Presentation to the Annual Meeting of Host Country

Presentation to the Annual Meeting of Host Country Committee on Carbon Finance Pricing, Risks and Costs Richard Rosenzweig Natsource LLC February 2005 Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 1

Overview of Presentation l About Natsource – Greenhouse gas (GHG) emissions experience l Greenhouse Gas Credit Aggregation Pool (GG-CAP) l Greenhouse Gas Market Overview – 2004 market overview – Demand trends – Instruments for compliance l Project-Based Reductions: Price and Risk – Current pricing – Three types of risk – Delivery risks associated with project-based reductions – Managing risk l Appendix 1: 2004 Market Summary Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 2

About Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 3

GHG Emissions Experience GHG Asset Management: l Development of the Greenhouse Gas-Credit Aggregation Pool (GG-CAP) – Fund manager has contracted for millions of tons of GHG reductions l Representation of World Bank Carbon funds and Dexia-Fond. Elec funds in Asia l Manage account for Fortune 100 Company in North American and UK Markets Emissions Brokerage and Project Structuring Experience: l In 2004, brokered multi-million tonne transaction of candidate CERs from a project with a baseline methodology approved by the CDM executive board l In 2001, brokered the first transactions of U. K. and Danish national allowances – l Brokered the first forward swap of national allowances In 2000, brokered early transatlantic and transpacific transactions Strategic Services: l Provide market intelligence and policy expertise to assist asset managers, Fortune 500 multi-national energy and manufacturing firms and governments l Advisors to Fortune 500 multi-national energy and manufacturing firms in assessing emissions risk and developing risk management strategies l Advisors to developers on project structure l GHG project screening and portfolio modeling l Advisors to governments on emissions trading system design l Staff developed the first project-based mechanism designed to reduce GHG emissions and participated in the negotiations to develop the rules governing the project-based mechanisms in the Kyoto Protocol Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 4

Environmental Finance 2004 Market Survey Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 5

Greenhouse Gas Credit Aggregation Pool Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 6

Natsource Greenhouse Gas Credit Aggregation Pool (GG-CAP) l $200 million fund target l Organize a ‘buyers group’ of entities to purchase a large pool of projectbased emission reductions (ERs) l Natsource Asset Management Corp. (NAM) would be the pool manager and originate, contract for and manage delivery of Kyoto compliant ERs from 15 -30 contracts over the 2005 -2012 year period l NAM would structure, execute and manage contracts with legal, measurement and verification, and other service providers over the 9 year period l A ‘pooled fund’ model would be used whereby buyers’ capital secures their ownership of a % of the ERs in proportion to their % investment in the pool l NAM acts only as the Buyers’ agent in the transactions Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 7

GG-CAP – Overview Allows buyers to purchase tonnes collectively l Large portfolio, extensive risk management l Minimum level for voting rights is 1 m. tonnes (8/9 yrs) l Maximum price set by Members l Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 8

GG-CAP Status and Timeline l Current Status: – 6 Companies committed l represents 130% of minimum volume (Japan, Europe and Canada) – 6 Companies engaged in final due diligence l represents additional 60% of minimum volume – Under consideration by 5 Japanese, 10 European and 3 Canadian entities l Anticipate First Close in first quarter of 2005 – Purchase and Management Agreement frozen – Management Committee meets to consider key matters – Contracting to begin l Operations and supply network in place l Screening, scoring and pricing of projects begun Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 9

Greenhouse Gas Market Overview Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 10

Market Development Through April 2004 l Traded volume more than doubled from 02 -03 to 78 million tonnes l On target for another doubling to over 150 million tonnes traded in 2004 l Buyers purchasing high quality, potential compliance instruments – Pre-compliance instruments trading for $3. 00 -$6. 50 per tonne – Weighted average is $4. 00 -$5. 00 l HFC destruction projects created 31% of traded reductions l Reductions created by power sector projects account for 50% of traded volume l 30% of traded ERs are created by renewable projects l Over 75% of traded ERs created by projects in Latin America and Asia l Japanese private sector has become most prominent market participant * Lecocq, F. (2004) “State and trends of the carbon market 2004, ” Washington, DC: World Bank, based upon data and analysis provided by Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 11

Potential Demand in the GHG Market Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 12

