business of climate change

8/2/2019 Business of Climate Change

1/122


2/122


3/122

1

Climate Change:The Science, Economics and

Implications for Business

Jonathan Pershing [email protected], Climate, Energy and Pollution Program

World Resources Institute

http://www.wri.org

The Business of Climate Change: Risks and Opportunities

Goldman Sachs

13 April 2007


4/122

2

World Resources Institute The World Resources Institute (WRI) is an

environmental think tank that goes beyond researchto find practical ways to protect the earth andimprove people's lives.

Our mission is to move human society to live in ways

that protect Earth's environment and its capacity toprovide for the needs and aspirations of current andfuture generations. Four key areas of work: Climate and energy Ecosystems Governance Sustainable Enterprise


5/122

3


6/122

4

IPCC, February 2007The IPCC has very high confidence that the

globally averaged net effect of human activitiessince 1750 has been one of warming

[I]ts rate of increase during the industrial erais very likelyto have been unprecedented inmore than 10,000 years.

NOTE: very high / very likelyimplies greaterthan 90% confidence


7/122

5

Carbon

Dioxide

70%

Methane23%

Nitrous

Oxide

7%

Mix of Greenhouse Gases

75% from fossil fuel burning

25% from changes in land-use


8/122

6

Change in GHG Concentrations

Source: IPCC, 2007


9/122

7

Global Temperature Changes


10/122

8

Projecting Climate Change

Source: UK Hadley Center, 2007


11/122

9Source: IPCC, 2007

Projected future temperature


12/122

10

Projections of Surface Temperature

Source: IPCC, 2007


13/122

11

Risks from Global Warming

Source: Parry (2001), and IPCC WG 2, April 2007

Water shortages harm up to250 million in Africa by 2020 Certain agriculture yields in

Africa may fall 50% by 2050

Decreased fresh water inAsia for 1 billion by 2050.

Parts of Europe lose up to60% of species by 2080.

Reduced snowpack inAmerican West; water supplyproblems by 2020


14/122

12

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

Andean Glaciers


15/122

13

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


16/122

14

Malaria and Climate

Climate suitability for stable malaria transmission across the diverse topography of Zimbabwe,

based on United Kingdom Meteorological Office (UKMO) global climate scenarios

Relationship betweentemperature and

malaria parasitedevelopment time

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

2000 2050


17/122

15

Crop YieldChange

Source: IPCC TAR


18/122

16

Impacts


19/122

17

Most Impacts Will Be Felt in Developing Countries

-

1,000

2,000

3,000

4,000

1970s 1980s 1990s 2000s

Numberaffected(Millions)

Dev'ed

CIT

Dev'ing

LDC

Source: UK Embassy, based on World bank data


20/122

18

WRE CO2Stabilisation profiles Year in which globalemissions peak

450550

650

750

1000

2005 20152020 2030

2030 2045

2040 2060

2065 2090

The emissions space forstabilising CO2 concentrations

Source: IPCC-TAR Synthesis Report

18


21/122

19

Framing Mitigation:

Emissions and Key Emitters


22/122

20

National GHG Emissions, 2000


23/122

21

Per Capita Emissions, 2000


24/122

22

Largest Emitters: Developed & Developing

Source: WRI, Baumert et al, 2005


25/122

23

CO2

Emissions Trends 2005 - 2030

Source: IEA WEO, 2006


26/122

24

Key Countries

The USA


27/122

25


28/122

26

States with GHG targets

Source: WRI, CAIT

States represent 25% of total US emissionsAggregate reduction: 13% below current levels


29/122

27

State Policies

State Action Plans

Biodiesel Mandate Ethanol Mandate

Renewable Portfolio Standard

Source: WRI, CAIT


30/122

28

Proposed CA Gas Guzzler/Sipper Fees

YouPay

YouGetPa

id

S

ource:UCS,

BasedonAB493


31/122

29

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 technologiesand energy efficiency


32/122

30

USCAP Recommended Reductions

Source: USCAP, 2007


33/122

31

Popular Opinion Is Shifting


34/122

32

Key Actors

The EU


35/122

33

Europe The EU aims to commit

itself, as part of an

international climateprotection agreement, to a30% reduction in itsgreenhouse gasemissions by 2020

(compared with 1990). Until a new agreement is

concluded, and withoutprejudice to its position ininternational negotiations,the EU will reduce itsemissions by at least 20%by 2020 (compared with1990).

