Bob German from DTE Energy presents: An overview of carbon markets including policy and the value chain - Types of carbon projects being developed - Typical carbon transaction structures - How can I get involved in the carbon space?

1. Introduction to Carbon Markets
Presentation to Ann Arbor SPARK
Ann Arbor, MI
July 1, 2010

2. Agenda
• DTE Carbon
• Carbon Market Overview
• Carbon Offset Project Transaction
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3. DTE Carbon
DTE Energy Key Facts – 2009
• Revenue $8.0 billion
DTE Energy Co. (NYSE: DTE) is a diversified energy
• Net Income $532 million
company involved in the development and • Assets $24 billion
• Credit Rating BBB-
management of energy-related businesses and
• Current Equity Market Cap $7.7 billion
services nationwide. • Current Employees 10,500
Regulated Platform
Our largest operating subsidiaries are Detroit Edison and
MichCon. Together, these regulated utility companies
provide electric and/or gas services to more than three
million residential, business and industrial customers in
Michigan.
Non-Regulated Platform
Our electric and gas utility businesses have each been in
operation for over a century. We have leveraged that
wealth of experience and assets to develop a number of
non-regulated subsidiaries which provide energy-related
services to business and industry nationwide.
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4. Carbon Market Milestones
International Climate Change Policy
1992: UN Framework Convention On Climate Change (“UNFCCC”)
– Set a voluntary goal of reducing emissions from developed countries to 1990
levels by 2000
1997: Kyoto Protocol (negotiations began 1997)
– Established binding GHG reduction targets to reduce emissions 5.2% below
1990 levels by participating industrialized countries during the “first commitment
period” of 2008-2012
– EU ETS began in 2005
– U.S. did not ratify Kyoto Protocol but is working on domestic legislation
2009: Copenhagen COP 15 continued the negotiations toward a
post-2012 international climate agreement
– Produced the non-binding “Copenhagen Accord”
2010: Mexico will host COP 16 in December to further negotiations
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5. U.S. Climate Change Policy –
Federal legislation, EPA regulation and state / regional legislation
are proceeding on parallel paths
Federal Climate Change Policy (“Legislative” approach)
– U.S. House:
• June 2009: The “American Clean Energy and Security Act of 2009” (“ACES” or “Waxman-Markey”) passed
– U.S. Senate:
• Sept 2009: Kerry-Boxer draft bill released but never reached the Senate floor and eventually tabled
• May 2010: Team of Kerry-Lieberman (“KL”) introduced the American Power Act but it hasn’t reached the floor
– Federal climate change legislation is still in play but is generally thought to be unlikely to pass in 2010.
Currently proposals are leaning toward a “clean energy” solution with these features:
• A national renewable portfolio standard (“RPS”)
• Support for nuclear energy and offshore drilling
• A utility sector-only cap-and-trade program initially (2013) followed by phase in of industrials (2016)
– The 112th Congress (2011 – 2013) will likely have more Republicans which could make it more difficult to
pass stringent climate legislation
– EPA regulation of CO2 is generally the least preferred approach. A legislative solution will likely contain the
aforementioned features with a less stringent emission reduction target (“cap”).
– Regional markets like AB32 and / or WCI would be preempted by federal legislation but may exist
temporarily before implementation of the federal program
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6. Carbon Market Development
Kyoto Protocol Key Elements
Six Greenhouse Gases (“GHGs”) Covered:
• Carbon dioxide (CO2); methane (CH4); nitrous oxide (N2O); perfluorocarbons
(PFCs); hydrofluorocarbons (HFCs) and sulphur hexafluoride (SF6)
• Accounting in metric tons of carbon dioxide equivalent (“tCO2e”)
Market-Based Approach with flexible compliance mechanisms as follows:
• Emissions trading (e.g., “cap-and-trade”) - entities may ‘trade’ emission
allowances and offsets to achieve compliance
• The Clean Development Mechanism (“CDM”) - emission reduction credits for
investments in developing countries
• Joint implementation (“JI”) – emission reduction credits from investments in
developed / industrialized countries
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7. GHG Global Warming Potentials (“GWP”)
Greenhouse Gas (GHG) GWP
CO2 1
CH4 21
N2O 310
HFC-23 11,700
HFC-32 650
HFC-125 2,800
HFC-134a 1,300
HFC-143a 3,800
HFC-152a 140
HFC-227ea 2,900
HFC-236fa 6,300
HFC-4310mee 1,300
CF4 6,500
C2F6 9,200
C4F10 7,000
C6F14 7,400
SF6 23,900
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8. Carbon Market Size & Growth
In 2009, “compliance” carbon market value was approximately $144 billion
compared to “voluntary” carbon market value of only $388 million
Volume (MtCO2e) Value (US$ million)
Market 2008 2009 2008 2009
Voluntary OTC 57 51 $420 $326
CCX 69 41 $307 $50
Other exchanges 0.2 2 $2 $12
Total Voluntary Markets 126 94 $729 $388
EU ETS 3,093 6,326 $100,526 $118,474
Primary CDM 404 211 $6,511 $2,678
Secondary CDM 1,072 1,055 $26,277 $17,543
Joint Implementation 25 26 $367 $354
Kyoto [AAU] 23 155 $276 $2,003
New South Wales 31 34 $183 $117
RGGI 62 813 $241 $2,667
Alberta's SGER 3 5 $34 $61
Total Regulated Markets 4,713 8,625 $134,415 $143,897
Total Global Markets 4,839 8,719 $135,144 $144,285
Source: Ecosystem Marketplace, Bloomberg New Energy Finance, World Bank 8

