Role of Financial Instruments in Managing Energy and Climate RisksDr. Hugo Banziger, Chief Risk OfficerBrussels, 15 May 2007

Trading schemes to reduce emissions have been establishedGrowth potential of carbon market expected to be similar to other derivative marketsTrading in carbon and other emissions certificates is based onKyoto protocolEU Emissions Trading SchemeOther national schemesSubstantial capital flows for clean energy in developing countries were the consequenceThe carbon trading market has seen so far a significant growth and is expected to grow furtherIn April 2006, emissions data for 2005 were released, indicating significant Phase 1 EUA (1) over-allocationAs a consequence, futures prices for these Phase 1 EUA plummeted

Derivate markets / EUA Futures Price History (1) EUA = European Union AllowancesGlobal carbon trading market, in USD billionDB estimateSource 2005/06 figures: World BankNotional in derivative markets, in USD trillionSource: ISDAInterest rates and FX derivativesCredit Default SwapsEUA Future Price, in EUR/Tonne

but success going forward relies on several preconditions Clarity and certainty is key!Continuation of success story in emission reductions and carbon trading market relies on: Consistent and reliable legal framework Explicit follow-up rules after Kyoto in 2012 Clear policy on tax and VAT treatment of emissions certificates Global fungibility of certificates Stable certification processes Providing direct access to the private sectorMore funds will flow into the market once certainty & predictability is ensured, resulting in optimized emissions reductions

Role of financial institutions Financial institutions contribute in many ways to emissions reductionsFinancing of projects whose objective is to reduce emissions Creating a market for emissions certificatesApplying techniques to the carbon market that have been developed by banks in other markets derivativesCreating liquidity market makingAdding transparency to the market creating indicesCreating settlement and documentation infrastructure DTCC?Providing Intellectual Capital to the market through market expertise structured products

Case study of a Clean Development Mechanism (CDM) projectLargest ever private sector syndication of a CDM project conducted by Deutsche BankInvestment is in the carbon credits generated by Chinese chemical company Zhejiang Juhua Co LtdTransaction will achieve reduction of 29.5m tonnes of carbon dioxide equivalent over 6 yearsDB financially guaranteed the underlying payment structure, syndicated the deal and sold/traded the CERs (1) thereafterTransaction underlined DBs expertise in environmental finance and commitment of the environment and sustainability

(1) CER = Certified Emission ReductionSummaryDeal structure

Deutsche Bank in the emissions marketLeader in all aspects of the global emissions marketsDeutsche Bankis a major market-maker and trader in emissions trading schemesprovides a wide range of value-added structured emissions productsprovides advice and assistance regarding emissions trading, policy and Kyoto complianceis involved in over 25 projects with total expected reductions of over 185m tonnes CO2 conducts and publishes extensive research & analysis on the global emissions market

Role of Financial Instruments in Managing Energy and Climate RisksDr. Hugo Banziger, Chief Risk OfficerBrussels, 15 May 2007