Chicago Climate Exchange:

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• Chicago Climate Exchange
• The First and Only Voluntary GHG Market
• Bruce H. Braine
• Vice President, Strategic Policy Analysis
• American Electric Power
• February 24, 2006

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Overview

• Background and IntroductionVoluntary Greenhouse
  Gas Allowances
• Chicago Climate Exchange
• Background and scope
• AEP actions and implementation
• Incentives for new technologies and fuel diversity

3
AEP System

• Located in 11 States AR, OK, TX, LA, VA, WV,
  OH, KY, IN, MI and TN
• AEP is the largest US coal consumer and largest
  electricity generator
• Vast majority of coal-fired generation is in
  Ohio, West Virginia and Indiana
• About 70 of AEP generating capacity is
  coal-fired, with the remainder nuclear, gas,
  hydro or wind

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Background and Introduction-Voluntary Greenhouse
Gas Credits

• Mandatory Greenhouse Gas Reduction Programs (e.g.
  EU system) has market for CO2 allowances or
  credits.
• Companies (Regulated under the CO2 Program) must
  have enough allowances to cover their emissions.
• Companies may reduce their emissions, buy or sell
  allowances or use allowances from a previous year
  (if banking is permitted) in order to comply.
• Voluntary Greenhouse Gas (GHG) Programs Usually
  Are Company-Specific Targets Without Emissions
  Trading
• EPA Climate Leaders
• DOE 1605B and Power Partners
• Business Roundtable Climate Resolve
• Others

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Voluntary Greenhouse Gas Credits

• Voluntary Greenhouse Gas Reduction Programs (e.g.
  EU system) can also have a market for CO2 or GHG
  allowances or credits. If
• Voluntary Market has a binding contractual
  commitment in place of a government mandated
  requirement
• Voluntary Market has a cap on emissions for each
  participant
• Voluntary Market has appropriate verification,
  accounting and auditing functions.
• Chicago Climate Exchange (CCX) is the only
  voluntary GHG market and one of the largest GHG
  markets in the world.

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What is Chicago Climate Exchange?
Chicago Climate Exchange (CCX) is the worlds
first and North Americas only voluntary, legally
binding pilot greenhouse gas reduction and
trading program for emission sources and offset
projects in North America, Brazil
and elsewhere.
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Size of Live, Emerging and Planned GHG Markets
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CCX Overview

• An unprecedented voluntary greenhouse gas
  emission reduction and trading pilot program
  administered by 100 companies and organizations
• Total member emissions About 250 MM metric tons
  CO2 equivalent (4 US CO2 emissions)
• Member legally binding commitment to reduce GHG
  emissions below a baseline (average 1998-2001
  levels)
• 1 in 2003
• 2 in 2004
• 3 in 2005
• 4 in 2006
• 4.25 in 2007
• 4.5 in 2008
• 5 in 2009
• 6 in 2010
• Extension Period

• AEP Info
• Current Baseline 155 MM metric tons (adjusted
  for divestitures)
• Reduction or offset of about 46 MM metric tons of
  CO2 during 2003-10
• AEP One of 14 founding members
• AEP first company to commit to extension period

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CCX Members
Aerospace and Equipment Rolls-Royce Automotive Fo
rd Motor Company Chemicals Dow
Corning DuPont Diversified Manufacturing Bayer
Corporation Interface, Inc. Ozinga Bros Electric
Power Generation American Electric Power Central
Vermont Public Service Green Mountain
Power Manitoba Hydro TECO Energy,
Inc. Electronics Motorola, Inc.
Environmental Services Waste Management,
Inc. Food Processing Premium Standard
Farms Forest Products Abitibi-Consolidated Aracr
uz Celulose S.A. International Paper Klabin
S.A. MeadWestvaco Corp. Stora Enso North
America Temple-Inland Inc. Information
Technology IBM States, Municipalities State of
New Mexico City of Boulder City of Chicago City
of Oakland City of Portland
Pharmaceuticals Baxter Healthcare Private
University Tufts University Public
Universities The University of Iowa University of
Minnesota The University of Oklahoma Recreation A
spen Skiing Company Semiconductors ST
Microelectronics Steel Roanoke Electric Steel
Corp. Transportation Amtrak
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CCX Associate Members
Architecture/Planning Mithun, Inc. Associations C
onfederation of British Industry Brokerage
Services Amerex Power Consulting Domani
LLC Global Change Associates Natural Capitalism,
Inc. Rocky Mountain Institute Energy and
Management Services Airtricity Orion Energy
Systems Ltd Sieben Energy Associates Thermal
Energy International Engineering Vanasse Hangen
Brustlin, Inc.
Financial Services Access Industries, Inc. MB
Investments, LLC Information Technology Open
Finance LLCIntercontinental Exchange Legal
Services Foley Lardner Non-Governmental
Organization American Coal Ash Association America
n Council on Renewable Energy Delta
Institute Houston Advanced Research
Center Midwest Energy Efficiency Alliance World
Resources Institute
Private College Presidio World College Risk
Management The Professional Risk Managers
International Association Religious
Organization Jesuit Community of Santa Clara
University Retiring/Offsets Carbonfund.org SRI
Fund Pax World Technology Millennium Cell Polar
Technology TerraPass
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Participant Members
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CCX Compliance Rules