9. U.S. GHG Emissions by Sector (2007)
The electricity, transportation and industrial sectors represent over 80% of U.S.
GHG emissions
Total GHG Emissions
Year
(MtCO2e)
1990 6,127
1995 6,489
2000 7,044
2005 7,133
2006 7,059
2007 7,168
2008 6,957
Data from EPA “Inventory of U.S. Greenhouse Gas Emissions and Sinks, 1990 - 2008” released April 15, 2010 9

10. Carbon Allowances and Offsets
Definitions
Carbon Allowance: The right to emit a given amount (usually 1 tonne) of CO2 under a cap-
and-trade program. Distributed to emitters by free allocation and / or
auction.
Carbon Offset: Also known as a Carbon “Credit”. The reduction, removal, or sequestration
of GHG emissions from the atmosphere. Offsets are verified by an
independent 3rd party verifier, from projects including methane destruction
(e.g., landfill gas), forestry and high GWP gas destruction.
Additionality: Addresses the question of whether the project would have happened anyway,
even in the absence of revenue from carbon credits. Only carbon credits from
projects that are "additional to" the “business-as-usual” scenario represent a net
environmental benefit.
CERs: Certified Emission Reductions; EU ETS offsets from projects in developing countries
CRTs: Climate Reserve Tonnes or “carrots”; California Climate Action Reserve offsets
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11. Carbon Cap-and-Trade
Emissions Reductions Targets vs. “Business As Usual”
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12. Carbon Markets in Practice
Cap-and-Trade Example
Assumptions PLANT B
Plant A + Plant B emissions = 1,000 tons
PLANT A
Cap requires 10% emissions reduction
(i.e., 60 tons and 40 tons at Plant A and Plant B,
respectively)
Emission reduction costs:
• Plant A: $20 per ton
• Plant B: $10 per ton Before: 400 Tons
After: 360 Tons
Costs to Reduce Emissions without “Trade” 40 Tons Reduced
Plant A = $20 x 60 tons = $1,200 Before: 600 Tons
Plant B = $10 x 40 tons = $400 After: 540 Tons
60 Tons Reduced
Total Costs = $1,600 or $16 per ton
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13. Carbon Markets in Practice
Cap-and-Trade Example
Assumptions PLANT B
Same 10% emission reduction requirement but
add emissions trading market mechanism PLANT A
Emission reduction costs:
• Plant A: $20 per ton
• Plant B: $10 per ton
Costs to Reduce Emissions with Trading
Plant A = $20 x 0 tons = $0
Plant B = $10 x 100 tons = $1000 Before: 400 Tons
After: 300 Tons
Total Costs = $1,000 or $10 per ton 100 Tons Reduced
Plant A purchases 60 tons of emission reductions Before: 600 Tons
(excess) from Plant B After: 600 Tons
0 Tons Reduced
Plant B keeps 40 tons to meet their cap 60 Tons Purchased
Cap and trade allows the market to reduce
emissions at the lowest total cost
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14. North American Carbon Initiatives
A “patchwork” of carbon programs exist
or are in development in North America:
• RGGI
• WCI
• AB32
• MGGRA
Figure from: http://www.pewclimate.org/print/5864 14

