Bonn climate talks

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BONN CLIMATE TALKS

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Bonn climate talks
Welcome to Trading Carbon’s Bonn climate talks supplement. While there have been UN-level talks and discussions in other international fora on climate change since last December’s high level meeting, Bonn marks the half-way point between Copenhagen and Cancun later this year. Copenhagen was envisaged as the final stage of the process outlined in 2007’s Bali action plan to culminate in a new agreement to deal with climate change in the post-2012 world. That didn’t happen and we were left with the Copenhagen accord – a document that was not adopted at the UN level and which, for many, didn’t go much further than the Bali action plan itself. This supplement aims to outline some of the main talking points. Detail on reducing emissions from deforestation and degradation (Redd+) is a prominent section of the accord. However, while Redd+ has been heralded one of the most successful aspects of the negotiations, there is still much to do before it can provide serious reductions in greenhouse gas emissions. We also take in the views of the most vulnerable nations – least developed countries and small island states – to the Copenhagen accord and how the future negotiations might affect them. The big question, of course, is when will there be an international agreement that will provide more certainty to businesses on the shape of the post-2012 climate change regime. Will this mirror the approach of the Kyoto protocol or are we in line for something completely different possibly outside of the auspices of the UN?

Contents
S1 Introduction/Contents S2 Post 2012 Legally binding or just embarrassing? Andreas Arvanitakis discusses when a new legally binding international climate regime could be in place. And asks what difference could it make to countries’ efforts on greenhouse gas mitigation S4 LDCs/SIDs viewpoint Moving forward Gaile Walters examines how the world’s most vulnerable nations to climate change – least developed countries and small island states – view the Copenhagen accord and the prospects for global climate change negotiations this year S6 Redd+ Much still to be done Reducing emissions from deforestation and degradation is an area that promises much progress at the international level. But, as Manual Estrada finds, it still requires a lot of work before it becomes a reality

June 2010

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POST 2012

will a legally binding international climate agreement make a difference? aSkS AndreAS ArvAniTAkiS

really didn’t know if it was going to work out. I wouldn’t have given it more than 50 per cent chance. I was pretty sure of two things though: If it died, it would do so quickly – within two years most likely. If it survived, I would regret not grasping the opportunity, despite the risks. It was a job offer from Point Carbon, at the time a start-up boasting just a dozen or so employees, none in the UK. It was the summer of 2003 and at the time the emissions trading vision felt pretty precarious; the business plan centred on the carbon market, in turn based on policies that were not quite in place yet. The UN Framework Convention on Climate Change (UNFCCC) had been around for ages and achieved nothing, the EU emissions trading scheme (ETS) directive hadn’t even entered into force. In fact, we were still watching the Kremlin to see whether Russia would ratify the Kyoto protocol and bring it to life. Needless to say, I did take the job at Point Carbon, based largely on a hunch, and have never looked back. Now there is a sense of deja vu, though. The emissions trading world has come a long way, but in 2010 we face uncertainty at the international level and we await clarification on regional or national ETSs. The risks and rewards of investing in the post-2012 market have to be weighed up by business, in general, in the same way as in 2003, hopefully, not just on a hunch. The question seemed quite straight forward at the time: In or out? Now, it is more complex, just as the coagulation of the politics and the proliferation of rules have complicated the market. Rather the question is in (but how and where), or out (when)? The business community is a broad grouping of different interests in the international policy context, but there is one cause most constituents support and that is the call for greater certainty. Regulatory/policy uncertainty is peaking and threatens to kill the emissions market, or at least anaesthetise it for some time. To be able to measure the risks and scope out the opportunities, that high-level uncertainty needs to come down, the message goes. Simply put, ‘certainty’ makes for a lower discount rate on future cash flows and lifts the net present value of a project. So what is this certainty in the international policy framework that business seeks? When does it become
June 2010

