Carbon Funds in the Emerging Carbon Market and the Role of the Prototype Carbon Fund

1. Carbon Funds in the Emerging Carbon Market and the Role of the Prototype Carbon Fund Carbon Finance Conference February 15th-16th, 2001, London www.Prototypecarbonfund.org

2. PCF Status and Focus Deal flow far exceeds funding - several carbon contracts now under negotiation • >50 deals with $300m+ carbon purchases under review • Targeting signed ERPAs of $35-40mm in Argentina, Chile, Cost Rica, Morocco, Uganda, Poland, Honduras, India by end-Summer, 2001 • Reserve ERPAs of $17-22mm in Hungary, Bulgaria, Jamaica, Guyana, Guatemala, Brazil • conditional letters of intent to purchase to 6 others by end Feb, 2001 Constraints: Government Awareness and Resolve, Quality of Asset after baseline review

3. PCF Portfolio and Focus • predominance of wind, waste management, small-hydro and bagasse/biomass co-generation • strategic focus on building market infrastructure for aggregation and intermediation of small projects • leaving space for PV, transport, fuel-switching, LULUCF (EITs) and Energy Efficiency

4. Typology of Funds/Plays • Pure Carbon Funds (PCF, National Funds) • Private Equity Funds • Aimed at JI/CDM Projects • New Energy, RE, EE Funds with Carbon Credits • Forestry Funds with Carbon Credits • Energy or Forestry Funds that Could Add Carbon Credits • Mutual Funds with % in Private Equity • NGO Funds • Sustainability, Social, Ethical Mutual funds • Corporate “Funds” Earmarked for Carbon Credit Investment

5. Summary Findings from Fund Manager Interviews • About 5 private sector funds to capture JI/CDM C credits in all investments (UBS, Hancock, Commonwealth, Carbon Trader, Env Fin Prod) • Handful of private equity funds also seeking carbon credit investors to raise IRR in deals • Major forestry funds thinking about C credits • New energy private equity and mutual funds might seek C credit deals if demand rises • Social funds use C as screening indicator • total capital driving C credits: $2.5-4 billion in Energy sector; $1bn+ in forestry

6. Carbon Funds(All leverage private finance) • PCF $145M + potential fund subscription by Participants up to $180m • Netherlands Clean Development Funds: ~$230m over three to four years • Commonwealth Bank’s Clean Fuel Program BP is first participant, other companies expected. Funded by consumer “checkoff.” Program invests in GHG mitigation projects in Australia. AGO certifies. • National Funds • Australian government funds/initiatives • The Netherlands – Eru-PT – government funded

7. UBS details confidential JI & CDM RE, EE, Fuel Switching About $50 Swiss investors In Planning Hancock New Forestry Fund details confidential JI Article 3.3. Forestry in US, Australia, NZ About $100 In Planning Environmental Financial Products details confidential ?? $?? In planning The Carbon Trader carbon unit trust To invest in C offset forestry projects in Australia About $50M: Aus investors in lead, to mkt Japan, Europe In Planning Private Equity Funds Aimed at JI and CDM Projects

8. REEF Global RE, EF $200M Operating Dexia/ FondElec E&C Europe RE, EF $70-100M Operating Clean Energy Fund E&C Europe RE, EF $200-300M Seeking Investors LA Clean Tech Fund Latin Am RE, EE, PC $20-35M Seeking Investors CreditLyonnais/ ArthurAnderson Global RE, EE $400-500M On Hold Black Emerald LeasingPartners RE in EU, Turkey, E Eur $150-500M To Seek Investors March 2001 Private Equity Energy Funds with JI/CDM Carbon Credits to Enhance IRR

9. Impax Capital (UK & US) $25M Clean tech Launched First Albany Corp (US) $100M Energy tech Proposed Nuveen Investments fuel cell unit trust (US) Fuel cells Underway SAM (Switzerland & US) (includes food) $35M US&Eur RE,EE,other Launched 2000 Societa di Gestione Risparmia (Milano) ? New Energy Private Equity Fundswhich Could Have C Component

10. Merrill Lynch New EnergyTechnology $300M 25% in priv cos Launched 2000 Bank Sarasin New Energy Invest $113M 75% in priv cos Launched 2000 Innovest New Energy (with C Component) $? ? Planning SAM Smart Energy Fund $50M+ Small% unlisted 1st half 2001 start New Energy Mutual Funds with % in Private Equity or Companieswith possible C Component

