Highlights of the survey

The IETA Index ofGHG Market Sentiment

The survey confirmed a continued strongsense of confidence and progress in themarket. GHG market sentiment remainsstrongly positive, with the overall index at 79%,unchanged since our first survey in April.

Looking forward, the market expects

Continuing growth up to 2012 and greaterexpectation of significant growth beyond2012;

Prices strengthening and project basedvolumes increasing;

More harmonisation in the EU-ETS,particularly with regard to allocation andmonitoring;

Significant role for project based credits,with greater demand from complianceplayers, particularly beyond 2012; and

A greater demand for VERs.

- +84%

79%April2007

79%

October2007

- +84%

79%April2007

79%

October2007

About this report

The survey was conducted on behalf of IETA by PricewaterhouseCoopers’ International Survey Unitand this report was prepared for IETA by the PricewaterhouseCoopers Sustainability & Climate Changeteam.

About the IETA Index of GHG Market Sentiment

The IETA Index of Market Sentiment is based on views of respondents on six key questions about marketconditions and sentiment:

Is the GHG market an attractive market which meets your organisation’s objectives? Is participation in the GHG market a better proposition than it was a year ago? Is the GHG market an effective instrument in reducing emissions and helping to address climate

change? What level of growth do you anticipate in the GHG markets in the next twelve months? Will the GHG market be a better business proposition in the next twelve months and do you expect

your organisation to increase its participation? Is the GHG market an established instrument that will continue beyond 2012?

The aggregate result remains strongly positive at 79%, the same as in April 2007 (on a scale of 0% -100%, where 0% is uniformly and strongly negative and 100% is uniformly and strongly positive).

These six questions will form the core of future market sentiment surveys, enabling IETA to provide themarket with a barometer of GHG Market Sentiment.

1

Message from the President and CEO ofIETA

IETA is delighted to update our GHG MarketSentiment Index. Derived from IETA’s secondsurvey of the views of the main marketparticipants in October 2007, we believe itprovides an important barometer of marketopinion – not only of past and currentperformance, but also of how it is expected toperform in the future.

As well as the questions used to calculate theGHG Market Sentiment Index, the surveycovered a range of other important GHGmarket issues that will be of real value andinterest to participants. Already there aresignificant changes in sentiment since weundertook the first survey in April 2007.

IETA is a neutral body representing a broadspectrum of the main market participants, andis ideally placed to survey the market in thisway. The survey was undertaken on our behalfby the PricewaterhouseCoopers InternationalSurvey Unit to ensure its impartiality,confidentiality and professionalism.

The GHG market is still young but maturingrapidly, with increasing volumes and newproducts already appearing. This Indexprovides the kind of information that isavailable in many other trading markets anddemonstrates the increasing sophistication thatGHG markets have reached in record time.

As with the first survey, we have chosen to pollcompanies for their views, as opposed toindividuals. We intend to repeat this twice ayear and we expect markedly to increase thenumber of companies surveyed, making theresults even more comprehensive andauthoritative. If you wish to be included pleasedo not hesitate to contact the IETA Secretariat.

I hope that you will find the Index and theresults of the survey as useful and interestingas I have. We always welcome your views andsuggestions, and look forward to hearing fromyou.

Andrei Marcu

2

SUMMARY OF IETA’S SECOND GHG MARKET SENTIMENT SURVEY

The results of the second survey by IETA ofviews on GHG market sentiment, trends inthe market, and regulation.

Who was asked?

All members of IETA were invited to contribute,together with other leading participants in GHGmarkets. Altogether 256 companies and otherparticipants were surveyed and we received138 responses – a response rate of 54%.

The responses covered all segments of themarket: 33% from traders and investors, 32%from compliance players and 21% from serviceproviders, a similar make up of respondents tothe first survey. These included many of themajor participants in the GHG market.

How positive is the market?

The IETA GHG Market Sentiment Index isbased on responses to six key questions. Inthis second survey it is remains at a healthy79%, the same as in April this year.

- +84%

79%April2007

79%

October2007

- +84%

79%April2007

79%

October2007

Looking at the Index by type of respondent,traders & investors are slightly more confidentthan compliance buyers, and market sentimentis more positive in Europe than North America.

This report outlines the main themes of thesurvey results which underpin the sense ofconfidence and progress, but it also highlightsa desired agenda for change, to improve thereliability and effectiveness of carbon markets.

