“ Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles ”

1. “Using Carbon Markets to Encourage the Uptake of Low Carbon Vehicles” Meeting the Low Carbon Challenge The Low Carbon Vehicle Partnership Third Annual Conference Thursday 15 June 2006 Robert Rabinowitz, PhD ECX Associate Membership Ltd. robert@ecxeurope.com +44 (0)20 7382 7803

2. The world’s first and North America’s only voluntary, legally binding rules-based greenhouse gas emission reduction and trading system. The most liquid, pan-European platform for carbon emissions trading cleared | quoted | liquid | transparent | regulated

3. What is Emissions Trading? A mechanism for efficient allocation of capital to reduce greenhouse gas emissions • New regulations: each plant cuts 1 tonne. • Total Cost to Society: • No trading = €40 • Trading = €20 pollution control cost structure €40 €30 per tonne €30 €30 €20 (Plant B) €10 per tonne €10 €10 €10 €10 (Plant A) €0 No Plant A Plant B Trading Trading

4. “Cap and Trade” Emissions Markets Emission target: 95 tons (5% cut) 100 ton baseline 10 ton shortage 10 ton surplus 105 tons 85 tons

5. Successful US Environmental Markets • PHASING OUT LEADED GASOLINE (1982-1987) • 100% compliance • 10 billion allowances banked to offset later costs • Saved $250 million vs. “command-and-control” regulation • ACID RAIN PROGRAMME (1995-) • Sulphur dioxide emissions reduced 38% • Compliance levels exceed 99% • Costs≈30% of lowest estimate prior to launch • Health benefits exceed costs by a ratio of 40:1 • LESSONS LEARNED: • Flexibility on “when,” “where” and “how” is viable and enforceable • Multiple participants creates market liquidity • Essentially 100% compliance • Targets met early • Significant cost-savings

6. The Global Carbon Market Today • EU EMISSIONS TRADING SCHEME • Volume > 600 million tonnes • Notional value > €12 billion • Price: €7-€30 • UN CLEAN DEVELOPMENT MECHANISM • Volume > 500 million tonnes (mostly forward contracts) • Average Price: $5 in 2004, $12 in Q1 2006 • Major “north-south” capital flows for sustainable development • CHICAGO CLIMATE EXCHANGE • All 6 GHGs, major multinationals, independent audit & regulation • Included emissions ≈ UK National Allocation Plan • Over 10 million tonnes traded • Price: $0.8 per tonne at launch, now at $4

7. Precedents in the US Auto Sector • CORPORATE AVERAGE FUEL ECONOMY (CAFE) • Sales weighted annual average fleet fuel economy • Credits for exceeding target, alternative fuel vehicles • Since 1983 more than $618 million paid in penalties • AVERAGING, BANKING AND TRADING • Applies to emissions from engine families • Use of standard factors such as mileage and engine life • LESSONS LEARNED: • Use of fleet averages + standardized factors • Credits earned for actions apart from meeting direct targets • CAFE: Lack of trading + penalties = failure to meet target • ABT: Few participants = no liquidity = ineffective market • Disconnect from other sectors restricts flexibility + liquidity

8. Key Design Principles • Inclusion of multiple emission sources with different mitigation costs • Minimal transaction barriers • Certainty over rules, targets and compliance value of traded instrument • Liquidity (necessary for actual transactions and risk management) • CONCLUSION: • LINK TO GLOBAL CARBON MARKETS

9. Trading Scenario • Manufacturer A • 2010 Vehicle Sales: 1,000,000 • Baseline Emissions: 200 g/km • 2010 Emission Target: 188 g/km (-6%) • 2010 Actual Emissions: 192 g/km (-4%) % Improvement per $1,000 of Sales • Manufacturer B • 2010 Vehicle Sales: 500,000 • Baseline Emissions: 150 g/km • 2010 Emission Target: 141 g/km (-6%) • 2010 Actual Emissions: 129 g/km (-14%)

10. Calculating Compliance Positions Manufacturer A -4 g/km 1,000,000 160,000 km .9 -576,000 tonnes CO2 -0.576 tonnes per vehicle -€11,520,000 -€11.52 per vehicle Manufacturer B 12 g/km 500,000 160,000 km .9 864,000 tonnes CO2 1.728 tonnes per vehicle €17,280,000 €34.56 per vehicle Difference between fleet average and target % Improvement per $1,000 of Sales Number of vehicles sold Mileage multiplier Carbon intensity of fuel CO2 = €20 per tonne

11. Example of a Transaction €9.52 million % Improvement per $1,000 of Sales Manufacturer A Total Liability = 576,000 Manufacturer B Total Credit = 864,000 Carbon credits = 476,000 tonnes of CO2 100,000 tonnes CO2 credits for alternative actions 388,000 tonnes CO2 banked The Global Carbon Market

12. Design Options Target: Existing voluntary targets? Absolute or relative targets? Credits: Reward for early action? Credits for scrapping most polluting vehicles or other activities? Banking: Unlimited? Time limits? Absolute limits? Flow control? Borrowing? Mileage Multiplier: 1 year or entire vehicle life? Relation to Global Carbon Market: Problem 1: Auto sector demand for credits increases burden on other sectors Answer 1: Set achievable targets that enable leaders to earn credits Problem 2: Rising sales offsets efficiency gains - auto sector earns credits while emissions increase Answer 2: Tightened targets to account for fleet growth or “gateway” % Improvement per $1,000 of Sales

13. Conclusion • Using carbon markets to achieve a product standard is an innovative regulatory approach • Clear regulatory metric: emissions per kilometre • Cost-effective, high compliance levels • Provides incentives to exceed targets • Flexibility on how to achieve goal: e.g. manufacturing, consumer marketing and education, credits for other actions, reducing carbon intensity of fuels • Need not be in conflict with use of carbon market to cap transport emissions % Improvement per $1,000 of Sales