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LEGALLY BINDING, OR JUST EMBARRASSING?
‘investment grade’ so business feels the confidence to plough finance into the next generation of greenhouse gas mitigation projects? Figure 1 shows a schematic representation of the dilemma. In reality of course, it is a sliding scale; a European utility will know well enough that they face carbon constraints and must mitigate that risk. A hedge fund/project developer may have a greater appetite for risk today with one eye on tomorrow’s rewards. Essentially they are both asking themselves the same question, how much certainty do I need to pull the trigger on investing in emissions reductions? When guessing what will happen next in the international climate regime, we can start by eliminating some unlikely scenarios. First, as the major developing countries in Copenhagen opposed any decisions that might undermine the Kyoto protocol, the EU’s idea of replacing Kyoto with a new agreement that has legally binding targets and includes the US, is unlikely. The negotiations will continue along two tracks, one under the protocol and one under the convention, as least for the foreseeable future. Second, a strong binding framework under the convention that co-exists with Kyoto is unlikely, because countries, such as China and India, have strongly opposed a legally binding

Figure 1. How much certainty is needed for investment in emissions reductions

Policy uncertainty

Investability

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POST 2012
outcome of the convention track. The convention itself, as it stands today, is a rather general and non-committing framework with no sanctions or other punitive measures. In this context, anyone waiting for a relatively simple structure like the Kyoto protocol to emerge before stepping into the game will be stuck on the sidelines indefinitely. We do not expect a new deal or agreement will substitute the Kyoto protocol, but rather that at least the EU, Australia, New Zealand and Japan – and possibly also Russia – will inscribe a new round of targets in Annex B. Supplementary building blocks under the convention could be developed that have the combined effect of increasing transparency and reducing emissions, although they will be less binding than Kyoto. Whether the lack of a ‘binding’ legal status is a problem for business is debatable. International law takes precedence over national law in theory, however, in practice it is easy to walk away from ‘binding’ protocols. The US cold-shouldered the Kyoto protocol without a second thought under the George W Bush administration, and is no closer to embracing it again now. Canada will come to 2012 and not be in compliance, even though it has not rejected Kyoto outright. Perhaps you know when a treaty or protocol is ‘binding’ when you feel pain for noncompliance. Kyoto’s compliance mechanism is intended to underpin the ‘binding’ nature of the caps. If a party is not compliant, there are two strands – the first is facilitative and intended to help them comply. The second is punitive and should result in twice the shortfall in this period being subtracted from the cap in the next phase. But it turns out that its legally binding nature has not led to uniform compliance. Canada is keenly following the US in the non-Kyoto stream and is unlikely to subscribe its targets in an annex to the amended protocol. If it doesn’t have a cap in the next phase, the compliance mechanism cannot be applied. So for Canada, the protocol is not politically binding and so its legally binding nature does not bite – at worst it may be a little embarrassing to be out of compliance. Talking to one of the frontiersmen in this market I was reminded that, in the context of joint implementation in Europe, the argument that money could be made in investing in reducing emissions fell flat until the EU ETS directive hit the statute books, suddenly the game was on. The US is another case in point. It cannot sign up to anything internationally unless it has secured implementation domestically. So as well as the international negotiations over development and climate, another system is emerging of ETSs that, once operational, may start to reach out and link directly to each other. Until then, international offsets will connect these markets indirectly. But legal status and being legally binding are different. Many negotiators agree that a legal agreement would be significantly stronger than a political outcome. Developing countries certainly want caps for industrialised countries and finance flows for mitigation and adaptation to be legally binding. Likewise, industrialised countries would like to see domestic efforts ‘internationalised’ by naming them

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Figure 2. Copenhagen’s impact on certainty and the carbon price
15 14.5 14 €/tCO2 13.5 13 12.5 12 1/12/09 8/12/09 15/12/09 22/12/09 29/12/09 EU allowance spot price