EU GHG Trends and Projections

(1990 = 100)

Source: EU Environment Agency


36/122

34

EU ETS 2nd Period Allocations

Source:EU,

DG

Environment


37/122

35

UK

Source:EU,

DG

Environment

1st Period Cap: 245.32005 verified emissions: 242.42006 verified emissions: 251.1

Proposed 2008-2012 cap: 246.2Cap allowed, 2008-2012: 246.2


38/122

36

Poland

Source:EU,

DG

Environme

nt

1st Period Cap: 239.12005 verified emissions: 203.1

2006 verified emissions: 199.1Proposed 2008-2012 cap: 284.6Cap allowed, 2008-2012: 208.5


39/122

37

EUA closing prices: 2006 - Present

ECX CFI Futures Contracts: Price and Volume

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

2/6/20

06

2/27

/200

6

3/20

/200

6

4/10

/200

6

5/3/20

06

5/24

/200

6

6/15

/200

6

7/6/20

07

7/27

/200

6

8/17

/200

6

9/7/20

06

9/28

/200

6

10/19

/200

6

11/9/

2006

11/30

/200

6

12/21

/200

6

1/15

/200

7

2/5/20

07

2/26

/200

7

3/19

/200

7

VOLUME

(tonnesCO2)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Pricepe

rtonne(EUR)

Total Volume

Dec07 Sett

Dec08 Sett

Source: ECX.com


40/122

38

The Carbon Market

(1/2005 9/2006)

Volume~716 MMTCE

Value~$21.5 billion

Source: IETA/World Bank 2006


41/122

39

Key Countries

China


42/122

40

Chinese CO2 Emissions

0

2

4

6

8

10

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

BillionsofTo

nsCarbonDioxide

China - EIA (2006)

China - IEA (2006)

China - EIA (2002)

Source: WRI, based on IEA & EIA data

P j t d t S U S b 2010


43/122

41

Projected to Surpass U.S. by 2010

0

2

4

6

8

10

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Bi

llionsofTons

CarbonDioxide

U.S. - EIA (2006)

China - EIA (2006)

China - IEA (2006)

China - EIA (2002)

but cumulative emissions from 1920-2025 will be only 60% as large

Chi Sh f I l W ld


44/122

42

Chinas Share of Incremental World

Growth (1998-2003)

0 20 40 60 80

GDP

Crude Steel Production

Cement Production

Primary Oil Demand

Primary Coal Demand

Electricity Demand

Carbon Dioxide Emissions

IEA, WEO 2004


45/122

43

Chinas Unmatched Coal Dependence

0% 20% 40% 60% 80% 100%

China

India

Japan

U.S.

Russia

S. Africa

AverageCoal

OilGas

Nuclear

Hydro

121

680

2337

525

387

1554

Total Demand

(MTOE)

Source: BP Statistical Review of World Energy 2006.


46/122

44

PRC Oil Supply Balance

0

3

6

9

12

15

1990 2000 2010 2020 2030

mb/d

-20%

0%

20%

40%

60%

80%

Production Demand Imports as % of demand (right axis)

