Role of Financial Instruments in Managing Energy and Climate Risks

1. Role of Financial Instruments in Managing Energy and Climate Risks Dr. Hugo Banziger, Chief Risk Officer Brussels, 15 May 2007

2. Trading schemes to reduce emissions have been established… Growth potential of carbon market expected to be similar to other derivative markets • Trading in carbon and other emissions certificates is based on • Kyoto protocol • EU Emissions Trading Scheme • Other national schemes • Substantial capital flows for clean energy in developing countries were the consequence • The carbon trading market has seen so far a significant growth and is expected to grow further • In April 2006, emissions data for 2005 were released, indicating significant Phase 1 EUA (1) over-allocation • As a consequence, futures prices for these Phase 1 EUA plummeted Derivate markets / EUA Futures Price History Notional in derivative markets, in USD trillion Source: ISDA Interest rates and FX derivatives Credit Default Swaps Global carbon trading market, in USD billion Source 2005/06 figures: World Bank DB estimate EUA Future Price, in EUR/Tonne (1) EUA = European Union Allowances Dr. Hugo Banziger · Page 2

3. …but success going forward relies on several preconditions Clarity and certainty is key! Continuation of success story in emission reductions and carbon trading market relies on: • Consistent and reliable legal framework • Explicit follow-up rules after Kyoto in 2012 • Clear policy on tax and VAT treatment of emissions certificates • Global fungibility of certificates • Stable certification processes • Providing direct access to the private sector • More funds will flow into the market once certainty & predictability is ensured, resulting in optimized emissions reductions Dr. Hugo Banziger · Page 3

4. Role of financial institutions Financial institutions contribute in many ways to emissions reductions • Financing of projects whose objective is to reduce emissions • Creating a market for emissions certificates • Applying techniques to the carbon market that have been developed by banks in other markets  derivatives • Creating liquidity  market making • Adding transparency to the market  creating indices • Creating settlement and documentation infrastructure  DTCC? • Providing ‘Intellectual Capital’ to the market through market expertise  structured products Dr. Hugo Banziger · Page 4

5. Case study of a Clean Development Mechanism (CDM) project Largest ever private sector syndication of a CDM project conducted by Deutsche Bank Deal structure Summary • Investment is in the carbon credits generated by Chinese chemical company Zhejiang Juhua Co Ltd • Transaction will achieve reduction of 29.5m tonnes of carbon dioxide equivalent over 6 years • DB financially guaranteed the underlying payment structure, syndicated the deal and sold/traded the CERs (1) thereafter • Transaction underlined DB’s expertise in environmental finance and commitment of the environment and sustainability (1) CER = Certified Emission Reduction Dr. Hugo Banziger · Page 5

6. Deutsche Bank in the emissions market Leader in all aspects of the global emissions markets Deutsche Bank… • …is a major market-maker and trader in emissions trading schemes • …provides a wide range of value-added structured emissions products • …provides advice and assistance regarding emissions trading, policy and Kyoto compliance • …is involved in over 25 projects with total expected reductions of over 185m tonnes CO2 • …conducts and publishes extensive research & analysis on the global emissions market Dr. Hugo Banziger · Page 6

7. Role of Financial Instruments in Managing Energy and Climate Risks Dr. Hugo Banziger, Chief Risk Officer Brussels, 15 May 2007