Changes in the market, and in sentiment

In the six months since the first survey, therehave been some notable changes in themarket and regulatory environment. The IPCChas issued the Fourth Assessment Report

which concludes that climate change isunequivocal and there is 90% certainty thatanthropogenic emissions are the cause of this.The strength of the IPCC’s statements andtheir high profile, raised by the award of theNobel Prize in October, may have raisedexpectations that GHG regulation and theGHG markets are here to stay.

A notable change in sentiment since April isthe stronger expectation that volumes andprices will increase beyond 2012.

While the price of Phase 1 EUAs has droppedto close to zero, prices for Phase II EUAs haveincreased over 30% since April. There isgreater clarity around the Phase II allocationwith National Allocation Plans now largely fixedand there is also the prospect that the aviationsector will be included in the ETS in Phase II.

Demand for project-based credits is increasing,with more compliance players and privatefunds expecting to use them up to and beyond2012. At the same time the CDM ExecutiveBoard is reviewing a much greater proportionof projects and delaying project registration.As in April, registration and projectperformance remain the most significantconcerns for project developers.

Does the GHG market work?

The overwhelming majority of respondents(84%) believe that the GHG market is aneffective policy instrument for reducingemissions and helping to address climatechange, and almost all participants (90%) areof the opinion that the GHG market willcontinue beyond 2012, with significantly moreparticipants strongly believing this to be thecase now compared with in April.

Is it good for business?

Seventy eight percent feel that the GHGmarket meets their objectives, and 75%confirm that it is a better business propositionnow than it was a year ago. Similar proportionswere seen in the April survey, reflecting a trendof continuing improvement.

Will the GHG market continue to grow?

As with the survey in April, most respondentsexpect the growth in the GHG market to

3

continue, with more than half looking forwardto significant growth in the next year. Growth isalso expected in the EUA and CER marketsand in the infant carbon derivatives marketover the next five years and beyond 2012. It isnotable that 51% of respondents expect toincrease their trading activity in the VERmarket, compared with 41% six months ago.

Views on EUA prices in Phase II are lessbullish now compared with six months ago,though this is against a background ofsignificantly higher market prices. The pricefor Phase II EUAs has increased from around15 Euros in April to 22 Euros in mid November,so it is not surprising that the surveyparticipants feel there is less potential forsignificant price increases in future.

CER prices have followed the increases seenin the EUA market, though from a lower base.Views on CER price growth are similar, withover sixty percent feeling that prices will besomewhat higher in the second phase of theEU ETS. Some upward price movement mightbe due to increased concerns about access toCERs. The ITL is now operational, althoughmarket participants have witnessed aprolonged forecast of the ITL ‘go-live’ date,suggesting that CERs might not be accessibleuntil far into 2009. The potential of latedelivery of some CERs has clearly injectedsome volatility into the market.

Will trading activity increase?

The majority of respondents who are active inthe market expect to increase their tradingactivity, both in Phase II and beyond 2012.

In the EUA market, 21% expect to increasetrading activity significantly in Phase II, and22% beyond 2012. In the CER market, 34%foresee a significant increase in their tradingactivity in the CER market in this period. Anotable change is that overall, 68% expectsome increase in their CER trading activitybeyond 2012, up from 62% in April.

When will the GHG market go global?

Close to eight out of ten respondents expect atruly global GHG market to be establishedwithin ten years – over one in four sees thishappening within five. The vast majority ofrespondents also see a role for the CDM andJI mechanisms beyond 2012. There is little

change since April in the view that the GHGmarket will be global in the next decade.

Who will buy project based credits andwhat are the key risks?

There is a general consensus that demand forproject based credits is likely to increaseacross the board, with 60% of respondentsexpecting substantial growth in demandcoming from firms participating in emissionstrading schemes, as opposed to governmentsand government sponsored funds.

Views on risks in relation to project-basedcredits suggest somewhat greater concernabout risks on JI projects than on CDMprojects, reflecting the relative stages ofdevelopment of the two mechanisms. For bothCDM and JI, however, respondents see projectperformance as by far the biggest concerns.Registration of JI projects is a more significantconcern now compared with in April. For theCDM, while project formulation and issuance ofcredits are still risks, there is less concernabout them than six months ago.

The emergence of a voluntary market?