nationally appropriate mitigation actions – so called Namas – and setting them in a legal context. The belief that legal form is more important than a ‘pledge and review’ system, as sketched out in the Copenhagen accord, is not just related to a compliance mechanism. It is about building trust between negotiating parties that the other will do what they say and, perhaps more importantly, it underpins the development of national policy. Without Kyoto and its particular legal status, there would be no EU ETS, not just because of the protocol’s compliance mechanism. It also provides a spur for action by policy-makers and a buttress against lobbying for inaction. Take the Copenhagen accord. It sets out a massive finance plan building to $100 billion per year by 2020, as well as a series of pledges to cut emissions on the part of industrialised and some rapidly developing countries. But pledges for funds from Treasury departments are subject to the prevailing domestic policy winds. Likewise, an international ‘pledge’ to cut emissions with a target date several terms in office away, may not prove convincing either. On the other hand, if those international pledges are nationalised’ into domestic legislation, then you have binding emissions caps creating demand for offsets. A sense-check of the scale of finance tells you that $100 billion a year, cannot come just from public coffers. It must primarily come from the private sector, and most likely via emissions trading as well as other mechanisms. For some countries, affording the pledges in the Copenhagen accord with a legal status, sometimes under the Kyoto protocol and sometimes the convention, will be a spur for action at the domestic level – it would help the EU to upgrade its target from a 20 per cent cut in 2020, for example. In the case of the US, and eventually other countries, domestic legislation needs to be in place first. Once those pieces come together, you have a semblance of certainty by most people’s definitions. If ‘investment grade’ certainty means likely increased demand in the emissions market, then the Bonn talks in May and June will give another clue as to whether we are moving towards an agreement with legal status any time soon. But clearly what happens in US national policy is the catalyst for investment. l Andreas Arvanitakis is a senior analyst at Point Carbon in London Email: aa@pointcarbon.com
June 2010

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LDCs/SIDs vIewpoInt

AS UN climAte NegotiAtioNS weAve Slowly towArdS mexico, progreSS iS poSSible for the moSt vUlNerAble, SAyS GaILe waLterS

Moving forward
s the international environmental community heads towards the high-level UN climate change meeting (COP16) in Mexico at the end of 2010, there can be little doubt that Copenhagen’s COP15 did not assist in the unification of a house divided. Much criticism has been levelled at the resulting Copenhagen accord, which was negotiated at the 11th hour by a handful of countries, while the rest of the world seemed to wait in another room. The outcome has been described by the UN Framework Convention on Climate Change (UNFCCC) itself as an engagement by governments “at the highest political level”, when, in fact, the desired result was a binding agreement operating at the highest international legal level. Sadly the accord does not have the status of binding

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the Basic countries – Brazil, China, India and South africa – have already put daylight between themselves and other developing countries
international law. Some critics have wondered whether Copenhagen has not set a bad precedent for the increased use of fora outside the multilateral UN framework. The major players in these negotiations were the US, Brazil, China, India and South Africa. The latter four developing countries have been given the acronym ‘Basic’ and are major emitters in the non-Annex I group under the Kyoto protocol. The Basic countries have already put daylight between themselves and the other developing nations. In an earlier article ahead of Copenhagen, I explored the need to create a special regime that addresses the distinct concerns of the least developed countries (LDCs) and small island developing states (SIDs) that differs from those breakout countries, such as the Basic alignment (see Trading Carbon, October 2009, pages 32–33.
June 2010

