California's AB32 Program

Overview of the California Carbon Market Presented by: Randy Lack Founder & Chief Marketing Officer September 2011 CONFIDENTIAL AND PROPRIETARY

ELEMENT MARKETS INTRODUCTION - US Emissions House of the Year - 2010 Launched in 2005, Element Markets has become the largest integrated environmental credit marketing and project development company in North America Leading marketer of environmental commodities in the US with a focus on Emissions, GHG, and Renewable Energy Trading and is the largest account manager in CAR. Transacted over $700,000,000 in environmental credits since inception in 2005 Has retired over 500,000 tonnes of CAR offsets voluntarily for clients in the last 12 months EM is one of the largest developers of biogas projects in the US and owns the largest Anaerobic Digestion Project in North America that produce Business Units Greenhouse Gas (GHG) and Emissions Services Renewable Energy Group GHG Offset Projects Credit Marketing Credit Marketing Biogas Development Project Types Marketing Compliance Solutions Methane (Landfills, Coal Mines, Agriculture) Asset Management Industrial Gases (N20 & ODS) Credit Aggregation Forestry Credit Monetization

AB32 PROGRAM OVERVIEW Background In December 2010, the California Air Resources Board approved California s proposed cap and trade regulations, a key part of the AB32 / The Global Warming Solution Act of 2006 In late June, CARB Chairwomen Mary Nichols announced that California would delay the compliance obligation for affected entities under AB32 for one year Beginning in 2013, the regulations will cover GHG emissions from electric generation facilities, industrial emitters, and fuel suppliers, and require them to reduce emissions to 1990 levels by 2020 The program will be implemented over 3 phases or compliance periods: 2013-2014 (Phase I); 2015- 2017 (Phase II); 2018-2020 (Phase III) Covered Entities Phase I (2013-2014): Electric Generation Units, Industrial Stationary Sources (including Carbon Dioxide Suppliers) and Importers of Electricity from specified sources with emissions over 25,000 tpy, as measured in any single year from 2008-2011. Also included is electricity from unspecified source threshold is 0 MWhs Phase II and Phase III (2015-2017, 2018-2020): Liquid fuel suppliers and suppliers of natural gas with emissions >25,000 tpy. Also included are importers of electricity threshold is 0 (tons or MWhs) for all sources of electricity

AB32 PROGRAM OVERVIEW Effects of Reduced Emissions on an Entity s Compliance Obligation Entities are in the program until their emissions are below 25,000 tpy for an entire compliance period or if they shut down the facility If a facility triggers the threshold in any year, they must remain in the program until the end of the current compliance period at a minimum Note that entities can opt into the program and be eligible to receive free allocations; they can subsequently opt out after a compliance period Compliance Instruments Allowances issued by ARB Allowances / Offsets from programs linked to California (e.g. Western Climate Initiative states) Offset credits issued by ARB (including Early Action offsets) Sectoral-based Offset Credits

AUCTION FORMAT First Auctions August 15, 2012 and November 14, 2012 For 2013 allowances Auction Allowance Reserve Frequency Quarterly Auction 3 weeks after each quarterly auction Available for sale Current vintage and current vintage + 3 years 121.8 million tons (from future vintages and through borrowing from future years) available at start of program Format Single-round, sealed-bid, uniform price format Fixed Price Sale - Tiers of Allowances, with minimum purchase price for each tier; Participants submit bids for purchase of allowances from each tier Who can participate Anyone Covered Entities under AB32, possibly covered entities from linked programs Min. price of $10 (constant $2009) ($10 for 2015 vintage) Floor Price (2013) $40 (Tier I) $45 (Tier II) $50 (Tier III) Increases every year by CPI+ 5% Floor Prices (2014+) Increases every year by CPI+ 5%