15. Carbon Value Chain
The following depicts the various players and their interrelationships in the nascent
carbon space:
and / or
Voluntary
Buyers
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16. Carbon Offset Buyers
Segment Characteristics/Drivers
• Pure “voluntary” buyers: businesses, governments, non-
profits, educational/healthcare/religious institutions
• Purchase offsets with no current regulatory obligation and
Sustainable Strategy / Corporate no intention of satisfying a future obligation - buy and retire
Drivers:
Social Responsibility - meet objective of a sustainability strategy
- green marketing – “carbon charisma”
- carbon neutral products or projects
- site level initiatives with or for employees
• Entities with a high likelihood of being covered by a future
federal, regional, or state cap and trade program
• ACES* - “covered entity”” – utilities, merchant power
Pre-compliance producers, industrials, oil refineries, NG LDC’s, etc.
Buyers Drivers:
- natural short under program
- Purchase and “bank” cheap offsets
• Banks, hedge funds, carbon funds
Pre-compliance • Building offset portfolios expected to have value in future
compliance market
Speculators Drivers:
- for profit trading and carbon finance
• Project aggregators supplying businesses and individuals
Retailers • May or may not take positions in projects
Drivers:
- mixed between non-profit and for-profit
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17. Carbon Offset Project
High-Level Transaction Process
• Identify emission reduction project (e.g., landfill methane destruction)
• Select a methodology / standard to verify emission reductions:
– Chicago Climate Exchange (“CCX”)
– Climate Action Reserve (“CAR”)
– Voluntary Carbon Standard (“VCS”)
– Gold Standard
• List the project and engage an independent 3rd party verifier to:
– Prepare a Project Submittal or Project Design Document (“PDD”) to ensure the
project meets specifications of methodology
– Quantify the expected project offsets to be generated
• Develop / build and operate the project
• Periodically verify emission reductions (e.g., annually)
• Market and sell verified emission reductions or hold for your own portfolio
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18. Carbon Transaction -
Case Study: Carbon Project Financing
Project Description Deal Overview
• Provide project financing for capital construction of a Location: US Midwest
gas collection capture and flare system.
Project Type: LFG Destruction – Flare
• Project financing is provided in the form of pre- Est. Start Date: 2Q 2010
payment for a forward strip of carbon offsets.
VER Program: Climate Action Reserve
Customer Description Firm Purchase Terms:
Private company in the waste management industry. • Tons 100,000
• Vintages ‘10 – ’14
Benefits to Project Developer Option Terms:
• Provides turnkey financing and carbon off-take to project • Tons 100,000
owner in need of capital
• Vintages ’15 – ’19
Risks to Financier / Off-take • Expiration Date 12/31/2013
• Volumetric (if project under delivers)
• Decline in market price
• Greater credit risk as a result of pre-payment
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19. Contacts
Bob German, Director, Carbon Business Development
germanr@dteenergy.com
734.887.2150
Blake Richards, Director, Carbon Trading
richardsb@dteenergy.com
734.887.4053
414 S. Main Street
Suite 600
Ann Arbor, MI 48104
734-302-4800
www.dteenergy.com
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