Over half the respondents to the survey expectto increase their trading in the VER market, asignificant increase compared with six monthsago. Earlier this year, a number of reportshighlighted the lack of standards andenvironmental integrity in the voluntary offsetmarket, which threatened to undermineconfidence in the whole GHG market.

IETA is working with The Climate Group andWBCSD to establish an accepted standard forvoluntary offset projects. The second versionof the Voluntary Carbon Standard waslaunched in mid November.

What needs to be done to make the marketwork better?

Issues that most respondents felt were mostimportant were:

Harmonisation of allocation arrangementswithin the EU-ETS;

Harmonisation of monitoring, reportingand verification rules in the EU-ETS;

Clarification of accounting standards foremissions trading; and

Harmonisation of policy on auctioningacross the EU.

4

IETA’S SECOND MARKET SENTIMENT SURVEY

MARKET SENTIMENT

Meeting business objectives

Since our first survey in April 2007, there hasbeen a significant shift in the degree ofconfidence in the future of the GHG market,particularly beyond 2012; 47% strongly agreethat the market will continue beyond 2012,compared with 38% six months ago. Overall90% expect it to continue beyond 2012, withless than 3% dissenting. This result probablyreflects a number of developments since April,including the award of the Nobel Prize to AlGore and the IPCC, the recent commitment bythe European Commission to longer termtargets, as well as the shifting attitudes andpolicy developments in the US and elsewhere.

Since April 2007, the price of Phase I EUAshas gradually faded away and is now close tozero, recognising the reality of substantial over-allocation Phase I. But, with Phase II NationalAllocation Plans now largely fixed, Phase IIEUAs have gained ground over the year, risingfrom 15 Euros in April to 22 Euros in midNovember, and project based credits havetaken their cue from these later vintages.

The market has demonstrated a resilience thathas encouraged both policy makers andmarket participants. The market is not perhapsas exciting as in the early days of 2006, so it isnot surprising, that this second surveycontinues to reflect a sense of progress andconfidence. It is also not surprising, that thereare no fundamental changes in marketsentiment.

As with the survey in April, eight out of tenrespondents feel that the GHG market is aneffective policy instrument for reducingemissions and helping to address climatechange, with only 4% dissenting.

There is also strong support for the view thatthe GHG market is good for business – 78%said the GHG market is an attractive marketthat meets the respondents’ objectives.Seventy nine percent saw the market as abetter business proposition than one year ago,a similar proportion as in April this year, withthe strongest support from the trading andinvestment community.

Market Conditions and Sentiment – Present conditions

44.2

50.4

31.3

33.3-1.5

-6.1

-1.5

-5.5

-4.5

-2.2

48.6

47.0

32.7

35.6

-100 -50 0 50 100

%

The GHG market is an effectiveinstrument in reducing emissionsand helping to address climatechange

The GHG market is an attractivemarket which meets myorganisations objectives

DisagreeStrongly disagree Agree Strongly agree

October 2007

April 2007

8.9

15.6

1.4

1.4

146

147

12.6 - 135

15.7 - 134

Don’tknow

%

Neither agree/Disagree

%

Base

8.9

15.6

1.4

1.4

146

147

12.6 - 135

15.7 - 134

Don’tknow

%

Neither agree/Disagree

%

Base

5

Growing optimism

Looking forward, the responses reflect a highlevel of optimism as found in April 2007.Ninety seven percent of respondents expectthe GHG market to grow in the next twelvemonths, with 60% expecting significant growthin trading volumes, funds invested and numberof market participants. Only 1% expects somedecline.

Nearly eighty percent of respondents expectthe GHG market will be a better businessproposition in the next twelve months and soexpect to increase their participation. In relationto the EU-ETS this high level of confidenceprobably reflects two factors: the progress thathas been made in recent months to finalize thePhase II allocation plans and, for complianceplayers at least, the likely respite from the highcosts of allowances for the balance of Phase I.

Subsequent answers suggest this confidencespans all the main carbon instruments,reflecting increased confidence in regulatoryprocesses and in the depth and resilience ofthe GHG market more generally.

Again, the survey also elicited a strong vote ofconfidence in the longevity of the GHG market.90% see the GHG market as an establishedinstrument that will continue beyond 2012, withless than 3% dissenting. It is notable that 47%of participants strongly agree that the marketwill continue beyond 2012; a significantincrease from 38% in April.

