MANDATORY GREENHOUSE GAS EMISSION TRADING SCHEMES OPERATING IN AUSTRALIA, CALIFORNIA, EUROPEAN UNION AND QUÉBEC July 2013

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1 MANDATORY GREENHOUSE GAS EMISSION TRADING SCHEMES OPERATING IN AUSTRALIA, CALIFORNIA, EUROPEAN UNION AND QUÉBEC July 2013 Jurisdiction Australia California Québec European Union Scheme name Carbon Pricing Mechanism (CPM) Cap and trade program (Program) 1 Cap and Trade System for Greenhouse Gas Emissions Allowances (SPEDE) European Union Emissions Trading System (ETS) Scheme type Fixed price uncapped scheme July 1, 2012 June 30, Cap and trade Cap and trade Cap and trade Cap and trade from July 1, Scheme description From July 1, 2015 the CPM establishes a cap on annual greenhouse gas emissions (GHG emissions) of entities covered by the CPM and imposes obligations on such entities (liable entities) to acquire and surrender an eligible emissions unit for each tco2-e 3 emitted by or attributable to that entity. The Program establishes a cap on annual GHG emissions of entities covered by the Program (covered entities) and imposes obligations on such entities to acquire and surrender one compliance instrument for each tco2-e emitted by or attributable to that entity. The SPEDE establishes a cap on annual GHG emissions of entities covered by the system and imposes obligations on such entities (liable entities) to acquire and submit an eligible emission allowance for each tco2-e attributable to their total verified GHG emissions reported for the relevant compliance period. The ETS establishes a cap on annual GHG emissions of entities covered by the ETS and imposes obligations on such entities (liable entities) to acquire and surrender an EU emission allowance or a CER 4 or ERU 5 (eligible emission unit) (subject to restrictions as detailed below) for each tco2-e emitted by or attributable to that entity. Legislation Clean Energy Act 2011 (Cth) Global Warming Solutions Act of 2006 (Assembly Bill 32) Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (made under the Environment Quality Act 2009) EU Directive 2003/87/EC (established ETS) EU Directive 2004/101/EC (set limits on surrender of CERs and ERUs) EU Directive 2008/101/EC (included aviation sector) EU Directive 2009/29/EC (Phase III)

2 Target To reduce Australia's GHG emissions by 5% below 2000 levels by 2020 (a reduction of 28 mtco2-e/pa 6 ). To reduce California's GHG emissions to 1990 levels by 2020 (a reduction of 80 mtco2-e/pa). To reduce Québec's GHG emissions to 20% below 1990 levels by 2020 (a reduction of 16.1 mtco2-e/pa). To reduce EU GHG emissions by 20% below 1990 levels by 2020 (a reduction of 502 mtco2-e/pa). If a global agreement is reached for the post Kyoto period the target increases to 15% below 2000 levels by 2020 (a reduction of 83.4 mtco2-e/pa). California Air Resources Board (CARB) has announced a goal to reduce GHG emissions 20% below 1990 levels by 2050 (a reduction of mtco2-e/pa). If a global agreement is reached for the post Kyoto period the target increases to 30% below 1990 levels by 2020 (a reduction of 753 mtco2-e/pa). Australia's long-term aspirational target is 80% below 2000 levels by 2050 (a reduction of mtco2-e/pa). The EU's long-term aspirational target is 80-95% below 1990 levels by 2050 (a reduction of 2, ,386.4 mtco2- e/pa). Scheme coverage The CPM covers 60% of Australia's GHG emissions (equals 330 mtco2-e/pa). It imposes obligations on 330 liable entities that are responsible for attributable GHG emissions of 25,000 tco2-e/pa or more. Examples of liable entities include: major industrial entities, electricity generators, gas retailers, gas/coal/fuel producers, large gas users, large off road liquid fuel users and waste and fugitive industries. The Program covers 85% of California's GHG emissions (equals mtco2- e/pa). The Program imposes GHG compliance obligations on 350 businesses (representing 600 facilities), each of which is responsible for attributable GHG emissions of 25,000 tco2-e/pa or more. Covered entities become subject to the Program in two phases: (i) in January 2013, limitations on major industrial sources and electric utilities went into effect; and (ii) in 2015 distributors of transportation fuels, natural gas and other fuels will also become subject to the regulations. During the first compliance period (2013 and 2014) the scheme imposes obligations on operators of around 80 sites (mainly in the industrial and electricity sectors) that are responsible for attributable GHG emissions of 25,000 tco2-e/pa or more. The scheme will be extended in the second compliance period ( ) to covered entities that distribute fuel in Québec or import fuel for their own consumption. From January 1, 2015 the scheme will cover about 85% of GHG emissions in Québec (equals mtco2-e/pa). The ETS covers 27 EU States plus Norway, Liechtenstein, Iceland and Croatia equaling 45% of EU GHG emissions (2,124.5 mtco2-e (based on 2010 EU GHG emissions)). The ETS initially imposed a cap on GHG emissions on a Member State basis. Since 2013, an EU wide cap has been introduced and that cap reduces by 1.7% pa. Total cap for 2013 = 2,039 mtco2-e. Liable entities include power generators and major industrial entities responsible for attributable GHG emissions (e.g. oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals). Aviation was added in 2012 but suspended pending international agreement (no liability for 2012 year).

