Climate Change: The Science, Economics and Implications for Business
The Business of Climate Change: Risks and Opportunities Goldman Sachs 13 April 2007

Jonathan Pershing jpershing@wri.org Director, Climate, Energy and Pollution Program World Resources Institute http://www.wri.org
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Four key areas of work: – – – – Climate and energy Ecosystems Governance Sustainable Enterprise 2 . • Our mission is to move human society to live in ways that protect Earth's environment and its capacity to provide for the needs and aspirations of current and future generations.World Resources Institute • The World Resources Institute (WRI) is an environmental think tank that goes beyond research to find practical ways to protect the earth and improve people's lives.

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” NOTE: very high / very likely implies greater than 90% confidence 4 . February 2007 The IPCC has “very high confidence that the globally averaged net effect of human activities since 1750 has been one of warming…” “[I]ts rate of increase during the industrial era is very likely to have been unprecedented in more than 10.000 years.IPCC.

Mix of Greenhouse Gases Nitrous Oxide 7% Carbon Dioxide 70% Methane 23% 75% from fossil fuel burning 25% from changes in land-use 5 .

Change in GHG Concentrations Source: IPCC. 2007 6 .

Global Temperature Changes 7 .

Projecting Climate Change 8 Source: UK Hadley Center. 2007 .

Projected future temperature Source: IPCC. 2007 9 .

2007 10 .Projections of Surface Temperature Source: IPCC.

water supply problems by 2020 Source: Parry (2001). • Reduced snowpack in American West. April 2007 11 .Risks from Global Warming • Water shortages harm up to 250 million in Africa by 2020 • Certain agriculture yields in Africa may fall 50% by 2050 • Decreased fresh water in Asia for 1 billion by 2050. • Parts of Europe lose up to 60% of species by 2080. and IPCC WG 2.

Andean Glaciers

Source: http://news.bbc.co.uk/1/shared/spl/hi/picture_gallery/05/sci_nat_how_the_world_is_changing/html/1.stm

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Lima, Peru
(population ~7 million, 50 mm/yr rainfall)

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Malaria and Climate
Relationship between temperature and malaria parasite development time

Climate suitability for stable malaria transmission across the diverse topography of Zimbabwe, based on United Kingdom Meteorological Office (UKMO) global climate scenarios

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2050

14 Source: Patz, Jonathan A. and Olson, Sarah H. (2006) Proc. Natl. Acad. Sci. USA 103, 5635-5636

Crop Yield Change Source: IPCC TAR 15 .

Impacts 16 .

based on World bank data .000 CIT Dev'ing LDC 1.000 - 1970s 1980s 1990s 2000s 17 Source: UK Embassy.Most Impacts Will Be Felt in Developing Countries 4.000 Number affected (Millions) 3.000 Dev'ed 2.

The emissions space for stabilising CO2 concentrations WRE CO2 Year in which global Stabilisation profiles emissions peak 450 550 650 750 1000 Source: IPCC-TAR Synthesis Report 18 18 2005 – 2015 2020 – 2030 2030 – 2045 2040 – 2060 2065 – 2090 .

Framing Mitigation: Emissions and Key Emitters 19 .

National GHG Emissions. 2000 20 .

2000 21 .Per Capita Emissions.

2005 . Baumert et al.Largest Emitters: Developed & Developing 22 Source: WRI.

CO2 Emissions Trends 2005 .2030 23 Source: IEA WEO. 2006 .

Key Countries The USA 24 .

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CAIT States represent 25% of total US emissions Aggregate reduction: 13% below current levels 26 .States with GHG targets Source: WRI.

State Policies State Action Plans Renewable Portfolio Standard Biodiesel Mandate Ethanol Mandate 27 Source: WRI. CAIT .

Proposed CA Gas Guzzler/Sipper Fees
Source: UCS, Based on AB 493

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USCAP Proposal
• • • • • • Call for a cap and trade program Establishment of a national GHG inventory and registry Credit for early action Aggressive technology research and development Policies to discourage new investments in high-emitting facilities Policies to accelerate deployment of zero and low-emitting technologies and energy efficiency

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USCAP Recommended Reductions

Source: USCAP, 2007

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Popular Opinion Is Shifting 31 .

Key Actors The EU 32 .

as part of an international climate protection agreement. to a 30% reduction in its greenhouse gas emissions by 2020 (compared with 1990). • Until a new agreement is concluded. 33 . and without prejudice to its position in international negotiations. the EU will reduce its emissions by at least 20% by 2020 (compared with 1990).Europe EU GHG Trends and Projections (1990 = 100) Source: EU Environment Agency • The EU aims to commit itself.

EU ETS 2nd Period Allocations 34 Source: EU. DG Environment .

UK 1st Period Cap: 245.2 Cap allowed.4 2006 verified emissions: 251. 2008-2012: 246.1 Proposed 2008-2012 cap: 246.2 35 Source: EU.3 2005 verified emissions: 242. DG Environment .

1 2006 verified emissions: 199.1 2005 verified emissions: 203.6 Cap allowed. 2008-2012: 208.5 36 Source: EU.1 Proposed 2008-2012 cap: 284.Poland 1st Period Cap: 239. DG Environment .