Current Demand Trends in GHG Market l Market driven by Kyoto Protocol entry into force – Requires developed countries to reduce their GHG emissions below 1990 levels by 2008 -2012 – Much of obligation will be devolved to private firms l Over 3 billion tons of demand in 2008 -2012 – Japan is estimated to be short by approximately 1 billion tons during the five year commitment period – Canada is estimated to be short by over 1. 2 billion tons during the five year commitment period – Europe is estimated to be short by approximately 800 million tons during the five year commitment period l Modest demand in Europe from 2005 -2007 Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 13

Instruments for Compliance l Internal reductions l Assigned Amount Units (AAUs) l European Union Allowances (EUAs) l Project-based Natsource LLC reductions (CERs, ERUs) Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 14

Project-Based Reductions: Price and Risk Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 15

Prices For Market Instruments • CERs = 2000 -2012 CDM credits ERUs = 2008 -2012 JI Credits • 2005 EUAs = 2005 Delivery EU Allowances 2006 EUAs = 2006 Delivery EU Allowances 2007 EUAs = 2007 Delivery EU Allowances *All prices as of February 11, 2005 Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 16

Relationship Between Price and Risk l EUAs trade for significantly higher prices than project-based reductions l Premium for allowances is based on risks associated with forward-delivery of project-based reductions – Less risk in allowances being delivered (credit) l Risks are associated with delivery of project-based reductions on a forward-basis – Risks that a portion of project-based reductions will not be delivered l Buyer assess risk when determining willingness to pay Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 17

Three Types of Risk l International l Country l Project Natsource LLC regulatory risk Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 18

Rules Regarding International Regulatory Risk Becoming More Certain l 19 baseline methodologies have been approved by CDM Executive Board l Baseline methodologies are replicable around the world l Case by case approach is troublesome l Retrospective look at approved methodologies hurts the market Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 19

Elements of Country and Project Risk l Counterparty Risk -- relates to credit worthiness of ER sellers l Regulatory Risk-Country -- relates to country policies governing crediting and transferring of project-based ERs to buyers l Performance Risk-Country -- relates to the investment climate in host country l Performance Risk-Carbon -- relates to the technology and extent to which generation, creditability and ownership of ERs is affected by the particular type of technology l Performance Risk-Technology -- relates to the operational and/or commercial aspects of technologies utilized in ER projects (based on actual data) Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 20

Country Risk Can Be Minimized l Sovereigns are competing for carbon finance l Developers evaluate country risk prior to investing l Buyers evaluate country risk prior to purchasing l Countries can take steps to attract CDM investment by reducing CDM investment risk – stable investment regime – transparent, certain approval processes – predictable tax regime for CERs – process for conflict resolution Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 21

Project Risks Can Be Mitigated l Several elements of risk distinct from country risk affect delivery and price l These include but are not limited to: – credit risk – performance risk higher with certain technologies (e. g. , wind vs. fuel switch) l Several risk management techniques can mitigate these risks and increase CER price for future delivery – seller guarantees CERs if project under delivers – seller develops a diverse portfolio with reserve margins – options – insurance Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 22

Further Information www. natsource. com Rich Rosenzweig 1120 19 th Street, NW Suite 730 Washington D. C. , U. S. A. 20036 1 202 496 1423 1 202 496 1416 fax Email: rrosenzweig@natsource. com Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 23

Appendix 1: 2004 Market Summary Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 24

Trading Has Increased Significantly l Trading more than doubled between 2002 and 2003 l Market on track to double again in 2004 Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 25

Buyers Purchasing Higher Quality ERs l Buyers purchasing for compliance – 95% of reductions likely to count l Projects with approved baselines reduce uncertainty Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 26

Prices for Project-Based Reductions Have Remained Stable l Compliance instruments trading between $3 and $6. 50 / tonne l Weighted average between $4 and $5 Prices may increase if Russia ratifies Protocol l Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 27

Significant Opportunities in the Power Sector l l Projects with approved methodologies are biggest sellers of reductions (e. g. HFC destruction, LFG) 50% of traded reductions created by power sector projects Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 28

Asia and Latin America Lead in Hosting Projects l l 50% of traded reductions created by projects in Asia 27% of traded reductions created by projects in Latin America Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 29

Japanese Private Firms Are Now Largest Buyers in Market Japanese buyers purchased 41% of reductions in 2004 l Governments and World Bank Carbon Finance Business (CFB) remain large purchasers l Natsource LLC Proprietary and Confidential- Not to be Reproduced Natsource Asset Management 30