Chinas oil imports will increase from around 2.4 mb/d now to almost 10

mb/d in 2030 equal to 75% of domestic demand


47/122

45

Mitigation Solutions

Hi t i l d P j t d E i i


48/122

4620542004

14

7

Billion of Tons of

Carbon Emitted per

Year

1954

0

Historicalemissions

2104

Curre

ntly

projected

path

Historical and Projected Emissions

Source: Pacala & Socolow, Science, 13 Aug 2004

To stabilize, must reduce emissions


49/122

4720542004

14

7

Billion of Tons of

Carbon Emitted per

Year

1954

0

Historicalemissions

2104

Curre

ntly

projected

path

Flat path

To stabilize, must reduce emissions

considerably


CO2 target

~500ppm

hi h ill i lti l t h l i


50/122

4820542004

14

7

Billion of Tons of

Carbon Emitted per

Year

1954

0

Curre

ntly

projectedp

ath

Flat path

Historical

emissions

2104

14 GtC/y

7 GtC/y

Seven 1B ton wedges

which will require multiple technologies



51/122

49

StabilizationTriangle

2004 2054

7 GtC/y

14 GtC/y

Fuel Switch Forests & Soils

CO2 Capture

and Storage Nuclear Fission

Energy Efficiency &

Conservation

Multiple technologies are available

Renewable

Electricity & Fuels

Humanity already possesses the fundamental scientific, technical,

and industrial know-how to solve the carbon and climate problem

for the next half-century.

- S. Pacala and R. Socolow, Science, 13 Aug 2004, Vol. 305

Scaling these requires a MAJOR


52/122

50

Scaling these requires a MAJOR

change in current practice

Source: Pacala and Socolow, Science, 2004

Todays

Technology

Actions that Provide1 Gigaton/year of

Mitigation

Major Issues

Coal Plants

Replace1,000conventional 500-MWplants with zero-

emission power plants

Technical, Social, &Economic Viability

Nuclear Build 500 1 GW plantsEconomics, Safety, Non-proliferation,

EfficiencyDeploy 1 billion cars at 40mpg instead of 20 mpg

Distributed opportunitythat is hard to capture

Solar PVInstall 4,500 x currentU.S. solar generation

Geographic Limitations,Storage


53/122

51

Not all wedges are good

Global cost curve of GHG abatement opportunities


54/122

52

ppbeyond BAU

2030

-60

-140

-130

0

-160

-120

9876543 28272625

-150

-100

40

18171615141312

30

111010

-40

-30

-20

-10

10

20

24232221202 19

-90

-80

-70

-110

-50

Cost of abatement

EUR/tCO2e

Insulation improvements

Fuel efficientcommercialvehicles

Lighting systems

Air Conditioning

Water heating

Fuel efficient vehicles

Sugarcane

biofuel

Nuclear

Livestock/soils

Forestation

Industrial

non-CO2

CCS EOR;New coal

Industrialfeedstock substitution

Wind;lowpen.

ForestationCellulose

ethanol

CCS;new coal

Soil

Avoideddeforestation

America

Industrial motorsystems

Coal-to-gas shiftCCS;

coalretrofit

Waste

IndustrialCCS

AbatementGtCO2e/year

Avoiddeforesta

Asia

Stand-by losses

Co-firingbiomass

Biodiesel

~27 Gton CO2e below 40 EUR/ton (-46% vs. BAU)

~7 Gton of negative and zero cost opportunities

Fragmentation of opportunities

Source: McKinsey, 2007

Marginal abatement cost in the different scenarios*


55/122

53

Marginal abatement cost in the different scenarios

* Assuming opportunities are addressed in order of increasing cost

550 ppm 450 ppm 400 ppm

2030

Abatement

potential

GtCO2e/year

Cost of abatement

EUR/tCO2e

1050

-100

-150

-50

30 35

0

50

15 2520

2535 3540 > 40Marginal cost:(EUR/tCO2e)

Source: McKinsey, 2007


56/122

54

Filling the Wedges650 ppm 550 ppm 450 ppm

Source: van Vuuren, den Elzen, Lucas, et al. 2006

Cumulative Investment in Energy


57/122

55

Infrastructure, 2005 - 2030Source: IEA, WEO, 2006

Directions for the future:


58/122

56

Directions for the future:

Risk AND Opportunity

Climate Change and Competitiveness


59/122

57

Products /Technology

Regulations

Litigation

Reputation /Brand

Supply Chain

PhysicalImpacts

Bn

mpsoCmaeC

e

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

Earnings andarnings andcash flowash flowfor certainor certain

investmentsnvestments

Climate Change and Competitiveness


60/122

58

Investment and Policy Priorities

Enhance sinks;change Agpractices

Slow deforestationLand Use

Low emissions

intensity materialuse

Advanced

industrialproduction

Avoid lock-in ofinefficient productionIndustry

Transportinnovation

Sustainable fuelsystems

Avoid lock-in ofinefficientinfrastructure

Transport

Carbon neutralbuilding design

Avoid lock-in ofinefficient buildings

Buildings

Biomass + CCS;safe nuclear

Post-combustionCCS; RE

Avoid lock-in ofconventional coal

Power

Long term

priorities

Medium term

Priorities

Near Term

PrioritiesSector


61/122

59

Questions?

Jonathan Pershing [email protected]

Director, Climate, Energy and Pollution Program

World Resources Institute

http://www.wri.org

The Business of Climate Change: Risks and Opportunities

Goldman Sachs

13 April 2007


62/122


63/122

4/16/2007 5:30 PM 1

Ray KoppResources for the Future

April 13, 2007 New York City


64/122

4/16/2007 5:30 PM 2

Objectives Overview of legislative proposals in the

Senate Review of the European Union EmissionsTrading Scheme (EU ETS)

Challenges and opportunities for thebusiness community

Closing comments

state action, piece meal regulation, andadaptation


65/122

4/16/2007 5:30 PM 3

Congressional ActionImportant questions to ask

1. What is the scope of the regulatoryprogram?

2. Who gets regulated?

3. What are the emission reduction targets?4. What do we know about the expected cost?

5. Are there attempts to limit cost uncertainty ?

6. How are the allowances allocated?

th


66/122

4/16/2007 5:30 PM 4

The Bills 110th

Congress Sanders-Boxer S.309

Kerry-Snowe S.485 McCain-Lieberman S.280

Bingaman-Specter Discussion draft


67/122

4/16/2007 5:30 PM 5

Who Gets Regulated? Upstream - Bingaman-Specter

Downstream - McCain-Lieberman Power plants and large emitters (EU

approach)

Hybrid - McCain-Lieberman Transport upstream

Unspecified

Sanders-Boxer Kerry-Snowe

Emission Reduction Targets


68/122

4/16/2007 5:30 PM 6

ss o educ o a ge s

21.9%7.6%Bingaman-Specter

59.0%39.0%McCain-Lieberman

61.0%42.0%Kerry-Snowe

63.0%42.0%Sanders-Boxer

20302020

Percent Reduction from Business as Usual (BAU)


69/122

4/16/2007 5:30 PM 7

Cost to Reach the TargetEnergy Information Administration (EIA) analysis 10% below BAU in 2025

$11/per ton CO2e allowance price in 2025

would cause electricity prices to rise by 6.5%,

22% below BAU in 2025 $45/per ton CO

2

e allowance price in 2025

would cause electricity prices to rise by 35%

McCain-Lieberman, Kerry-Snowe, Sanders-Boxeremissions reductions of around 40% by 2020 and 60%by 2030.

Cost Certainty & Allocation


70/122

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, Auction, unspecified Bingaman-Specter

explicit allocation

initial 10% auction in 2012 increasing gradually to65%.

European Union Emissions


71/122

4/16/2007 5:30 PM 9

Trading Scheme (EU-ETS)EU ETS Structure

Began 2005 and includes the 27 countries of the EU The program is run in two phases.

Phase 1 from 2005 2007, Phase 2 from 2008 2012, coinciding with the Kyoto commitment period.