00 25.00 0.00 3.000.EUA closing prices: 2006 .000 6.000 15.000 20.000.00 5.00 30.000.000.Present ECX CFI Futures Contracts: Price and Volume 8.000 7.000 0 0 6 06 06 06 0 6 06 06 0 7 06 06 0 6 06 06 06 06 06 07 0 7 07 07 20 7/20 0/20 0/20 3/20 4/20 5/20 6/20 7/20 7/20 7/20 8/20 9 /2 0 9/20 0 /2 0 1 /2 0 5/20 5/20 6/20 9/20 / 9/ 9/2 0 /1 11 / 1 /3 2 /2 1/1 7/ 7/2 8/1 5/ 5/2 6/1 2/ 2/2 3/1 2/6 2/2 3/2 4/1 1 1 1 Total Volume Dec07 Sett Dec08 Sett 35.000.com 37 Price per tonne (EUR) .00 10.000 VOLUME (tonnes CO2) 5.00 Source: ECX.000 2.00 4.000.000 1.000.000.

The Carbon Market (1/2005 – 9/2006) Volume ~716 MMTCE Source: IETA/World Bank 2006 Value ~$21.5 billion 38 .

Key Countries China 39 .

IEA (2006) China .Chinese CO2 Emissions 10 Billions of Tons Carbon Dioxide 8 6 4 2 China . based on IEA & EIA data 40 .EIA (2006) China .EIA (2002) 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: WRI.

S.Projected to Surpass U.IEA (2006) U.EIA (2002) 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 …but cumulative emissions from 1920-2025 will be only 60% as large 41 .S. .EIA (2006) China . by 2010… 10 Billions of Tons Carbon Dioxide 8 6 4 2 China .EIA (2006) China .

China’s Share of Incremental World Growth (1998-2003) 0 GDP Crude Steel Production Cement Production Primary Oil Demand Primary Coal Demand Electricity Demand Carbon Dioxide Emissions 42 IEA. WEO 2004 20 40 60 80 .

Japan India China 0% 20% 40% 60% 80% 121 680 2337 525 387 1554 100% Total Demand (MTOE) Coal Oil Gas Nuclear Hydro Source: BP Statistical Review of World Energy 2006. 43 .S. Africa Russia U.China’s Unmatched Coal Dependence Average S.

PRC Oil Supply Balance 15 80% 12 60% 9 mb/d 40% 6 20% 3 0% 0 19 9 0 2000 P ro d uctio n D e m and 2010 2 0 20 20 3 0 Im p o rts as % o f d e m and (right axis ) -2 0 % China’s oil imports will increase from around 2.4 mb/d now to almost 10 mb/d in 2030 – equal to 75% of domestic demand 44 .

Mitigation Solutions 45 .

13 Aug 2004 .Historical and Projected Emissions 14 Billion of Tons of Carbon Emitted per Year ly nt re ur C ed ct je ro p th pa 7 Historical emissions 0 1954 2004 2054 2104 46 Source: Pacala & Socolow. Science.

Science. must reduce emissions considerably… 14 Billion of Tons of Carbon Emitted per Year ly nt re ur C ed ct je ro p th pa 7 Historical emissions Flat path ~50 2 targe t 0p pm CO 0 1954 2004 2054 2104 47 Source: Pacala & Socolow. 13 Aug 2004 .To stabilize.

Science. 13 Aug 2004 .…which will require multiple technologies 14 Billion of Tons of Carbon Emitted per Year tly en r ur C ed ct je ro p th pa 14 GtC/y Seven 1B ton “wedges” 7 Historical emissions Flat path 7 GtC/y 0 1954 2004 2054 2104 48 Source: Pacala & Socolow.

Pacala and R.Multiple technologies are available 14 GtC/y Renewable Electricity & Fuels CO2 Capture and Storage Nuclear Fission Stabilization Triangle 2004 7 GtC/y 2054 Energy Efficiency & Conservation Fuel Switch Forests & Soils “Humanity already possesses the fundamental scientific.S. Vol. technical. Socolow.” . 305 49 . and industrial know-how to solve the carbon and climate problem for the next half-century. 13 Aug 2004. Science.

Deploy 1 billion cars at 40 Distributed opportunity mpg instead of 20 mpg that is hard to capture Install 4. Science. 2004 . Nonproliferation.500 x current Geographic Limitations.000 conventional 500-MW plants with “zeroemission” power plants Build 500 1 GW plants Major Issues Technical.S.Scaling these requires a MAJOR change in current practice Today’s Technology Coal Plants Nuclear Efficiency Solar PV Actions that Provide 1 Gigaton/year of Mitigation Replace1. Social. U. & Economic Viability Economics. Safety. solar generation Storage 50 Source: Pacala and Socolow.

Not all wedges are good… 51 .

Avoid gas shift deforesta CCS.Global cost curve of GHG abatement opportunities beyond BAU 2030 Cost of abatement EUR/tCO2e 40 30 20 10 0 -10 0 -20 -30 -40 -50 -60 -70 -80 -90 -100 -110 -120 -130 -140 -150 -160 Industrial Cellulose feedstock substitution Forestation Livestock/soils ethanol CCS EOR. Asia coal Waste retrofit Soil 1 2 3 4 5 6 7 8 Sugarcane biofuel 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Industrial Avoided Industrial CCS CCS. Wind. 2007 52 . BAU) ~7 Gton of negative and zero cost opportunities Fragmentation of opportunities Source: McKinsey.deforestation Co-firing non-CO2 Biodiesel America new coal biomass Industrial motor systems 9 Fuel efficient vehicles Water heating Air Conditioning Lighting systems Fuel efficient commercial vehicles Insulation improvements Abatement GtCO2e/year ~27 Gton CO2e below 40 EUR/ton (-46% vs. Nuclear Coal-to. New coal low Stand-by losses Forestation pen.