As to the development of a truly global GHGmarket, 29% see this happening within the next5 years (i.e. by 2012), whilst 77% believe it willhappen at some stage in the next ten years;only a small number (less than 2%) doubt thiswill ever happen.

Sectoral views

As with the first survey earlier this year, thereappears to be a broad alignment on theprincipal issues between the differentconstituencies covered by survey responses.However, traders and investors tend to bemore confident or enthusiastic that the othergroups, whilst the compliance players tend tobe the least enthusiastic group.

Geographically, there seems to be slightlymore confidence in Europe and North Americacompared to other world regions, although thisvariation is small and may not be statisticallysignificant.

A barometer of sentiment

IETA plans to continue to monitor changes inmarket sentiment in future surveys, to providea barometer for GHG market sentiment, baseddirectly on the views of leading marketparticipants. It is clear from the responses thatthe sentiment is as positive as it was in Aprilearlier this year.

6

EUROPEAN CARBON MARKET

Strong growth in EUA markets

Trading volumes on the EU-ETS have grownstrongly since the scheme was launched in2005 with the 6 months since April 2007 allrecording higher volumes than at any pointsince the launch. Trading has shifted towardsPhase II allowances, now that the allocationplans have been set, and the price of Phase Ivintages has dropped from around 2 Euros toclose to zero. The longer term trend remainsstrongly positive.

Increasing depth, liquidity & sophistication

Survey respondents see no reason why thispicture should change. As in April this year,nearly ninety percent of respondents expectsignificant growth or some growth in tradingvolumes in Phase II, though the strength offeeling is slightly weaker than six months ago,perhaps reflecting the higher base againstwhich growth will be judged.

As the first survey showed, there are positiveexpectations for the market beyond 2012: 52%expect significant growth in this period, with afurther 27% predicting some growth.

These responses are a clear vote ofconfidence in the longevity of the EU-ETS.Views on Phase II volumes will have taken acue from the robust stance by the EuropeanCommission on Phase II allocations, whilstscience and policy developments (such as theinclusion of the aviation sector) are no doubt afactor in the expectations of more ambitiousgrowth post 2012.

The continued confidence and growingsophistication in the EU-ETS is furtherreflected in views around the development ofcarbon derivatives and other products thatallow market actors to better hedge risks ortake exposure to carbon markets.

Unsurprisingly, the data reveal similar trends tothose on trading volumes, with a clear majorityexpecting growth and, as with our first survey,higher numbers identifying significant growth inthe post-2012 era, compared to EU-ETSPhase II.

Market Conditions and Sentiment – Future Outlook

53.4

43.1

55.1

50.7

38.4

46.7

25.2

27.9

-3.4

-0.7

-2.7

-4.4-0.7

-1.5

-100 -50 0 50 100

%

Base

15.4

Don’tknow

%

2.0

0.7

Neither agree/Disagree

%

14.3

4.8

147

146

0.7 136

0.77.3 137

Base

15.4

Don’tknow

%

2.0

0.7

Neither agree/Disagree

%

14.3

4.8

147

146

0.7 136

0.77.3 137

15.4

Don’tknow

%

2.0

0.7

Neither agree/Disagree

%

14.3

4.8

147

146

0.7 136

0.77.3 137

The GHG market will be a betterbusiness proposition in the nexttwelve months and so we expectour organisation/company toincrease its participation

The GHG market is an establishedinstrument that will continue post2012

DisagreeStrongly disagree Agree Strongly agree

October 2007

April 2007

7

Bullish views on EUA prices, but somefurther divergence from CER prices

The market appears to be generally bullishabout future price levels. Fifty six percent ofrespondents expect EUA prices to be higher inPhase II, with 10% expecting significantincreases. Although these responses are lessstrong than in April, prices at the time of thissurvey were around 22 Euros compared to 15Euros in April. As might be expected, tradersand investors are generally the most bullishamongst the respondents.

However, a notable finding of the survey is that27% of respondents believe that prices post2012 will be significantly higher than currentlevels; this is up from 20% in April.

Views on CER price growth are comparablewith views on EUA prices. One in five feels thatCER prices could remain about the same in thesecond phase of the EU-ETS, down from 26%in April. Again, these results should be seen in

The context of significantly higher CER pricesthan six months ago. Overall the majority viewis that CER prices will be higher, both in thePhase II and beyond 2012, and more expectthat Phase II CER prices will be significantlyhigher than in April.