Cap covers only CO2, about 12,000 sources, about ofEU CO2 emissions

Transport is not currently included in the system,

although air transport will be added in 2011

EU ETS Structure


72/122

4/16/2007 5:30 PM 10

National Allocation Plan (NAP)NAPs describe three decisions

1. How much of a countrys Kyoto target isassigned to the regulated sectors

2. How much of the cap is assigned to eachsector

3. How the sector allocation is further

subdivided among individual companies

EU ETS Structure


73/122

4/16/2007 5:30 PM 11

Allowance Allocation Hybrid gratis-auction allocation scheme for

Phase 2 European Commission placed upper limit

of 10% on auction

Phase 2 allocation appears designed topurposefully distribute the cost of theprogram

EU ETS Structure


74/122

4/16/2007 5:30 PM 12

Has the Program Worked? Phase 1 was developed and implemented

quickly problems arose Phase 2 seems set for an orderly startJan. 2008 and will avoid many Phase 1

problems However, some issues remain Price stability

Coverage Beyond 2012

EU ETS Structure


75/122

4/16/2007 5:30 PM 13

Lessons for the US?

Allowance Allocation matters A Lot

These systems work, make them broad

Add as much certainty as possible to the

path of future emissions and allowanceprices

Keep the system simple and transparent

Business Challenges & Opportunities


76/122

4/16/2007 5:30 PM 14

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 outputbased allocation

Auctioning



77/122

4/16/2007 5:30 PM 15

Rising Energy Prices: Winners and Losers

Energy prices will increase throughout thecountry, but in varying degrees

e.g., electricity prices likely to rise most in

areas of coal fired generation

Magnitude of increase in proportion toseverity and timing of the GHG cuts



78/122

4/16/2007 5:30 PM 16

Rising Energy Prices: Winners and Losers Credible policy will alter expectations regarding

future energy prices

Household energy consumption decisions will bealtered & benefit producers of energy efficientdurables

Low income households will need increasedenergy assistance

Energy intensive manufacturers will bedisadvantaged.

Especially those facing foreign competition fromcountries with low or zero GHG prices

Concluding Remarks - States


79/122

4/16/2007 5:30 PM 17

Co c ud g e a s 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 permitallocation?

Concluding Remarks


80/122

4/16/2007 5:30 PM 18

Piecemeal Regulation Will we have a single economy-wide

program that promotes economicefficiency,

e.g., upstream cap & trade or GHG tax?

Or sector-by-sector regulation

e.g., proposed by Senator Feinstein

What about hybrids like Kerry-Snowe?

Concluding Remarks - Adaptation


81/122

4/16/2007 5:30 PM 19

g p

Actions to mitigate climate change posechallenges & opportunities for business, but

these may pale in comparison to thechallenges & opportunities posed byadaptation.

The recent IPCC report is clear the climateis changing now

But, one sees little if any attention paid to this

fact in terms of federal policy proposals


82/122


83/122

A Business Leaders Perspective onClimate Change

The Goldman Sachs Center for EnvironmentalMarkets

Lewis Hay, III

Chairman and CEO

April 13, 2007

Cautionary Statements and Risk FactorsThat May Affect Future Results


84/122

3

y

Any statements made herein about future operatingresults or other future events are forward-looking

statements under the Safe Harbor Provisions of thePrivate Securities Litigation Reform Act of 1995. Theseforward-looking statements may include, for example,statements regarding anticipated future financial andoperating performance and results, including estimatesfor growth. Actual results may differ materially from suchforward-looking statements. A discussion of factors thatcould cause actual results or events to vary is containedin the Appendix and in our SEC filings.

FPL Group


85/122

4

FPL FPL Energy

$25.1 billion market capitalization

$36.0 billion in total assets

34,324 MW in operation

$15.7 billion operating revenue

One of the largest U.S. electric utilities Vertically integrated, retail rate-

regulated utility 20,981 MW in operation

4.4 million customers $12.0 billion operating revenue

Successful competitive energy supplier,operating in 24 states

13,343 MW in operation U.S. market leader in wind generation with

34% market share Own and operate the largest solar plants

in the world $3.6 billion operating revenue

A Growing, Diversified Company

All data as of December 31, 2006, except market capitalization, which is as of April 10, 2007.