2007 Cost of abatement EUR/tCO2e 50 550 ppm 450 ppm 400 ppm 0 0 -50 5 10 15 20 25 30 2030 Abatement potential 35 GtCO2e/year -100 -150 Marginal cost: (EUR/tCO2e) 25–35 35–40 > 40 53 * Assuming opportunities are addressed in order of increasing cost .Marginal abatement cost in the different scenarios* Source: McKinsey.

Filling the Wedges 650 ppm 550 ppm 450 ppm Source: van Vuuren. et al. 2006 54 . den Elzen. Lucas.

WEO. 2005 .Cumulative Investment in Energy Infrastructure.2030 Source: IEA. 2006 55 .

Directions for the future: Risk AND Opportunity 56 .

Climate Change and Competitiveness Regulations Business impacts of Climate Change Physical Impacts Supply Chain • • • • • • • • • • • • Potential Revenue Drivers New low-carbon products and markets Changes in demand patterns Ability to pass through costs New forms of income (carbon credits) Threats from low carbon substitutes Impact of weather patterns Potential Cost Drivers Increased raw material costs New regulatory costs Higher energy/electricity costs Insurance premiums for risky assets New capex to lower emissions Possible new tax expenses Products / Technology Earnings and cash flow for certain investments Litigation Reputation / Brand 57 .

change Ag practices Land Use 58 . safe nuclear Transport innovation Low emissions intensity material use Industry Advanced Avoid lock-in of industrial inefficient production production Slow deforestation Enhance sinks.Investment and Policy Priorities Sector Power Buildings Transport Near Term Priorities Avoid lock-in of conventional coal Avoid lock-in of inefficient buildings Avoid lock-in of inefficient infrastructure Medium term Priorities Post-combustion CCS. RE Carbon neutral building design Sustainable fuel systems Long term priorities Biomass + CCS.

wri.org 59 .org Director.Questions? The Business of Climate Change: Risks and Opportunities Goldman Sachs 13 April 2007 Jonathan Pershing jpershing@wri. Climate. Energy and Pollution Program World Resources Institute http://www.

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2007 New York City 4/16/2007 5:30 PM 1 .Ray Kopp Resources for the Future April 13.

piece meal regulation. and adaptation 4/16/2007 5:30 PM 2 .Objectives • Overview of legislative proposals in the Senate • Review of the European Union Emissions Trading Scheme (EU ETS) • Challenges and opportunities for the business community • Closing comments – state action.

Congressional Action Important questions to ask 1. Are there attempts to limit cost uncertainty ? 6. Who gets regulated? 3. What do we know about the expected cost? 5. What is the scope of the regulatory program? 2. How are the allowances allocated? 4/16/2007 5:30 PM 3 . What are the emission reduction targets? 4.

280 Bingaman-Specter Discussion draft 4/16/2007 5:30 PM 4 .485 McCain-Lieberman S.The Bills 110th Congress • • • • Sanders-Boxer S.309 Kerry-Snowe S.

Bingaman-Specter • Downstream .McCain-Lieberman – Power plants and large emitters (EU approach) • Hybrid .Who Gets Regulated? • Upstream .McCain-Lieberman – Transport upstream • Unspecified – – Sanders-Boxer – Kerry-Snowe 4/16/2007 5:30 PM 5 .

0% 42.0% 59.0% 21.9% 4/16/2007 5:30 PM 6 .6% 2030 63.0% 39.0% 7.Emission Reduction Targets Percent Reduction from Business as Usual (BAU) Sanders-Boxer Kerry-Snowe McCain-Lieberman Bingaman-Specter 2020 42.0% 61.

• 22% below BAU in 2025 – $45/per ton CO2e allowance price in 2025 – would cause electricity prices to rise by 35% • McCain-Lieberman. Kerry-Snowe.Cost to Reach the Target Energy Information Administration (EIA) analysis • 10% below BAU in 2025 – $11/per ton CO2e allowance price in 2025 – would cause electricity prices to rise by 6. Sanders-Boxer emissions reductions of around 40% by 2020 and 60% by 2030. 4/16/2007 5:30 PM 7 .5%.

Auction. 4/16/2007 5:30 PM 8 .Cost Certainty & Allocation • Do the Bills Try to Limit Uncertainty about Costs? – McCain-Lieberman: Allowance Borrowing – Bingaman-Specter: “safety valve” • How Are Allowances Allocated? – Gratis. unspecified – Bingaman-Specter • explicit allocation • initial 10% auction in 2012 increasing gradually to 65%.

– Phase 1 from 2005 – 2007. although air transport will be added in 2011 4/16/2007 5:30 PM 9 .000 sources. coinciding with the Kyoto commitment period. about ½ of EU CO2 emissions • Transport is not currently included in the system. • Cap covers only CO2. Phase 2 from 2008 – 2012. about 12.European Union Emissions Trading Scheme (EU-ETS) EU ETS Structure • Began 2005 and includes the 27 countries of the EU • The program is run in two phases.

How much of the cap is assigned to each sector 3. How the sector allocation is further subdivided among individual companies 4/16/2007 5:30 PM 10 . How much of a country’s Kyoto target is assigned to the regulated sectors 2.EU ETS Structure National Allocation Plan (NAP) NAPs describe three decisions 1.

EU ETS Structure Allowance Allocation • Hybrid gratis-auction allocation scheme for Phase 2 • European Commission placed upper limit of 10% on auction • Phase 2 allocation appears designed to purposefully distribute the cost of the program 4/16/2007 5:30 PM 11 .