Higher participation rates

Responses to questions about the participants’own trading activities support the overall moodof confidence in the market and there is littlechange in sentiment since April for tradingactivity in Phase II. Both in Phase II andbeyond 2012, the majority of respondents whoare active in the GHG market expect toincrease their trading activity of EUAs andCERs. However, significantly more of therespondents expected to increase their tradingactivity beyond 2012, with 58% expecting toincrease activity in the EUA market comparedwith 51% in April. Sixty eight percent expect toincrease activity in the CER market comparedwith 62% in April.

8

PROJECT BASED CREDIT MECHANISMS

Exponential growth expected to continue

There are currently nearly 850 registered CDMprojects. Over the last 6 months there havealso been signs of increasing technological andgeographical (i.e. host country) diversification,with new markets, particularly South Korea andMexico, emerging outside the Big Three (India,China and Brazil). There is increasingacceptance of programmatic CDM projects, theITL is set up and being connected, and projectdevelopers and the investor community havegreater confidence in the rules.

However, there is also increased concern thatthe Executive Board is becoming a significantbottleneck in the approval process, with nearlyhalf of validated projects now being reviewedby the EB prior to registration.

The JI market is still in the early stages ofdevelopment, but is seen by many as anexciting prospect. UNEP estimates that thereare currently some 200 JI projects in thepipeline (up from 150 in April), with projectedcumulative volume of nearly 210 MtCO2 up to2012.

Some of this volume is already contracted toEU governments through legacy procurement

programmes; the remainder will compete forattention in the increasingly competitive privatemarket. As the CDM matures, it is likely thatbuyers will look to JI to provide them with newexposure to carbon projects and risks, with thepossibility of realising greater upside throughearly-mover advantage.

The survey asked for views on various aspectsof the CDM and JI markets. The overallsentiment remains positive. Not surprisingly,answers again suggest somewhat greaterconcern about risks on JI projects than onCDM projects, reflecting the relative stages ofdevelopment of the two mechanisms.

Bullish sentiment underpins CDM trading

As with the survey in April, the overwhelmingmessage from respondents on trading volumesis that significant growth can be expected, bothin the 2008-12 period and in the longer term.Opinion is more divided on price expectations.Over 60% anticipate higher prices during the2008-12 period, but as many as 21% ofrespondents expect them to stay anchoredaround current levels.

The key risks for CDM projects

38.145.3

51.955.9

34.441.4

46.2

47.3

51.547.7

44.741.7

50.051.6

50.741.4

29.332.3

59.553.9

47.7

45.7

42.448.4

42.442.5

28.831.3

-15.7

-17.2

-12.9

-21.2

-3.9-6.1

-7.0

-6.1

-4.7

-6.1

-11.8-18.8

-13.3-11.2

-100 -80 -60 -40 -20 0 20 40 60 80 100

%

Project formulation

Project financing

Project registration

Project implementation

Project performance

Insurance of credits

Price of credits

Project formulation

Project financing

Project registration

Project implementation

Project performance

Insurance of credits

Price of credits

Base

128

132

132

132

131

133

134

132

127

128

129

128

127

128

Base

128

132

132

132

131

133

134

132

127

128

129

128

127

128

No concern Minor Major

October 2007

April 2007

No concern Minor Major

October 2007

April 2007

9

Will the framework for project-based credits (CDM/JI) continue andCER/ERUs have a value beyond 2012?

6.1

0.0

2.7

5.4

42.9

42.9

1.5

0.0

4.4

6.6

44.9

42.6

0 10 20 30 40 50 60 70 80 90 100

Don't know

Strongly disagree

Disagree

Agree nor Disagree

Agree

Strongly agree

%

Apr-07 Oct-07

Over the longer term (post-2012), a similarpercentage (62%) think an upward trend islikely, fewer respondents (12%, down from18% in April) were in the undecided camp. Asbefore, traders and investors tend to bemoderately more bullish in their viewscompared to other groups of respondents.

Market already taking a view on Kyoto unitspost-2012

There has been much debate over the last 18months amongst IETA members and othersover the future of the project-based creditmechanisms after the end of the First KyotoCommitment Period.

The structures for the CDM have taken anumber of years to crystallise and theprocedures for JI, although making strongprogress, are still far from being firm.