Early Leader / Early Adaptor


86/122

5

Long history of anticipating and incorporatingenvironmental constraints Economic analyses reflect expectation of future

constraints

FPL Groups emission intensity1

is down ~13% since1990

Florida Power & Lights electric generatingefficiency has improved by 18% since 2000

Signatory to EPAs Climate Leaders Program Committed to an 18% reduction in our carbon

emission rate by 2008 off a 2001 base

Signatory to WWFs 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 SO2, NOx, and CO2

Wind Energy: Early Participant;


87/122

6

Aggressive Expansion

Involved in wind energysince 1989

Committed to majorexpansion in 1999

Approximately 34% of U.S.installed base

Expect to invest $2.8billion in 2007 and 2008

~ 5,550

~ 4,800

4,016

3,192

2,7582,720

1,7451,421

578460

0

1,000

2,000

3,000

4,000

5,000

6,000

99 00 01 02 03 04 05 06 07E 08E

MW

FPL Energy WindGeneration

~ $150 million in net income (2006)

As a source of energy, wind is the

i l bl


88/122

7

most economical renewableLevelized Cost of Renewable Generation

(in 2000 dollars)

- Solar

- Biomass

- Wind

- Geothermal

$perMWh

$20

$30

$40

$50

$60

$70

$80

$90

$100

Source: National Renewable Energy Laboratory; U.S. DOE, October 2002

2000 20

20

2005

2010

2015

Financial success and environmental

f i t


89/122

8

performance can co-existCO2 ProfileStock Performance

1

0

500

1,000

1,500

2,000

2,500

Source: National Resources Defense Council reportBenchmarking the Top 100 Power Producers 2004 data

0%

50%

100%

150%

200%

250%

06/200

1

12/200

1

12/200

2

12/200

3

12/200

4

12/200

5

12/200

6

FPL

UTY

S&P

500

1 FPL Group price performance only since June 11,2001, the date Lewis Hay, III was appointed CEO

Avg.= 1,442

Lbs/MWh

FPL Group

If the U.S. utility industry reached FPLGroups CO2 intensity, the U.S. wouldh t it K t t t


90/122

9

have met its Kyoto target

1 After adding new coal facilities

Industry

Average

FPL Group 1

Lbs

/MWh

CO2 Emissions

500

1,000

1,500

5,108 tons

5,128 tons

U.S. Total

Note: MWh and tons in millions

KyotoTarget

x 3,833 MWh = 1,172 tons

3,936 tons

U.S. Electric

All Other

CO2 Intensity

FPL Group

Total U.S. MWh

Climate Change: Our Assessment

On the one hand


91/122

10

On the one hand Trend is real; human contribution is real

Large uncertainties around magnitude of both

Long-term implications potentially huge

Hence, 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 oneoptimal CO

2concentration

Hence

Begin now; do it gradually; do it predictably; andtighten progressively

Long-term reductions will not occur

ith t b t ti l R&D


92/122

11

without substantial R&D3,500

3,000

2,500

2,000

1,500

1,0001990 1995 2000 2005 2010 2015 2020 2025 2030

Effic

iency

Renewa

bles

Nuclear

Adv. CoalCarbonCaptureDist.Energy

U.S.Elec

tricCO2Emissions

(millionmetricton

s)