2008 and will avoid many Phase 1 problems • However.EU ETS Structure Has the Program Worked? • Phase 1 was developed and implemented quickly – problems arose • Phase 2 seems set for an orderly start Jan. some issues remain – Price stability – Coverage – Beyond 2012 4/16/2007 5:30 PM 12 .

make them broad • Add as much certainty as possible to the path of future emissions and allowance prices • Keep the system simple and transparent 4/16/2007 5:30 PM 13 .EU ETS Structure Lessons for the US? • Allowance Allocation matters – A Lot • These systems work.

Business Challenges & Opportunities Allowance Allocation • Using allowances to distribute the burden – Regulated entities and cost pass through – Unregulated entities • Large energy consumers • States • Method of allocation – Gratis historical “grandfathering” & dynamic output based allocation – Auctioning 4/16/2007 5:30 PM 14 .

electricity prices likely to rise most in areas of coal fired generation • Magnitude of increase in proportion to severity and timing of the GHG cuts 4/16/2007 5:30 PM 15 .Business Challenges & Opportunities Rising Energy Prices: Winners and Losers • Energy prices will increase throughout the country.g. but in varying degrees – e..

Business Challenges & Opportunities Rising Energy Prices: Winners and Losers • Credible policy will alter expectations regarding future energy prices • Household energy consumption decisions will be altered & benefit producers of energy efficient durables • Low income households will need increased energy assistance • Energy intensive manufacturers will be disadvantaged. – Especially those facing foreign competition from countries with low or zero GHG prices 4/16/2007 5:30 PM 16 .

States • States are already moving forward – CA and Northeast states in the lead • State action raises fear of patchwork regulation & further motivates federal action – Will federal policy preempt state programs? – How much of a role will states play in permit allocation? 4/16/2007 5:30 PM 17 .Concluding Remarks .

.g. proposed by Senator Feinstein • What about hybrids like Kerry-Snowe? 4/16/2007 5:30 PM 18 . – e.Concluding Remarks – Piecemeal Regulation • Will we have a single economy-wide program that promotes economic efficiency.g.. upstream cap & trade or GHG tax? • Or sector-by-sector regulation – e.

Concluding Remarks . but these may pale in comparison to the challenges & opportunities posed by adaptation.Adaptation • Actions to mitigate climate change pose challenges & opportunities for business. • The recent IPCC report is clear – the climate is changing now • But. one sees little if any attention paid to this fact in terms of federal policy proposals 4/16/2007 5:30 PM 19 .

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A Business Leader’s Perspective on Climate Change The Goldman Sachs Center for Environmental Markets Lewis Hay. III Chairman and CEO April 13. 2007 .

statements regarding anticipated future financial and operating performance and results. A discussion of factors that could cause actual results or events to vary is contained in the Appendix and in our SEC filings. Actual results may differ materially from such forward-looking statements. including estimates for growth. These forward-looking statements may include. 3 .Cautionary Statements and Risk Factors That May Affect Future Results Any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. for example.

0 billion in total assets • 34.6 billion operating revenue A Growing.343 MW in operation • U. electric utilities • Vertically integrated. 4 .S. operating in 24 states • 13.S. 2007. retail rateregulated utility • 20. Diversified Company All data as of December 31.1 billion market capitalization • $36.4 million customers • $12.FPL Group • $25.324 MW in operation • $15. market leader in wind generation with 34% market share • Own and operate the largest solar plants in the world • $3.0 billion operating revenue FPL Energy • Successful competitive energy supplier.7 billion operating revenue FPL • One of the largest U. except market capitalization. 2006.981 MW in operation • 4. which is as of April 10.

Early Leader / Early Adaptor • Long history of anticipating and incorporating environmental constraints – Economic analyses reflect expectation of future constraints • FPL Group’s emission intensity1 is down ~13% since 1990 • Florida Power & Light’s electric generating efficiency has improved by 18% since 2000 • Signatory to EPA’s Climate Leaders Program – Committed to an 18% reduction in our carbon emission rate by 2008 off a 2001 base • Signatory to WWF’s PowerSwitch! Program – Committed to a 15% improvement in efficiency of our power plants by 2020 off a 2002 base • Signatory to US Climate Action Partnership 1 Represented by SO . and CO 2 2 5 . NOx.

000 3.800 4. Aggressive Expansion 6.421 460 578 2.Wind Energy: Early Participant.758 2.8 billion in 2007 and 2008 MW 0 99 00 01 02 03 04 05 06 07E 08E ~ $150 million in net income (2006) 6 .000 3.016 • • • • 5.000 Involved in wind energy since 1989 Committed to major expansion in 1999 Approximately 34% of U.000 FPL Energy Wind Generation ~ 5.000 1.550 ~ 4.000 4.S.192 2. installed base Expect to invest ≥ $2.745 1.720 1.

DOE. October 2002 . wind is the most economical renewable $100 $90 $80 $ per MWh $70 $60 $50 $40 $30 $20 0 00 2 5 00 2 0 01 2 5 01 2 Levelized Cost of Renewable Generation (in 2000 dollars) .Geothermal .Solar . U.As a source of energy.Wind 20 20 7 Source: National Renewable Energy Laboratory.S.Biomass .