3 Scheme administrator Clean Energy Regulator (CER) California Air Resources Board (CARB) Minister of Sustainable Development, Environment and Parks and the Western Climate Initiative, Inc. Directorate-General for Climate Action dex_en.htm Start date July 1, 2012 July 1, 2015 (transition to cap and trade) January 1, 2013 (first compliance period); January 1, 2015 (second compliance period); January 1, 2018 (third compliance period) January 1, 2012 December for transition year January 1, 2013 December for first compliance period January 1, 2015 December for second compliance period January 1, 2005 December 31, 2007 for Phase I January 1, 2008 December 31, 2012 for Phase II January 1, 2013 December 31, 2020 for Phase III January 1, 2018 December for third compliance period Register, records, creation, registration, transfer and surrender The Australian National Registry of Emissions Units records an entity s holdings in carbon units, KACCUs, and eligible international emissions units ANREU/Pages/default.aspx The Compliance Instrument Tracking System Service (CITSS) administered by the Western Climate Initiative Inc. The Compliance Instrument Tracking System Service (CITSS) administered by the Western Climate Initiative Inc. Single "Union registry" records holdings of eligible emission units and transactions concerning those units. gistry/links_en.htm

4 Certificate allocation/ acquisition process In the period July 1, 2012 to June 30, 2015 the fixed priced carbon units are: issued free of charge to trade exposed emission intensive industries (95.5% or 65% of their requirements) (88 million in 2012/2013) and to certain electricity generators as compensation for value loss (nil 2012/2013); or issued by the Regulator on payment of the fixed charge ($23 for the 2012/2013 period). Carbon units (up to the cap amount) issued under the CPM from July 1, 2015 will be: issued free of charge to trade exposed emission intensive industries and to certain electricity generators as compensation for value loss; or auctioned with the design still to be finalized but anticipated to be a descending clock auction Quarterly emission allowance auctions are held by CARB (at the first auction, held in November 2012, the settlement price for the 2013 emission allowance vintage was US$10.09 per allowance; at the second auction, held in February 2013, the settlement price for the 2013 emission allowance vintage was US$13.62 per allowance; at the third auction, held in May 2013, the settlement price for the 2013 emission allowance vintage was US$14.00 per allowance). There is an active secondary market for California GHG compliance instruments. Each compliance year a limited number of emission units are issued free of charge by the Minister to certain entities in trade exposed industries. From 2015 the number of free allocated units will drop by between 1 and 2 percent each year. Emissions reductions made during the eligibility period from January 1, 2008 to December 31, 2011 may also qualify for early reduction credits. Auctions (single round sealed bid) will be held up to four times per year (quarterly) and administered by Western Climate Initiative, Inc. 7 Plus the secondary market for such units. Phase III Up to 60% of capped amount of EU allowances are issued free of charge to certain entities including: 100% of their requirements to entities who are trade exposed; and 80% of their requirements to industrial entities (reducing by 7% pa); and nil% to power generators 8. This allocation will reduce by 7.7% pa. The remaining 40% of EU allowances will be auctioned. Bidders submit their bids during one given bidding window without seeing bids submitted by other bidders. The main two auction platforms are the European Energy Exchange (EEX) (common platform for the large majority of countries participating in the EU ETS) and ICE Futures Europe (ICE) (acts as the United Kingdom's platform). Plus the secondary market for such units. The European Parliament has approved a proposal to withhold around 900 million allowances from the market over the next few years. It still requires approval from the European Parliament and the European Council to become law. Plus the secondary market for such units.

