PRE-COMPLIANCE CERs – CDM Projects ERUs – JI Projects EUAs - Europe RGGI – US Northeast AB32 – US California NGACs - Australia OTC 13.4 MtCO2-e VERs ERs PERs U.S. = 68% CCX 10.3 MtCO2-e Source: State of the Voluntary Carbon Market Ecosystems Marketplace

11. Source: State of the Voluntary Carbon Market Ecosystems Marketplace

12. RECs Green power claims e.g. waste heat recovery reduces fossil fuel use Direct CO2 Reductions e.g. reduced onsite fugitive emissions [methane abatement] Direct CO2 Reductions RECs – Renewable Energy Credits – The rights to claim the environmental benefits and marketing rights from a certain quantity (kWh) of renewable electricity produced. A Renewable Project May Have RECs and GHG Reductions:

13. What Is a CO2 Offset? • An offset represents an action, • beyond business as usual, that • causes a reduction or the sequestration of CO2 • usually via funding of some type of project • Offsets are “Direct” or “Indirect” • “Direct” means that the reductions occur within the project boundary • “Indirect” means that the reductions occur outside the project boundary

14. Farm Digesters Produce Methane Gas from Manure Engine-generator burns methane biogas from the digester, and runs round-the-clock. Most systems provide 2x farm needs. Manure is digested in a closed tank that captures methane gas. Digestion stabilizes the manure, eliminates odor and facilitates spreading for better absorption by crops.

15. Schrack Farm - Loganton 650 Milkers, 150 heifers will fuel a 165 kW system producing - 1000 MWh/yr RECs CO2 reduction ~ 640 tons/yr Fuel CO2 reduction ~ 105 tons/yr Avoided Lagoon methane ~ 2237 tons CO2e/yr of GHG offsets • Assuming all paid as 20-year, up-front = 15 % of project cost

16. What Does the Voluntary Market Value? • Type of renewable source • Consumer and business preference for wind and solar. • Where the source is located • Even for ‘global’ warming offsets, a project closer to home is more attractive • Who owns the source, and are there social benefits • Extra value for non-utility projects, with local economic benefits such as not-for-profit, farmer and tribal-owned

17. Offsetting Emissions: A Business Brief on the Voluntary Carbon Market Business for Social Responsibility December 2006

18. Important Quality - Additionality • Are the REC/offset project revenues needed? • Is the project beyond “business as usual” – what is the baseline? • Is the long-term sale of RECs/offsets helpful or critical to proceeding with construction? • Does my purchase of the RECs/offsets make a difference?

19. Forward Stream 101 Total Volume Retirement in Current Year Discounted Average / Year x # number years Upfront Payment Provides Critical Support to Renewable Energy Project Forward – Stream Production Accounting >> = Discounted Forward Stream Production Volume Expected Annual Production of Proposed Renewable Energy Project Energy Production - MWh Average Discounted Average # number years

20. Those Who “Helped Build” the Little Alex

21. Project-Specific Additionality Four tests: Is the return on project investment (ROI) too low without the offset revenues? If the ROI is adequate, does the project owner lack access to the capital to make the investment? If the ROI is adequate and capital available without offset revenues, are there other technical barriers to implementation? If ROI is adequate, capital is available, and there are no technical barriers, is the project the first or substantially the first of its kind in the particular market, region or application? 

22. REC Quality & Price Existing Pre 1997 Non-additional REC $$ = gravy Existing “New” 1997+ “New” = proxy for indirect additionality REC $$ = often helpful New Planned - Expected Direct additionality REC $$ = expected, but has tolerance for short-term sales New Planned - Needed Direct additionality REC $$ = critically needed, has no tolerance for short-term sales PRICE Planned - needed RECs sales Planned - expected RECs sales “New” 1997+ Pre-1997 QUALITY/VALUE

23. Quality: RSVPE - Real Surplus Verifiable Permanent Enforceable

24. Ensuring The Offsets Are Real 800 Cows In family since 1776 800 cows In family since 1936 Schrack Family Farm Loganton, PA Penn England Farm Williamsburg, PA 2982 tons/yr 2950 tons/yr 350 Cows In family since 1900 700 Cows In family since 1840 Dovan Farm Berlin, PA Wanner’s Pride N Joy Narvon, PA 1430 tons/yr 2725 tons/yr

25. Monitoring REC Performance

26. Certification of RECs and Offsets • A buyer values third-party certification of their purchase – or knowledge of meeting third-party standards • A certified REC does not equate to certified CO2offset – changing with Green-e Climate standard • Certification costs can become material – with some buyers preferring to put their dollars into more RECs or offsets

27. Offsetting Emissions: A Business Brief on the Voluntary Carbon Market Business for Social Responsibility December 2006

29. ARSO or OSCARS? A.R.S.O. = Avoid/Reduce/Substitute then Offset what remains. Vision of Forum for the Future , UK NGO We suggest action to prime the pump: O.S.C.A.R.S= Offset/Start Conversations about how to Avoid/Reduce/Substitute

30. For more information contact NativeEnergy at (800) 924-6826 Or visit us on the web at www.nativeenergy.com