Financial success and environmental performance can co-exist Stock Performance1 250% CO2 Profile 2.500 Avg.= 1. the date Lewis Hay. III was appointed CEO . 2001.000 150% 1.500 200% FPL UTY S&P 500 Lbs/MWh 2.000 100% 50% 500 0% 06 /2 00 12 1 /2 00 1 12 /2 00 2 12 /2 00 3 12 /2 00 4 12 /2 00 5 12 /2 00 6 0 FPL Group Source: National Resources Defense Council report “Benchmarking the Top 100 Power Producers” – 2004 data 8 1 FPL Group price performance only since June 11.442 1.

would have met its Kyoto target 1.S.If the U. MWh Lbs/MWh 1.000 x 3. the U.500 CO2 Emissions FPL Group CO2 Intensity Industry Average Total U. Total 500 FPL Group 1 Note: MWh and tons in millions 1 5.S.S.S.108 tons U.128 tons Kyoto Target 9 After adding new coal facilities .936 tons 5.833 MWh = 1. Electric All Other U. utility industry reached FPL Group’s CO2 intensity.S.172 tons 3.

do it gradually. human contribution is real Large uncertainties around magnitude of both Long-term implications potentially huge Hence. and tighten progressively 10 . prudent to act now (insurance analogy) Voluntary programs insufficient • However… – Costs of precipitous actions potentially huge – Medium-term outcomes unaffected by immediate action (IPCC 2/07 report) – Science does not support identification of any one “optimal” CO2 concentration • Hence… – Begin now.Climate Change: Our Assessment • On the one hand… – – – – – Trend is real. do it predictably.

E ne sequestration rg y technologies not yet demonstrated at commercial volumes 1.500 y nc e ici ables f Ef new ar • Carbon capture Re Nucle technologies not Adv.S.000 2.000 1990 1995 2000 2005 2010 2015 2020 2025 2030 11 Source: EPRI. Electric CO2 Emissions (million metric tons) 3. “Electric Sector CO2 Impacts – February 2007” . Coal yet viable at Carb on commercial scale Di Captu re • Carbon st .500 U.500 2.000 1.Long-term reductions will not occur without substantial R&D 3.

But significant short-term reductions in CO2 intensity are possible – if the right price signals exist Cost of Abatement € per ton CO2 50 Low Cost Forestation CCS. “The McKinsey Quarterly – Number 1” . New Coal 0 Biodiesel CCS Retrofit Avoided Deforestation -50 Nuclear Fuel Efficiency in Vehicles Air Conditioning Lighting Systems -150 Building Insulation 5 10 15 -100 20 25 30 12 Gigatons of CO2 per year in 2030 Source: McKinsey & Co.

policy must balance several priorities Costs Climate Energy Security 13 .As a practical matter.

Technology choices represent longterm commitments All In Levelized Cost of Energy ($/MWh) Nuclear Nuclear Nuclear Nuclear IGCC IGCC IGCC Coal Coal Gas High Natural Gas & Low Emissions Costs Moderate Natural Gas & Low Emissions Costs Gas Coal Gas Moderate Natural Gas & Moderate Emissions Costs High Natural Gas & High Emissions Costs Note: Reflects illustrative combinations of CO2 costs and natural gas prices Source: Internal Estimates Gas Coal IGCC 14 .

Uncertainty at present is large Value Differential: Coal vs. Natural Gas Generation Coal in a low gas/high carbon scenario is a misallocation of capital ~$(4) Billion Low Natural Gas Pricing High ~$4 Billion Coal in a high gas/low carbon price environment creates significant value “Most Likely Zone” Low CO2 Pricing High Amounts represent lifetime NPV relative to hypothetical alternative combined cycle natural gas Source: Internal Estimates 15 .

Picking a winner is easy – if you can perfectly forecast gas and CO2 prices! $60 Average CO2 Cost ($/ton) $50 $40 $30 $20 $10 $0 $6 $7 $8 $9 Combined Cycle Gas Economically Preferred Region Nuclear Economically Preferred Region Ultra Super Critical Pulverized Coal Economically Preferred Region $10 $11 $12 Average Gas-Coal Spread ($/MMBtu) USCPC/CC Breakeven Note: Coal price fixed. natural gas price varies Source: Internal and industry estimates Nuclear/CC Breakeven 16 .

CO2 Policy Options Market-based Command and Control • Inefficient • Inequitable Cap and Trade • Fixed emission levels • Uncertain and volatile prices Carbon Fee • Predetermined price profile • Uncertain short-term emission levels Both result in a market price for CO2 emissions 17 .

All approaches involve administrative complexity. auction – Allocation basis Monitoring and measurement “Leakage” from uncovered sectors Import/export complexities • Monitoring and measurement Unless 100% of allowances are “free”. some are more complex than others Unconstrained Cap & Trade Constrained Cap & Trade Ceiling Carbon Fee CO2 Price Floor • • • • Distribution of allocations – % free vs. all approaches create a revenue stream (a “tax”) 18 .

At realistic values for CO2 pricing. the market value of allowances will be large 2010 Allowance $ per ton Estimated Tons (Billions) Total Value (Billions) 2030 Estimated Tons * (Billions) Total Value (Billions) $10 $20 $50 7 $70 $140 $350 5.5 $55 $110 $275 * Source: 1990 level from DOE Annual Energy Review 2005 (published in July 2006) 19 .

the specifics of allocation become huge Annual Impact of Alternative Allocation Methods CO2 Allocation (Millions of tons) 42.220 Methodology Input Assumptions: 2030 sector emissions levels capped at 1990 levels.8 10. 10% conventional gas boilers and 5% hydro/renewable) 20 .If all credits are given away for free.3 920 $300 Allowance Price ($ per ton) Amount ($ Millions) $1. 2030 CO2 price = $29/ton Hypothetical profile based on 20.1 $29 Output Difference 31.000 MW generation profile (75% coal. 10% combined cycle gas.

free allocations are not necessary to protect generators’ financial health Note: Points represent leading consolidated regulated and non-regulated generators operating within the Eastern transmission interconnect Source: FPL Group in collaboration with The Brattle Group 21 .Our analysis suggests that large.