5 Scheme linkage One-way link with EU Scheme, operational from July Discussions for linkage with California's cap and trade Program. Proposed link to Quebec appears in the CARB cap and trade regulations. California Governor, Jerry Brown, and CARB have formally approved implementation of the link effective as of January 1, See California tab. See Australia tab. Discussions are ongoing regarding potential linkage with Australian CPM and carbon trading programs in other jurisdictions. Liability acquittal process A liable entity can acquit liability under the CPM by surrendering: Australian carbon units issued under the CPM; Australian carbon credit units (issued under the Carbon Credits (Carbon Farming Initiative) Act 2011 from Kyoto compliant activities (KACCUs) which sequester, avoid or abate GHG emissions; eligible international emissions units for up to 50% of liability (being CERs, ERUs and EU allowances (with an additional sub limit of 12.5%) and any other units prescribed by the CPM). A covered entity can acquit liability under the Program by surrendering compliance instruments issued under the Program. There are two permitted forms of compliance instruments: (1) emissions allowances created and auctioned by CARB, and (2) offset credits issued by CARB to reflect reductions in GHG emissions from qualifying emissionsreduction projects. Offset credits may be used by a covered entity to satisfy only a maximum of 8% of the entity s GHG compliance obligations. The CARB regulations impose compliance obligations for each compliance period. The years 2013 and 2014 are the first compliance period, the years 2015 through 2017 are the second compliance period, and the years 2018 through 2020 are the third compliance period. At the end of each compliance period each covered entity is required to surrender compliance instruments for its total GHG emissions throughout the compliance period. A liable entity can acquit liability under the SPEDE by transferring to its 'compliance account' [for surrender to the administrator] any of the following eligible emission allowances: Emission units; Early reduction credits; Offset credits issued by the Minister to entities conducting approved activities in Québec which destroy GHG emissions or the government of a linked scheme (limited to 8% of total compliance instruments submitted); any emission allowance issued by a partner entity in the Western Climate Initiative (once the partner's scheme is linked with the SPEDE). A liable entity can acquit liability under the ETS by surrendering: EU allowances pre 2013 CERs, up to the relevant State based limit pre 2013 ERUs, up to the relevant State based limit from 2013, CERs and ERUs may only be surrendered if created from projects already registered and provided in the case of CERs that the host country has entered a commitment for a second Kyoto period or from new projects established in a 'least developed country' devplan/profile/ldc_list.pdf

6 Price drivers The Australian carbon unit and KACCU price may track and be slightly higher than the EU allowances price due to the linking of the two schemes with the limit of 50% on acquittal of eligible international emissions units. CARB has projected that compliance instrument prices in the first compliance period of the Program ( ) will range from US$15 to US$20. We would anticipate that following linkage between California and Quebec the prices under each scheme will converge, with California allowances driving pricing as a result of the much larger size of the California market. See California tab. EU market may influence prices in other markets due to the EU market s much larger size. Certificate denomination One carbon unit represents the right to emit one tco2-e. One KACCU represents the sequestration, avoidance or abatement of one tco2-e. One compliance instrument represents the right to emit one tco2-e. Each emission unit, offset credit and early reduction credit represents the right to emit one tco2-e. One EU allowance represents the right to emit one tco2-e.