• All Greenhouse Gases (CO2, CH4, SF6, N2O etc.)
  included
• CCX compliance can be met by any combination of
• Direct reductions in CO2 or other greenhouse gas
  emissions at AEP
• Emission Offsets (e.g., methane capture or carbon
  sequestration from forestry or agriculture)
• Early Action Credits (e.g. forestry projects
  undertaken between 1995 and 1998)
• Purchases through the CCX
• Excess reductions can be sold through the CCX or
  banked for use in later years
• Emissions quantification/accounting--WRI/WBCSD
  methods and CEMs for power plants
• Auditing and verification--NASD

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AEP Objectives in Participating in CCX

• Opportunity to set public policy precedents
• Recent year baseline (1998-2001) instead of
  1990
• New plants receive credits
• Market-based approach with all greenhouse gases
  (GHGs) counted and many types of greenhouse gas
  reductions counted (including forestry and early
  actions)
• All GHG tons treated the same in CO2 equivalent
  terms
• Central part of overall climate change strategy
  to meet the President's voluntary plan
• Learning opportunity from market competitors
• Helps AEP incorporate greenhouse gas risks in
  capital and operating decisions (through a price
  for carbon)
• Opportunity to do so at a relatively low cost

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AEP Implementation Activities

• Developed accounting/compliance systems
• Internal and external audits (NASD)
• CCX rulebook and revisions CCX Committees and
  Board participation
• Set up and began emissions trading on CCX
• AEP current and future actions which have or will
  result in GHG reductions
• Plant efficiency improvements
• Retirements/mothballing old gas steam coal
  units
• Nuclear availability improvements
• Forest management and forestry projects
• SF-6 leakage reductions
• Wind plant development and purchases
• New plants (IGCC and CC)

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Early Results in CCX

• Complete operation implemented rulebook,
  trading,
• clearing, registry, market oversight,
  governance
• Member Baselines, 2003 and 2004 Emissions
  Independently Audited
• Program-wide emission reductions achieved
• Trading and clearing mechanisms fully functional
  
• gt1,400 trades, over 4.6 million tons exchanged
• prices mainly range from 1 - 3.20/t
• About 1 million tons CO2 equiv. of offsets
  verified, issued and sold
• Landfill methane Waste Management (IN, TX)
• Agricultural methane Environmental Credit Corp.,
  Premium Standard Farms (MN, WA, TX)
• Agricultural soils Iowa Farm Bureau, Delta
  Institute (midwest)
• Reforestation Preciosu Woods (Costa Rica)
• Fuel switching IdleAire (CA, TX)

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Midwest Farmer Receives 12,000 check from sales
of methane collection credits (more to come)

• Agricultural Manure digesters enrolled in CCX in
• Minnesota
• Washington
• Texas

Aggregation services provided by CCX Member
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CCX Incentives for New Technology, Energy
Efficiency and Fuel Diversity

• Direct Credits for Member Energy Efficiency
• Renewables which displace direct emissions from
  members
• New Plants (Owned by Members) Receive CCX
  Allowances
• Allowances Equal to 0.4 Metric Tons CO2 Per Mwh
  Multiplied by Net Generation
• Equal to a Combined Cycle Gas Emission Rate
• Lower the Plants Emission Rate The More
  Allowances
• Incentives for New More Efficient
  Technologiese.g. IGCC with lower emission rates

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Views on CCX
We are joining the Chicago Climate Exchange for
two reasons. We want to strengthen a pioneering
effort to create market-based solutions to the
problem of climate change, and CCX helps us
maintain our own organizational commitment to
keep our net carbon dioxide emissions at zero,
Jonathan Lash, President, World Resources
Institute "... you could help to create the
conditions for efficient emission trading
systems, standardized accounting methods and the
like. The successful launch of the Chicago
Climate Exchange here in the United States is one
example of an initiative to create a carbon
market. We need more such innovative thinking on
financing mechanisms and new insurance products."
United Nations Secretary-General Kofi Annan I
want to congratulate the Exchange, which is the
first comprehensive voluntary pilot program for
domestic trading of greenhouse gases, on the
announcement of its founding members. Their
progress is great news for Chicago's economy and
for America's environment. Senator Joe
Lieberman "This voluntary market-based program
is precisely the kind of private sector
initiative that the Bush Administration has been
calling for in response to the climate change
challenge." U.S. Energy Secretary Spencer Abraham
"CCX represents an innovative market-based
approach to solving our energy issues and
improving air quality." Chicago Mayor Richard M.
Daley