Given the lead times for developing newprojects under CDM and JI and with only clearregulatory certainty up to 2012, many havecommented that the window for developingnew projects is closing.

The respondents within this survey, however,seem much more confident about prospectsbeyond 2012. Asked whether credits generatedunder the frameworks of the CDM or JI wouldhave a value after 2012, the message is the

same as in April: clearly affirmative (88%agreeing or agreeing strongly).

The market understands CDM and JI risksand prices accordingly

The survey asked respondents to rate theproject risks between those which they see asmajor risks and those which are minor.

The responses suggest that risks inherent inthe CDM project cycle are becomingincreasingly well understood in the market,whereas those embedded in the JI process arestill somewhat more opaque. However,registration and project implementation andperformance remain as key risks for CDMproject developers.

Risks surrounding regulatory aspects of theproject cycle, in particular project registration,are seen as higher for JI than under CDM. Incontrast, those risks that are more generic tocapital projects such as arranging projectfinance and project performance are evaluatedon a broadly similar basis between the CDMand JI.

10

VOLUNTARY CREDIT MARKETS

Different carbon currencies, convergingstandards

There is increasing appetite for offsetting, andmany companies and individuals are choosingVERs to achieve this. Demand for high qualityVERs is therefore increasing. Unlikecompliance units such as CERs or EUAs,voluntary grade carbon credits derive fromproject-based activities where the standards forbaselines, verification and contractual termsare not regulated. Earlier this year, a numberof reports highlighted the lack of standards andenvironmental integrity in the voluntary offsetmarket, which threatened to undermineconfidence in the whole GHG market.

This is not to say that various standards do notexist. Indeed, IETA has been actively involvedin promoting consensus around standards and,in collaboration with The Climate Group andthe World Business Council for SustainableDevelopment, has recently launched theVoluntary Carbon Standard version 2 (VCSv2). The VCS v2 is expected to provide muchneeded quality assurance for certification ofcredible voluntary offsets.

With the Executive Board reviewing morevalidated projects than in the past, manyprojects are taking longer than anticipated toachieve registration. One outcome of thesedelays is that projects which are generatingemissions reductions in the period prior toregistration have the opportunity to sell highquality VERs, as retroactive CER crediting isno longer an option.

These factors, affecting both demand andsupply, may explain why there has been asignificant increase, since April this year, in thenumber of respondents who expect to increasetheir trading activity in the VER marketcompared with 2006 levels.

Cautious optimism for growth in non-compliance credit markets

The survey asked for views on various aspectsof the voluntary, retail or offset market. As inApril, the overall sentiment is that a smallmajority of respondents do envisage that othersignificant project-based credit markets willdevelop with 64% agreeing to some degree.

Your Trading Activity in VER Markets

22.2

24.3

22.8

26.5

14.6

19.1

18.6

24.3

-0.7

-2.2

-1.4

-2.9-1.5

-3.7

-0.7

-100 -50 0 50 100

%

No Growth%

16.6

12.5

Base

145

144

19.1 136

19.9 136

Don’t know or NotApplicable

%

41.4

48.7

25.7

30.9

No Growth%

16.6

12.5

Base

145

144

19.1 136

19.9 136

Don’t know or NotApplicable

%

41.4

48.7

25.7

30.9

Firstly, in the period 2008 – 12

And, beyond 2012

Somedecrease

Significantdecrease

Someincrease

Significantincrease

October 2007

April 2007

11

Participation rates in the VER market amongparticipants are lower compared to the CDM/JIarena. Nevertheless, sentiment is notably morepositive now compared with April this year.Fifty one percent of those surveyed note thatthey plan to increase their trading activity in theVER market over the medium term (2008-12),and 43% think they will sustain these effortsbeyond 2012; these values are up from 41%and 37% respectively in April.

Moderate upward price drift for VERspossible over the medium term

It is notable that while more expected to beactively trading in the VER market, this has nottranslated into an increased expectation

concerning VER prices. As found in April,respondents indicate that prices for VERsmight be somewhat higher relative to currentlevels, but there is no real consensus on this.Thirty percent think they would stay about thesame over the medium term and 19% of thoseasked are unable to take a view on price forthe post-2012 period. This high percentage ofundecided respondents probably reflects agenerally lower level of understanding of thevoluntary market compared to the EU-ETS andthe CDM and JI markets, because a largenumber of current market participants onlyoperate within regulated compliance markets,and there is less transparency and fungibility inthe voluntary market.