7 Timing restrictions Carbon units are issued with a vintage year. Liable entities can surrender permits of a current and earlier year vintages and up to 5% of a following year's vintage. Compliance instruments are issued with a vintage year, but do not expire until they are surrendered and retired: in compliance with the requirements of the Program; voluntarily, or by an external trading system linked to the Program. Units and credits are issued with a vintage year. At the expiry of a compliance period, the Minister deducts the required eligible emission allowances sitting in a liable entity's compliance account in chronological order, from the least recent to the most recent, in the following order: EU allowances are issued with a vintage year and can be used within a Phase. The billion unused Phased II EU allowances have been converted to Phase III allowances and so can be used in Phase III. In any compliance year, a covered entity may surrender compliance instruments having a vintage of that year or any previous year. In order to prevent hoarding of compliance instruments, the CARB regulations impose account holding limits that restrict the share of total allowances that registered market participants and their affiliated entities can maintain in their compliance instrument holding accounts. The holding limit for allowances under the cap and trade regulations is based on the annual allowance budget for the then current budget year. Offset credits (up to 8%); Early reduction credits; Emission units.

8 Shortfall charge Currently US$29.90 for each tco2-e GHG emissions for which an eligible emission unit is not surrendered. From July 1, 2015, 200% average auction price of carbon units. If a covered entity fails to surrender a sufficient number of compliance instruments and the procedures for untimely surrender of compliance instruments by the entity have been exhausted, the entity will every 45 days thereafter accrue a separate violation for each required compliance instrument that has not been surrendered or obtained. Failure to surrender sufficient GHG emissions by the compliance deadline will lead to an administrative sanction equal to four times the missing number. US$130 per unit for each tco2-e GHG emissions for which an eligible emission unit is not surrendered. Violations can result in fines as well as imprisonment. Penalties vary depending on mens rea and the severity of resulting injuries. For example, a negligent emission in violation of the regulations can result in a fine of up to $25,000 and imprisonment for up to 9 months. If such negligence causes great bodily injury it can result in a fine of up to $100,000 and imprisonment up to one year. Different penalties apply for willful or intentional conduct. Price of units as at July 18, 2013 US$24.15 Approximately US$14 (emission allowances for vintage year 2013 were sold at a settlement price of $14.00 in the May 2013 auction) A minimum auction price is set annually, increasing by 5% plus inflation until In 2012 the auction floor price was US$10. US$5.30 Revenue from government auction sales US$5.77 billion in 2012/2013 at a price of $24.15 Market observers have projected that the aggregate annual revenues from auctions of emission allowances could grow to approximately US$10 billion by Predicted to generate a minimum of US$2.7 billion by Europe wide revenue of US$4.24 billion at a price of US$ California is working closely with British Columbia, Ontario, Quebec and Manitoba through the Western Climate Initiative to develop harmonized cap and trade programs that will deliver cost-effective emission reductions. The WCI jurisdictions have formed a non-profit corporation, WCI, Inc. to provide coordinated and cost-effective administrative and technical support for its participating jurisdictions emissions trading programs. (See 2 On July 16, 2013 the Labor party stated that if they are re-elected they will try to bring forward the start of the Australian trading scheme to July 1, However Labor needs to

9 amend the Clean Energy Act 2011 for the scheme to begin and both the Greens and the Coalition are vowing to block such a change in the Senate. 3 tco2-e is an abbreviation for metric tons of CO2 equivalent. tco2-e/pa is an abbreviation for metric tons of CO2 equivalent per annum. 4 Certified emission reduction is a credit issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by a CDM project and verified under the Kyoto rules. 5 Emission reduction unit is a credit issued under a Joint Implementation Project established under the Kyoto Protocol. 6 mtco2-e is an abbreviation for million metric tons of CO2 equivalent. mtco2-e/pa is an abbreviation for million metric tons of CO2 equivalent per annum. 7 The auction design is harmonised with the California process to allow joint auctions when the systems are linked. 8 Other than generators in eight of the Member States which have joined the EU since Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Poland and Romania.