A carbon fee offers substantial advantages over cap & trade • A CO2 fee beginning initially at a modest level ($10/ton) increasing over time – Can be easily applied to the entire economy – Allows sufficient time and opportunity for producers and consumers to adjust to the new price of CO2 – Encourages investment in CO2 reduction – more likely to yield greater long-run CO2 cuts – Avoids economic distortion and windfalls that can accompany free allocations – Provides a reliable source of revenue to underwrite R&D and other programs to benefit consumers – Is relatively easy to administer. with limited (and known) economic impact – Easily allows border adjustment – tariffs on imports. credits on exports – Provides economic benefit for early action 22 . avoiding unnecessary costs – Is equitable and efficient.

Proper “recycling” of CO2 revenues is required if the economy is not to be damaged Consumers Carbon Fee R&D Transition Protection for Import/Export Sectors 23 .

Modified Cap & Trade A modified Cap & Trade can mitigate recognized problems • Safety valve price and floor price would limit price volatility – Limits financial exposures – Ensures market for technology development • Safety valve and floor price that increases gradually over time – Allows for predictable planning and investment • Utilize an auction versus free allocations – Auction revenues employed as with the carbon fee 24 .

we will address it How we address it is critical – Effectiveness – Efficiency – Fairness • Congress needs to hear from investors – Need for economy-wide solution – Need for gradualism and progressivity – Need for clarity and predictability • FPL Group is prepared and well positioned 25 .Our bottom line • • • • The issue is real and needs addressing The stakes are huge Politically.

Q&A Session .

Appendix .

Inc. Accordingly. target. wildlife mortality. operating and other costs associated with compliance with these environmental statutes. and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs). the Public Utility Holding Company Act of 2005. •FPL Group and FPL are subject to complex laws and regulations. or combination of factors. will continue. the Atomic Energy Act of 1954. nor can it assess the impact of each such factor on the business or the extent to which any factor. and those costs could be even more significant in the future. and could cause FPL Group's and FPL's actual results or outcomes to differ materially from those discussed in the forward-looking statements: FPL Group and FPL are subject to complex laws and regulations and to changes in laws and regulations as well as changing governmental policies and regulatory actions.Cautionary statements and risk factors that may affect future results In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act). 28 . Forward-looking statements involve estimates. and the Nuclear Regulatory Commission (NRC). recovery of fuel and purchased power costs. beliefs. FPL holds franchise agreements with local municipalities and counties. operation and construction of transmission facilities. may. including initiatives regarding deregulation and restructuring of the energy industry and environmental matters. are expected to. Any forward-looking statement speaks only as of the date on which such statement is made. waste management. through the use of words or phrases such as will likely result. the Federal Power Act. The following are some important factors that could have a significant impact on FPL Group's and FPL's operations and financial results. and to changes in laws or regulations. plans. operation and construction of plant facilities. believe. projection. (FPL Group) and Florida Power & Light Company (FPL) are hereby providing cautionary statements identifying important factors that could cause FPL Group's or FPL's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of FPL Group and FPL in this presentation. the following important factors (in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements) that could cause FPL Group's or FPL's actual results to differ materially from those contained in forward-looking statements made by or on behalf of FPL Group and FPL. disposal. could. outlook) are not statements of historical facts and may be forwardlooking. including those of the Federal Energy Regulatory Commission (FERC). estimated. but not always. may cause actual results to differ materially from those contained in any forward-looking statement. as amended. rules and regulations relating to air quality. Any statements that express. objectives. decommissioning costs. and are accompanied by. plan. New factors emerge from time to time and it is not possible for management to predict all of such factors. operation of nuclear power facilities. is anticipated. including unanticipated events. allowed rates of return. These factors may have a negative impact on the business and results of operations of FPL Group and FPL. on their respective websites. among other things. The FPSC has the authority to disallow recovery by FPL of any and all costs that it considers excessive or imprudently incurred. FPL Group. the Energy Policy Act of 2005 (2005 Energy Act) and certain sections of the Florida statutes relating to public utilities. any such statements are qualified in their entirety by reference to. assumptions and uncertainties. changing governmental policies and regulatory actions. after the date on which such statement is made. The regulatory process generally restricts FPL's ability to grow earnings and does not provide any assurance as to achievement of earnings levels. and must renegotiate expiring agreements. the Florida Public Service Commission (FPSC) and the legislatures and utility commissions of other states in which FPL Group has operations. climate change. natural resources and health and safety that could. return on common equity and equity ratio limits. expectations. industry and rate structure. depreciation and amortization of assets and facilities. water quality. with respect to. and FPL Group and FPL undertake no obligation to update any forward-looking statement to reflect events or circumstances. potential. acquisition. in response to questions or otherwise. including the Public Utility Regulatory Policies Act of 1978. as amended. restrict or limit the output of certain facilities or the use of certain fuels required for the production of electricity and/or require additional pollution control equipment and otherwise increase costs. assumptions or future events or performance (often. There are significant capital. state and local environmental statutes as well as the effect of changes in or additions to applicable statutes. or involve discussions as to. rules and regulations. among other things. •FPL Group and FPL are subject to extensive federal.