It is not clear what role the LDC/SIDs group played in the Copenhagen accord negotiations. The accord does recognise the impact of climate change on the “particularly vulnerable, especially least developed countries, small island developing states and Africa” within the non-Annex I parties and relieves them of the obligation to perform mitigation actions, while promising funding for adaptation. There are two questions that remain to be asked on behalf of LDCs/SIDs: l Is the political promise of the accord enough; and l can it serve as a platform from which they can launch into real growth and sustainable development? Heading into Copenhagen, there were pre-existing political tensions based in large part on the developing world’s view that the UNFCCC notion of ‘common but differentiated responsibility’ needed to be ingrained in the text of any new treaty. Such a nuanced description of responsibility needed to go beyond a nod to the normative and recognise the real differences in development trajectories between the industrialised and developing world. There was more than a little suspicion that the voices and needs of the developing world – particularly the LDCs/ SIDs – were not being taken seriously. The manner in which the accord was eventually presented to the world has done little to quell those tensions. This can be seen in the very vocal responses of those LDCs/ SIDs who have agreed to be associated with the document. At the time of the document’s presentation to the plenary, it was met with some resistance. It was decided that it would be left to individual countries to signify their association with it. Non-Annex I parties were also required to submit mitigation implementation plans. LDCs/SIDs were given the option of implementing such plans voluntarily. By 31 January, some 101 countries of the 194 which are part of the UNFCCC system had submitted letters of association. Of this number, more than half are LDCs/SIDs (55) and approximately one fifth of that number lodged simple letters of association. In the majority, were letters that commented on the negotiation methods employed, the
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LDCs/SIDs vIewpoInt
political nature of the accord and voluntary commitments to mitigation or adaptation plans. The criticism of the negotiating methods ranges from mildly adverting to the political and, therefore, tenuous value of the accord, to the keener concern that the power inherent in consensus that ostensibly levels the playing field had been abrogated. While some LDCs/SIDs have signalled their intention to allow the accord to serve as a starting point, others believe it should be ignored. This view has found favour with larger countries in the Latin American bloc, such as Venezuela and Bolivia, as recently as April’s UN meetings in Bonn. It is not difficult to see that this may become a fault line in future negotiations. It is understandable that the hasty drafting of the accord would not present the type of detailed mechanisms that a lengthy and involved drafting process would ordinarily produce. The language of the text is aspirational, but makes consistent reference to the recognition of development priorities for developing countries that focus on socioeconomic development and poverty alleviation. The commitment to mitigation for the non-Annex I parties and adaptation through technology transfer, capacity building and funding for the most vulnerable developing countries is reaffirmed. The accord actually quotes money figures for 2010–2012 and up to 2020. The common thread among the associated LDCs/SIDs is the need for development assistance, which the Copenhagen green climate fund should rapidly provide. The LDCs/SIDs have long declared that development on their part along a low-carbon trajectory was always going to be a costly exercise and a burden they could not bear alone. They do not have to commit to any mitigation schemes, but

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a large number of them have done so in their noting of the accord. The LDCs/SIDS are not allowing themselves to be restricted to adaptation, but have prepared mitigation plans that take into account the extension of one of the Kyoto protocol’s flexible mechanisms, the clean development mechanism (CDM), and the expansion of reducing emissions from deforestation and degradation (Redd+) and incorporated these plans into their own sustainable development strategies.

perhaps it is good that there was a high level of political involvement in the process as it gave the issue a wider audience
In the lead up to Copenhagen and beyond, LDCs/SIDs in Africa and the Caribbean have been making some progress in the development of CDM projects. At this year’s African Carbon Forum conference in Nairobi in March, copresenters were able to show year-on-year increases in CDM projects in Africa to 122 in 2010 from 42 in 2007. These projects are in various stages of development and, if broken out across the continent, reveal a skew and do not compare with the superior numbers of projects in Asia or South America, but show that the interest and desire to become a part of that market is alive and growing in Africa. Investors have also signalled that they are willing to pay a premium for the credits generated from these projects. In the Caribbean, Guyana has emerged as a valuable player in the Redd+ market with its millions of hectares of virgin forest it has been able to present avoided deforestation as an economic value. Investors have shown great interest in the country and Guyana itself has used it as a departure for its own low-carbon sustainable development plans in a rather lengthy document on the topic. The workability of the Guyanese pilot will bear close scrutiny, but its development has not been deterred by the insufficiencies of Copenhagen. However, the failure to secure an agreement in 2009 will only provide more impetus for projects such as these, not less. Copenhagen, for all its failures, has provided clarity on the way forward. Perhaps it is good that there was a high level of political involvement in the process. This gave the issue a wider audience and exposed the possibility that getting a deal is not necessarily a problem of technical differences, but political will. It also showed that the LDCs/ SIDs are engaged in the process and are not simply looking for handouts. They are as committed to the principles and the fight against climate change as the industrialised world and they are prepared to put forward their own ideas, suggestions and strategies. It is unlikely that COP16 will be handled in the same manner as Copenhagen. l Gaile Walters is an international energy and environmental lawyer at Greenleaf Caribbean Email: gaile.walters@gmail.com
June 2010

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REDD+

Much still to be done

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ManuEl EstRaDa lookS at the StatuS of talkS to eStabliSh an international regime to reduce greenhouSe gaS emiSSionS from deforeStation and degradation
t has been more than four years since the parties to the UN Framework Convention on Climate Change (UNFCCC) started discussing policy approaches to reduce greenhouse gas (GHG) emissions from deforestation and degradation (Redd+) in developing countries. Redd+, which also includes forest conservation and carbon stock enhancement, has since become one of the most popular issues on the international climate change agenda, receiving unprecedented attention not only from governments, but also from researchers, multilateral funds and organisations, NGOs – including indigenous peoples organisations – politicians and the private sector. Readiness efforts have already started in a number of
June 2010