11. Sylvan Capital Partners (details confidential) Global >$100M In Planning Renewable Resources LLC Two funds: (details confidential) Brazil Global >$100M in Brazil $?M new global Started, one investment In Planning No details Environmental Financial Products (details confidential) US, global? $M? In Planning No details Private Equity Forestry Funds with Carbon Credits to Enhance IRR

12. CI Tropical Wilderness Preservation Fund Southern Countries Up to $100M $5M invested TNC Catalyst Investment Fund And Carbon Fund Both in Latin Am SE Asia $30M ? Planning Planning FFI Arcadia Fund Global $? So far $10M in Belize & SAfrica NGO Forest Funds Which Include Carbon Prospect

13. Types of Fund Investments in Projects with Carbon Credits • PCF invests cash for C credits. Price of C and amount of credits negotiated with equity holders. • UBS, Hancock, Carbon Trader to invest cash for equity and negotiate for C credits with other equity holders in projects. Investors get return plus C credit, or combination. • REEF, FondElec, LA Clean Tech will invest cash for equity and negotiate for some/all of C credit with other equity shareholders. Fund may sell C credit to enhance fund returns.

14. Types of Fund Investments in Projects with Carbon Credits(Continued) • Black Emerald to provide equipment lease in return for cash return, depreciation and tax loss benefits, and C credit. May have to negotiate C credit with equity owners of project. • Commonwealth Bank’s Program: Participants pledge revenues (BP’s penny checkoff on premium petrol). Program invests in projects in return for C credit. Credits owned by consumers and “retired.” • NGO funds use donor money to buy land or bid on concessions. C credit may be sold and the proceeds reinvested.

15. Investor Carbon Market Sentiment • Most fence sitting – waiting for national and international regulations • Early movers in deals and funds: • have high carbon exposure and regulatory risk, • are seeking strategic positioning • are seeking to influence policy • are at an early stage • wish to capture upside speculative C benefit • Mainstream investment, “big” money still skeptical

16. Other Players and Angles • Investment banks: waiting for market development • Social/ethical/sustainability funds: use carbon as a screening criteria • Some companies have internal “funds” for carbon credit investments (e.g., Fortum, Sucor Energy) • Agribusiness companies (Syngenta, Monsanto) • Swiss consortium funding R&D in Africa

17. Carbon Market Observations IRelative Value of CDM/JI Carbon Financing • Carbon Prices are NOT >$5/t/CO2 and unlikely to exceed this level before 2005 • At $3-5/t/CO2 Carbon Finance contributes: • typically 0.5-1.5% to Project Financial IRR • 5-10% of project finance in PV terms • Exceptions: Waste management (and methane-driven plays) and merchant renewables plants cf. coal • Conclusion: • carbon finance is no “magic bullet” • delicate balance between Protocol transaction costs and carbon finance volume

18. Carbon Market Observations IIPrivate Capital and CDM/JI • Private Capital Flows are Crucial to achieving Protocol objectives of: • technology transfer/sustainable development • climate change mitigation • Current Financial Incentives are modest AT BEST • Hence, transaction volume/cost must be low and certainty high to attract private capital • Current Decision Text and Proposals severely restrict private investment in CDM. Barriers include: • Transferability, Fungibility and Eligibility

19. Impact of Current Decision Text on CDM/JI project-based C Trade • Hampers or eliminates: • secondary market outside of domestic regimes; • greatly reduces investors incentives and market volume • arbitrage between domestic regimes for CERs: may render “surplus” CERs worthless at end of Commitment period (fungibility constraint) • Global Funds: ‘pooling’ of investment from mult-Annex I country investors (due to registration, transfer and eligibility uncertainties) • much small-country, small project ER trade • low cost CERs (due to possible baseline rules)

20. Annexed material

21. Features of the PCF • Portfolio or fund structure • Minimize Project Risks • Reduce Transactional Costs • Enhance the Learning Experience • Governments: $10 m; Companies: $5 m • Total: US$145 million to be used in 25-30 projects • PCF Products: • Competitively priced, high quality emissions reductions • target price outcome: $4-5/t-CO2 (= $20/t-C) • target cost of generating ERs: $3/t-CO2 (= $10/t-C) • High value knowledge assetto help create competitive advantage for corporate investors and efficient market regulation for Parties

22. PCF Subscribers ($145 million) Governments:(6) Netherlands, Finland, Sweden, Norway, Canada, Japan (through Japan Bank for International Cooperation) Private Sector: (17) RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP-Amoco, Fortum, RaboBank, NL