FPL Group provides full energy and capacity requirements services and engages in trading activities. Insurance. FPL Group's and FPL's nuclear units face certain risks that are unique to the nuclear industry including. 29 . options and forwards to manage their commodity and financial market risks. including the cost of replacement power. FPL Group could recognize financial losses as a result of volatility in the market values of these contracts. including. involve significant risks that could adversely affect the results of operations and financial condition of FPL Group and FPL. the requirement to purchase power in the market at potentially higher prices to meet contractual obligations. power generation facilities involve substantial risks. start up risks. breakdown or failure of equipment. warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses. and/or the write-off of their investment in the project or improvement. •The operation and maintenance of power generation facilities involve many risks. FPL's use of such instruments could be subject to prudency challenges and if found imprudent. transmission lines or pipelines. that may reduce the revenues and adversely impact the results of operations and financial condition of FPL Group. Breakdown or failure of an operating facility of FPL Energy may prevent the facility from performing under applicable power sales agreements which. including the supply and transportation of fuel. •FPL Group and FPL use derivative instruments. In addition to these risks. such as swaps. use of new technology. FPL Group and its subsidiaries will need to adapt to these changes and may face increasing competitive pressure. regulation or restructuring of the energy industry. the inability to properly manage or mitigate known equipment defects throughout our generation fleets unless and until such defects are remediated. the ability to store and/or dispose of spent nuclear fuel. termination payments under committed contracts. •FPL Group's and FPL's results of operations could be affected by FPL's ability to renegotiate franchise agreements with municipalities and counties in Florida. or at the plants of other nuclear operators. As a result. cost recovery could be disallowed by the FPSC. Should construction or capital improvement efforts be unsuccessful. as well as the risk of performance below expected or contracted levels of output or efficiency. but not limited to. including nuclear facilities. This could result in lost revenues and/or increased expenses. whether at FPL Group's and FPL's plants. In addition. The operation and maintenance of power generation facilities. The use of derivative contracts by FPL Group and FPL in the normal course of business could result in financial losses that negatively impact the results of operations of FPL Group and FPL. including. many of which are beyond the control of FPL Group. as well as additional regulatory actions up to and including shutdown of the units stemming from public safety concerns. The construction of. changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. FPL Group's competitive energy business is subject to risks. In the absence of actively quoted market prices and pricing information from external sources. •FPL Group's and FPL's ability to successfully and timely complete their power generation facilities currently under construction. or if a counterparty fails to perform. the results of operations and financial condition of FPL Group and FPL could be adversely affected. but not limited to. the potential payment of significant retrospective insurance premiums. could result in termination of the agreement or incurring a liability for liquidated damages. and capital improvements to. those projects yet to begin construction or capital improvements to existing facilities within established budgets is contingent upon many variables and subject to substantial risks. the valuation of these derivative instruments involves management's judgment or use of estimates. Should any such efforts be unsuccessful. in certain situations. or the impact of unusual or adverse weather conditions (including natural disasters such as hurricanes).•FPL Group and FPL operate in a changing market environment influenced by various legislative and regulatory initiatives regarding deregulation. FPL Group and FPL could be subject to additional costs. the dependence on a specific fuel source. including deregulation or restructuring of the production and sale of electricity. but not limited to.

Customer growth directly influences the demand for electricity and the need for additional power generation and power delivery facilities at FPL. Because FPL Group and FPL rely on access to capital markets. complete and integrate acquisitions is subject to significant risks. rates or policies. securities laws and corporate governance requirements. could impact FPL Group's and FPL's ability to grow their businesses and would likely increase their interest costs. •FPL Group's and FPL's results of operations are affected by changes in the weather. 30 . FPL Group's ability to successfully identify. FPL Energy's business depends upon transmission facilities owned and operated by others. maintenance of the qualifying facility status of certain projects. FPL Group's and FPL's results of operations can be affected by the impact of severe weather which can be destructive. excess generation capacity and demand for power. counterparty and market risks that are beyond the control of FPL Energy. which. settlements. recovery of these costs is subject to FPSC approval. accounting standards. the price and supply of fuel (including transportation).•There are other risks associated with FPL Group's competitive energy business. The inability of FPL Group. interest rates. investigations and claims. FPL Group Capital Inc and FPL to maintain their current credit ratings could affect their ability to raise capital on favorable terms. As a result. There can be significant volatility in market prices for fuel and electricity. as well as the passage of the 2005 Energy Act. •FPL Group's and FPL’s results of operations are affected by the growth in customer accounts in FPL's service area. in general. In addition. risk factors specifically affecting FPL Energy's success in competitive wholesale markets include the ability to efficiently develop and operate generating assets. power from these facilities is sold on the spot market or on a short-term contractual basis. the successful and timely completion of project restructuring activities. causing outages and/or property damage. rates of inflation. rates of inflation. in turn. •FPL Group and FPL are subject to costs and other effects of legal and administrative proceedings. In addition to risks discussed elsewhere. particularly during times of uncertainty in the capital markets. •FPL Group and FPL rely on access to capital markets as a significant source of liquidity for capital requirements not satisfied by operating cash flows. FPL Group may be unable to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and integrate them. as well as the effect of new. which may affect the volatility of FPL Group's financial results. and there are other financial. including the effect of increased competition for acquisitions resulting from the consolidation of the power industry. •FPL Group is likely to encounter significant competition for acquisition opportunities that may become available as a result of the consolidation of the power industry. securities laws and corporate governance requirements. In addition. In keeping with industry trends. housing starts and new home prices. Customer growth in FPL's service area affects FPL Group's and FPL’s results of operations. rates or policies. tax laws. or changes in. FPL Group and FPL are subject to costs and other effects of legal proceedings as well as changes in or additions to applicable tax laws. Weather affects FPL Group's and FPL's results of operations. and can affect the production of electricity at wind and hydro-powered facilities. competition from new sources of generation. Customer growth can be affected by population growth as well as economic factors in Florida. At FPL. may affect fuel supply. accounting standards. and could require additional costs to be incurred. FPL Energy's inability or failure to effectively hedge its assets or positions against changes in commodity prices. transmission constraints. Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. FPL Energy's ability to sell and deliver its wholesale power may be limited. if transmission is disrupted or capacity is inadequate or unavailable. counterparty credit risk or other risk measures could significantly impair FPL Group's future financial results. the inability to maintain current credit ratings and access capital markets on favorable terms may limit the ability of FPL Group and FPL to grow their businesses and would likely increase interest costs. including job and income growth. a portion of FPL Energy's power generation facilities operate wholly or partially without long-term power purchase agreements.