12

MARKET AND REGULATORY PROCESSES

Carbon market sensitivity to regulation

Although the price of carbon is ultimately set bythe market forces of demand and supply, theproper functioning of the market is sensitive tothe underlying regulatory processes - possiblymore so in the carbon market than in the othercommodity markets.

Respondents’ emphasis

The survey asked for views on a range ofissues in relation to market and regulatoryprocesses. There have been significantchanges since April in which issuesrespondents feel are important. In particular:

Harmonisation of monitoring, reporting andverification rules and compliancearrangements in the EU-ETS (in total 85%agree that this as important);

Harmonisation of allocation arrangementswithin the EU-ETS (84% agree that this asimportant);

Clarification of accounting standards foremissions trading (81% see this asimportant, more than half of whom agreestrongly on this point).

Given that well over half the surveyrespondents are based in Europe, with manybeing compliance players in the EU-ETS, theseresults appear to be a strong vote of supportfor harmonisation plans within the EU-ETS.

Harmonisation

IETA has been actively seeking to encouragemovement towards a more harmonized globalGHG market. It has pioneered thedevelopment of various methodologies andguidelines regarding emission measurementprotocols, financial regulation, projectprotocols, validation and verification, CDMmethodologies, accounting, price indexestablishment and contract protocols.

As early as 2002, IETA partnered with theWorld Bank Carbon Finance Group / PrototypeCarbon Fund to initiate the process to establisha common CDM & JI Validation & VerificationManual that could be used by a wide range ofstakeholders who were involved in developing,financing, validating and verifying CDM and JI

projects. This manual was launched formally atCarbonExpo in Cologne in July 2004.

Accounting

IETA has also been pushing for guidance onaccounting for emissions trading.

As markets for carbon dioxide and otheremissions emerge and develop in the EU andaround the world, the need to communicateclearly and unambiguously to stakeholdersabout how company performance has been,and is expected to be, affected by suchinitiatives has become paramount.

A direct challenge to meeting this need forclear and effective accounting guidance andtransparency was the withdrawal in June 2005of the International Accounting StandardBoard’s (IASB) interpretation of how to accountfor the EU ETS (IFRIC 3). The reason for thewithdrawal was the mismatch between thevaluation of assets and liabilities leading toartificial income volatility. This gave rise to anotable absence of specific guidance oncarbon accounting at the international level,although there are existing standards withinIFRS that deal with the accounting.

With the risk of alternative accountingtreatments emerging, the comparabilityrequirement of financial statements betweenentities as underpinned by the IASBFramework may be undermined. This in turncould pose clear risks to shareholder value andeffective stakeholder decision making.

In September this year, IETA andPricewaterhouseCoopers published anupdated survey of accounting practice in thisarea.

Carbon capture and storage

The survey asked respondents whether theyexpect carbon capture and storage to becomea significant factor in the GHG market withinthe next ten years.

As found in April this year, seven out of tenrespondents believe that it will, with broadlysimilar results across the sectors. This looksambitious, given the challenges that the earlymovers are facing with this new sector.

13

ABOUT THE SURVEY

The conduct of the survey

The survey was conducted on behalf of IETAby the PricewaterhouseCoopers InternationalSurvey Unit (ISU) in Northern Ireland. Thequestionnaire was devised by IETA, withassistance from PricewaterhouseCoopersCarbon Market Services in London.

All members of IETA were invited to contribute,together with other leading participants in GHGmarkets. Altogether 256 (up from 227 in April)companies and other participants weresurveyed.

Each participant company or organisation wassent an email with a web-based link to theelectronic survey on 22 October 2007. Onlyone request was made to each company ororganisation. The survey was 'live' for a total of3 weeks, closing on 12 November 2007.

During this period, electronic reminders weresent to non-respondents, in addition toreminder phone-calls made by IETA and ISU.

A total of 138 responses were received – aresponse rate of 54% - slightly lower than the150 who responded in April. The confidenceinterval is calculated at 5.5 (at a 95%confidence level).

The responses covered all segments of themarket: 32% are from compliance players,33% from traders and investors and 21% fromservice providers. These included many of themajor participants in the GHG market.

The report on the survey was prepared forIETA by the PricewaterhouseCoopers CarbonMarket Services team.