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developing countries with support from, for example, the World Bank’s Forest Carbon Partnership Facility and the UN Redd programme. These efforts are expected to continue in the coming years with additional funds from developed countries – such as the $3.5 billion pledged last year by the US, UK, France, Japan, Australia and Norway. Actions on the ground are also taking place. A 2009 survey by the Center for International Forestry Research – ‘Emerging Redd+: A preliminary survey of demonstration and readiness activities’ – found 44 demonstration activities being currently developed or planned worldwide; while Idesam’s and the Nature Conservancy’s ‘Casebook of Redd projects in Latin America’ identified 17 projects
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REDD+
in 2009 at advanced stages of implementation in six Latin American countries – Brazil, Bolivia, Ecuador, Guatemala, Paraguay and Peru. The casebook defined “advanced stages” as those with at least a defined baseline scenario and quantification of emission reductions. In contrast, the nature of the positive incentives and the details and rules of the international mechanisms through which they will be allocated to Redd+ activities remain as uncertain as when UNFCCC parties submitted their first proposals on these issues in 2006, if not more so. These are two of the key determinants of private sector participation, which has been widely recognised as paramount to achieving a significant reduction of emissions from deforestation and forest degradation. The draft decision currently being negotiated under the ad hoc working group on long-term cooperative action (AWG-LCA) – a UN forum to decide long-term issues – is still indecisive about the nature of the incentives for resultbased activities. This is because the three possible options – public funds, the carbon market and a combination of both – are mentioned in the text, but all of them are bracketed and so have not been agreed yet, and the Copenhagen accord, which although not adopted at UN level reflects the views of a number of key countries in the climate change context, is equally ambiguous in this respect. Moreover, the negative attitude of the EU towards the inclusion of forest credits in its emissions trading scheme (ETS), and the recent distaste to an economy-wide capand-trade scheme and to the wide use of international offsetting shown by some Senators in the ongoing debate in the US could mean that, at least in the short to medium terms, the two potentially largest sources of global demand for Redd+ credits could be nullified or at least limited. In fact, this situation, combined with the aversion of Brazil – the single most relevant developing country in the Redd+ debate – to carbon trading, raises serious doubts about the inclusion of Redd+ in the regulated carbon market anytime soon. Along the negotiation process, groups of parties have differed regarding how an international Redd+ mechanism agreed under the UNFCCC would reward successful mitigation actions. The EU, Brazil and Papua New Guinea, among others, have supported the adoption of a national-level baseline-and-credit scheme. Under such a system, countries would receive rewards (either carbon credits or non-market incentives) for reducing their historical emission levels, so as to avoid leakage concerns generally associated to individual projects, and to promote large-scale mitigation in developing countries. However, this approach would require good monitoring capacities and, since credits or incentives would be received and managed by the countries’ governments, good governance and transparent and efficient benefit sharing mechanisms. Attracting private investment to public Redd+ programmes would also be an important challenge, particularly in countries with low governance levels. Other parties, such as Colombia, proposed following a subnational approach based on the experience of existing Redd+ projects and the clean development mechanism (CDM). This approach, provided that leakage could be

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credibly addressed through methodologies, could offer an avenue for the immediate participation of all countries and the private sector, even those without the capacities required to implement a national scheme in the short term. A third option was brought to the table by a group of Latin American countries, which introduced the idea of a ‘nested approach’ that would allow countries with limited capacities to start at the subnational level and scale up to a national approach as these improve with time. The text being negotiated by the AWG-LCA is mainly based on a national approach, but contains text in brackets that would offer the option for developing countries to develop, “if appropriate”, “a subnational strategy”, a “subnational forest reference emission level[s] and/or forest reference level[s]”, and “subnational monitoring and reporting as an optional interim measure”. However, by referring exclusively to developing country parties, the text would limit the development of the aforementioned activities to national governments. This distinction is important, as it could have a number of relevant implications: l edd+ credits resulting form successful R subnational strategies would be issued exclusively to country governments by a dedicated UNFCCC body. That is to say, Redd+ activities carried out by subnational