S. •FPL Group and FPL are subject to employee workforce factors. could be affected by national. the inability to generate.Threats of terrorism and catastrophic events that could result from terrorism may impact the operations of FPL Group and FPL in unpredictable ways. economy. The ability of FPL Group and FPL to obtain insurance and the terms of any available insurance coverage could be affected by national. and the cost of and coverage provided by such insurance. The effects of terrorist threats and activities include. 31 . among other things.. also may materially adversely affect FPL Group's or FPL's business. Generation and transmission facilities. including loss or retirement of key executives. the risk of a significant slowdown in growth or a decline in the U. terrorist actions or responses to such actions or threats.S. •FPL Group's and FPL's ability to obtain insurance. FPL Group and FPL are subject to employee workforce factors that could affect the businesses and financial condition of FPL Group and FPL. have been identified as potential targets. in general. The risks described herein are not the only risks facing FPL Group and FPL. collective bargaining agreements with union employees and work stoppage that could affect the businesses and financial condition of FPL Group and FPL. and the increased cost and adequacy of security and insurance. state or local events and company-specific events. purchase or transmit power. financial condition and/or future operating results. •FPL Group and FPL are subject to direct and indirect effects of terrorist threats and activities. delay in economic recovery in the U. availability of qualified personnel. or that are currently deemed to be immaterial. Additional risks and uncertainties not currently known to FPL Group or FPL. state or local events as well as company-specific events.

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Key Business Risks & Opportunities in Climate Change
John P. Holdren
Teresa & John Heinz Professor of Environmental Policy John F. Kennedy School of Government Professor of Environmental Science & Policy Department of Earth & Planetary Sciences HARVARD UNIVERSITY Director THE WOODS HOLE RESEARCH CENTER Goldman-Sachs Conference on the Business of Climate Change New York, 13 April 2007
1

Business risks from climate change
• climate-change damage to firm’s assets & operations • climate-change damage to firm’s customers & markets • liability for firm’s contribution (by commission or omission) to climate-change risks
– financial – reputational

• competitive disadvantage under climate policies • competitive disadvantage from failure to exploit the opportunities presented by climate change

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Business opportunities from climate change
• new/improved products & services for a climatechallenged world
– identification, characterization, communication, and management of climate-change risks & opportunities – climate-change mitigation products & services – climate-change adaptation products & services

• trading emissions permits & offsets • “green” portfolio development & management

3

Mitigation products and services • management of soils. land use – forest preservation & management – husbanding soil carbon through agricultural practices • improved efficiency of energy end use – transport (better vehicles. lighting) – manufacturing (process improvements.and no-carbon electricity. vegetation. motors) • low. fuels – finding & transporting natural gas – wind. & photovoltaic electricity – food-non-competitive biofuels 4 . planning) – buildings (improved envelopes. HVAC. mode switching. solar-thermal. heat.

industry. and pathogen-resistant crops. trees – other pest. pest-.Adaptation products & services • fresh water supplies – water-use-efficiency technologies in agriculture. buildings – desalination / purification technologies • floods & droughts – water storage & distribution infrastructure • other agriculture/forestry impacts – development/deployment of more drought-.and pathogen-control measures 5 .

infrastructure against heat stress • storms & sea level – storm-resistant construction – raised.Adaptation products & services (continued) • human health – countermeasures against disease-carrying mosquitoes – improved treatments for malaria. strengthened. & additional dikes & storm-surge barriers 6 . West Nile – improved treatments. dengue.

5-5 trillion/yr avoidance costs from -$500/tC (profitable) to +$200/tC.03 trillion $42 trillion (MER) $59 trillion (ppp) 7 . avoiding 7 GtC/yr in 2050 at $50/tC $0.35 trillion/yr ~$0.How much money? Yardstick 2005 world economic product: Energy 2005 energy costs at retail: ~$5 trillion replacement cost of world energy system: ~$15 trillion annual investment in world energy system: ~$0.7 trillion publicly & privately funded energy RD&D: Carbon dioxide damage estimates $50-500/tC $0.

No. Climate Change 2007: The Physical Science Basis. Adaptation. Summary for Policy Makers. Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable. Summary for Policy Makers. December 2004 http://www. Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges. http://www. and Vulnerability.pdf UN Scientific Expert Group on Climate Change & Sustainable Development. 2.edu/BCSIA_content/documents/Innovations_T he_Imperative_6_06.unfoundation.ipcc. Climate Change 2007: Climate Change Impacts.org/SEG/ Intergovernmental Panel on Climate Change. Vol.ipcc.Some key references National Commission on Energy Policy.pdf Intergovernmental Panel on Climate Change. Holdren.harvard. Spring 2006 http://bcsia.energycommission. http://www.org John P. 1.ch/ 8 . “The energy innovation imperative”. February 2007 http://www. April 2007. United Nations Foundation.ch/SPM2feb07. February 2007.ksg. Innovations: Technology/ Globalization/Governance.

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