Survey Questions

The survey covered the following issues:

Is the GHG market an attractive market which meets your organisation’s objectives? Is participation in the GHG market a better proposition than it was a year ago? Is the GHG market an effective instrument in reducing emissions and helping to address climate

change? What level of growth do you anticipate in the GHG markets in the next twelve months? Will the GHG market be a better business proposition in the next twelve months and do you expect

your organisation to increase its participation? Is the GHG market an established instrument that will continue beyond 2012? When will a truly global GHG market be established? What level of growth or decline do you anticipate on trading volumes in EUAs, CERs and the carbon

derivative market? To what extent do you expect EUA, CER and VER prices to change? To what extent do you expect to increase or decrease your trading activity in the EUA market, the

CER market and the VER market? Will the framework for project based credits continue and will CER/ERUs have value beyond 2012? Views on risks in CDM and JI projects and the challenge of finance raising What level of growth or decline do you anticipate in the level of demand for project based credits? Will Carbon Capture and Storage become a significant factor in the GHG market in the next 10

years? Views on issues that are important for the development of a robust, transparent and reliable carbon

market

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GLOSSARY

AAU Assigned Amount Unit

CDM Clean Development Mechanism

CER Certified Emission Reductions

CO2e Carbon Dioxide Equivalent

ERU Emissions Reduction Units

EUA European Union Allowances

EU-ETS EU Emissions Trading Scheme

GHGs Greenhouse Gases

JI Joint Implementation

WBCSD World Business Council forSustainable Development

Important Notice

This report has been prepared for theInternational Emissions Trading Association(“IETA”) by PricewaterhouseCoopers LLP(“PwC”) in connection with the first IETA GHGMarket Sentiment Survey which wasconducted on behalf of IETA by PwC.

This report contains information obtained orderived from a variety of sources, as indicatedwithin the report. PwC and IETA have notsought to establish the reliability of thosesources or verified the information so provided.Accordingly neither PwC nor IETA assume anyresponsibility for any inaccuracy in the data norfor the accuracy of the underlying responsessubmitted by the participating IETAmembership and other organisations includedin the survey and no representation or warrantyof any kind (whether express or implied) isgiven by PwC or IETA to any person as to theaccuracy or completeness of the report.

PwC and IETA accept no duty of care to anyperson for the preparation of the report.Accordingly, regardless of the form of action,whether in contract, tort or otherwise, and to

the extent permitted by applicable law, PwCand IETA accept no liability of any kind anddisclaims all responsibility for theconsequences of any person acting orrefraining to act in reliance on the report or forany decisions made or not made which arebased upon such report.

The report is not intended to form the basis ofany investment decisions.

© International Emissions TradingAssociation

This document may be freely used, copied anddistributed on the condition that approval fromIETA is first obtained and that each copy shallcontain this Important Notice.

PricewaterhouseCoopers refers toPricewaterhouseCoopers LLP, a limited liabilitypartnership incorporated in England, or, as thecontext requires, other member firms ofPricewaterhouseCoopers International Limited,each of which is a separate legal entity

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ABOUT THE INTERNATIONAL EMISSIONS TRADING ASSOCIATION

Members

The International Emissions TradingAssociation (IETA) is a non-profit businessorganization created in June 1999 to establisha functional international framework for tradingin greenhouse gas emission reductions.

Our membership includes leading internationalcompanies from across the carbon tradingcycle. IETA members seek to develop anemissions trading regime that results in realand verifiable greenhouse gas emissionreductions, balancing economic efficiency withenvironmental integrity and social equity.

IETA currently comprises 173 internationalcompanies from OECD and non-OECDcountries and has formed several partnershipssuch as with the World Bank, Eurelectric, theJapan Association of Operational Entities, theFederation of Chilean Industry and theCalifornia Climate Action Registry.

Vision

IETA is dedicated to ensuring that theobjectives of the United Nations Convention onClimate Change and ultimately climateprotection are met through the establishment ofeffective systems for trading in greenhouse gasemissions by businesses, in an economicallyefficient manner while maintaining societalequity and environmental integrity.

IETA will work for the development of anactive, global greenhouse gas market involvingall three flexibility mechanisms of the KyotoProtocol: the Clean Development Mechanism(CDM), Joint Implementation (JI) andEmissions Trading, as well as those outsidethe Kyoto Protocol.

Further information is available at www.ieta.org