the three possible options – public funds, the carbon market and a combination of both – are mentioned in the text, but not agreed yet
entities would not be credited directly by the UNFCCC – as opposed to the CDM, where this is possible because Article 12.9 of the Kyoto protocol specifies that “participation under the clean development mechanism, including in activities mentioned in paragraph 3(a) above (project activities resulting in certified emission reductions) and in the acquisition of certified emission reductions, may involve private and/or public entities.” epending on each government’s decision, private D actors could implement Redd+ activities to support subnational strategies, but would not be able to do so in practice until governments have developed such strategies, established their associated subnational
June 2010

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REDD+
barriers associated with the implementation of a national approach could also affect this scheme. On the other hand, it is worth mentioning – even if current discussions in the US Senate are uncertain – that the climate and energy bill passed in the House in June 2009, the original Kerry-Boxer Senate climate bill and the new Kerry-Lieberman bill (see page 22) also limit international project-based activities and favour nationwide approaches. Only certain countries – those emitting less than 1 per cent of global GHG emissions and less than 3 per cent of global emissions from land use change and forestry – could generate credits from project activities. This would appear to rule out all projectbased forest carbon activity in Brazil and Indonesia from eligibility for US carbon credits. Under the House bill, project-based forest carbon would be phased out after five years, whereas Kerry-Boxer proposes a period of eight years. Additionally, project activities could continue in least-developed countries for eight or 13 years. So, what is next for Redd+? The context depicted above makes evident that policy approaches currently being discussed are likely to fail to attract large private sector investments to Redd+ activities, at least in the short term: demand for Redd+ credits is not being promoted and clear mechanisms for private participation do not yet exist. It may be argued that, since most developing countries need to build significant capacities and thus will not be in a position to deliver large volumes of Redd+ credits for some time, having a limited private sector demand for such credits would not actually affect the short-term mitigation potential of Redd+. However, if the conditions required to facilitate private sector participation are not established soon, investments could take some time to take place. Undeniably, the first condition that should be met is the adoption of a Redd+ mechanism or mechanisms under the UNFCCC in which the private sector could have a meaningful participation – for example, a market-based system – supported by international offsetting-friendly attitudes in the EU and the US in the medium term. Additionally, in parallel with host country readiness activities to improve monitoring accuracy, forest policies and governance, ‘Redd+ buyers readiness’ initiatives should be considered, so as to ensure that increased supply will be met by demand within the next decade. Such initiatives could include, for instance, awareness raising campaigns on how the adopted mechanisms would work, the exploration and establishment of, for example, cost-effective risk-reduction tools for private investments in government programmes, mechanisms to guarantee that private investments will not be affected during the transition from existing and planned Redd+ projects in the voluntary market to national approaches, and models to facilitate the integration of private actors in governmentled initiatives. l Manuel Estrada is an independent climate change consultant who has advised the government of Mexico at international negotiations Email: mporruacop9@gmail.com
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baselines and put in place the capacities required to monitor and report their results. The definition of national requisites and procedures for the participation of private entities in the scheme, their implementation and the establishment of a revenue distribution mechanism would require time, capacity and resources. As a consequence, the instrumentation of Redd+ actions could be delayed and the flow of private resources could be limited, if participation requirements and procedures established by governments are too complicated or bureaucratic, revenue sharing rules result unattractive to private investment, or governance is weak. ational governments with limited technical capacities N could delegate to private actors, NGOs and subnational

Policy approaches currently being discussed are likely to fail to attract large private sector investments in Redd+
governments the development and implementation of strategies and baselines, as well as the monitoring of results and the preparation of reports, so as to be able to participate in the market promptly, but they would need to have resources to pay for these services and enough capacities in place to verify that all these elements comply with international requirements, since international reporting would still be their exclusive responsibility. In summary, the removal of all brackets currently referring to subnational Redd+ in the AWG-LCA text would open the door to a scalable “partially national” approach more than to a subnational one. This is because the mechanics and requirements of such a scheme would be similar to those of a national approach, but applied only to specific areas within a country instead of to all of its territory. Consequently, many of the short-term
June 2010

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