OFFSETS Based upon the current offset % allowed for compliance the estimated maximum amount of offsets used for each Phase is as follows: Phase I 25.8 million Phase II - 91.8 million Phase III 83.1 million To date, only 5.1 million tonnes of ARB eligible offset credits have been issued under the Climate Action Reserve Only 4.2 million tonnes of those credits have not been retired and are still available Offset supply right now is expected to be low compared to the maximum amount that can be used At least until additional protocols are approved by ARB Maximum Offsets Allowed 35 30 25 Million tonnes 20 15 10 5 0 2013 2014 2015 2016 2017 2018 2019 2020

OFFSETS EARLY ACTION OFFSETS Early Offsets The program allows the use of offsets from the Climate Action Reserve (CAR) for certain projects types (remaining CRTs) Urban forestry 0 tonnes Forestry ~2 million tonnes Domestic ODS ~1.9 million tonnes Livestock (Ag.) ~292,000 tonnes Requirements Project State Date - prior to 1/1/2013 Project Location - United States Eligible Credits - 1/1/2005 - 12/31/2014 In order to be exchanged for ARB credits, the projects that earned the offset credits must be re- verified or checked in some manner by an ARB-accredited verifier Process is still being defined, but does pose some risk on transference Other Potential Project Types (LFG, N2O, CMM, International ODS, etc.) If these projects were eventually accepted by ARB, they could allow older vintages For example N2O could consider credits before they are required to capture under AB 32 (1/1/2012)

OFFSETS POST 2012 OFFSETS Once the program starts, ARB will implement its General Offsets program Project Types For right now, same 4 protocols are eligible with new protocols considered in 2012 Urban forestry, Forestry, Domestic ODS, Livestock Start Date Post December 31, 2006 Location Projects to be located in the United States, Canada, and Mexico. Eligible Offset Registries External registries can apply to be eligible ARB registries The registries can administer offset project registration, verification, etc Approval of an Offset Project Registry is valid for 10 years An approved Offset Project Registry must use the ARB-approved Compliance Offset Protocols

PRODUCTS AND PRICING California Carbon Allowances (CCA): AB32 Allowances for 2013 Delivery Auction floor price of $10 The program must be initiated and allowances trading for product to exist Historical lifetime range of CCAs has been $11.50 - $24.25/ CCA Currently valued at $18/ CCA California Carbon Offsets (CCO): AB32 Guaranteed Offsets for 2013 Delivery CCOs are offsets issued by CARB Falls under the 8% of allowable offset usage limit The program must be initiated and allowances trading for product to exist Currently valued at $12.00/ tonne AB32 CAR Approved Offsets: One of the four approved CAR offset protocols Offsets from one of the 4 CAR protocols that approved by CARB Falls under the 8% offset usage limit These offsets bear re-verification risk by CARB Currently valued at $10.50/ tonne

GOING FORWARD Superior Court Case ARB is moving forward with accepting its updated CEQA analysis to fulfill the outcome of the court case In the meantime, a stay is in place allowing ARB staff to continue implementation Offsets ARB has stated that they plan to issue new protocols for adoption by early 2013 Expectation is 1-2 protocols to be adopted and it will be interesting to see which protocols are selected with the offset supply concerns that exist by compliance entities Linkage with Other Programs The potential effect of other programs linking with AB 32 is unknown Quebec, Ontario and British Columbia all hope to initiate compliance in 2013 as well Still uncertain if other states/provinces link with California, but could have large impacts on the market

CONCLUSION The implementation of a state wide cap and trade program has the potential to have significant impacts on underlying commodities prices including natural gas and power Under AB32 will likely have a considerable effect on operating expenditures and business yields As the details of the program are still evolving it is important to be proactive and put into place internal and external controls to mitigate the affects of this program to your organization In California s current economic state and increasing regulatory environment, it is important to work with a firm that will assist you indentifying compliance options, project investment opportunities, energy efficiency measures, and that understands the overall costs of the program in order to enhance value and optimize your portfolio

ELEMENT MARKETS Randy Lack, Chief Marketing Officer Element Markets, LLC 3555 Timmons Lane, Suite 900 Houston, TX 77027 Office: 281-207-7213 rlack@elementmarkets.com www.elementmarkets.com