Carbon capturetechnologies notyet viable atcommercial scale

Carbonsequestrationtechnologies notyet demonstratedat commercial

volumes

Source: EPRI, Electric Sector CO2 Impacts February 2007

But significant short-term reductions

in CO2 intensit are possible if the


93/122

12

in CO2 intensity are possible if theright price signals exist

Co

stofAbateme

ntpertonCO2 50

-50

-100

-150

0

Gigatons of CO2 per year in 2030

5 302510 15 20

Building Insulation

Lighting Systems

Fuel Efficiency in Vehicles

Nuclear

Air Conditioning

Avoided DeforestationCCS Retrofit

Biodiesel

CCS; New CoalLow Cost

Forestation

Source: McKinsey & Co. The McKinsey Quarterly Number 1

As a practical matter, policy must

balance several priorities


94/122

13

balance several priorities

ClimateCosts

EnergySecurity

Technology choices represent long-term commitments


95/122

14

Moderate Natural Gas &Low Emissions Costs

Moderate Natural Gas &Moderate Emissions Costs

High Natural Gas &High Emissions Costs

AllInLevelize

dCostofEnergy($/MWh)

Source: Internal Estimates

Gas

Coal

Nuclea

r

IGCC

Gas

Coal

Nucle

ar

IGC

C

Gas

Coal

Nucle

ar

IGC

C

High Natural Gas &Low Emissions Costs

Gas

Coal

Nuclea

r

IGCC

Note: Reflects illustrative combinations of CO2 costs and natural gas prices

Uncertainty at present is large

Value Differential: Coal vs Natural Gas Generation


96/122

15

~$4 Billion

Natural GasPricing

Low

High

Low High

Most

Likely

Zone

Amounts represent lifetime NPV relative to hypothetical alternativecombined cycle natural gas

Coal in a lowgas/high carbon

scenario is amisallocation of

capital

Coal in a high

gas/low carbonprice environmentcreates significant

value

Source: Internal Estimates

~$(4) Billion

CO2 Pricing

Value Differential: Coal vs. Natural Gas Generation

Picking a winner is easy if you canperfectly forecast gas and CO2 prices!

$60 Nuclear


97/122

16

$60

$50

$40

$30

$20

$10

$0

Averag

eCO2Cost($/ton)

$6 $7 $8 $9 $10 $11 $12

Average Gas-Coal Spread ($/MMBtu)

USCPC/CC Breakeven Nuclear/CC Breakeven

Combined Cycle GasEconomically

Preferred Region

NuclearEconomically

PreferredRegion

Ultra Super Critical

Pulverized CoalEconomically Preferred

Region

Note: Coal price fixed, natural gas price varies

Source: Internal and industry estimates

CO2 Policy Options

Market based


98/122

17

Command

and Control

Cap and

Trade

Carbon Fee

Market-based

Fixedemission

levels

Uncertainand volatileprices

Pre-determined

price profile

Uncertainshort-termemission

levels

Inefficient

Inequitable

Both result in a market pricefor CO2 emissions

All approaches involve administrativecomplexity; some are more complex than

others


99/122

18

others

Distribution of allocations

% free vs. auction

Allocation basis

Monitoring and measurement

Leakage from uncovered sectors

Import/export complexities

Unless 100% of allowances are free,

all approaches create a revenue stream (a tax)

Monitoring and measurement

UnconstrainedCap & Trade

CO2

Price

Ceiling

Floor

ConstrainedCap & Trade

CarbonFee

At realistic values for CO2 pricing, themarket value of allowances will be large


100/122

19

Allowance$ per ton

2010 2030

Total

Value(Billions)

Estimated

Tons(Billions)

Total

Value(Billions)

Estimated

Tons *(Billions)

$10

$20

$50

7 5.5

$70

$140

$350

$55

$110

$275

* Source: 1990 level from DOE Annual Energy Review 2005 (published in July 2006)

If all credits are given away for free, thespecifics of allocation become huge


101/122

20

Assumptions: 2030 sector emissions levels capped at 1990 levels; 2030 CO2 price = $29/tonHypothetical profile based on 20,000 MW generation profile (75% coal, 10%combined cycle gas, 10% conventional gas boilers and 5% hydro/renewable)

Methodology

Input

Output

CO2 Allocation(Millions of tons)

Allowance Price($ per ton)

Amount($ Millions)

42.1

31.8

10.3

$29

$1,220

920

$300Difference

Annual Impact of Alternative Allocation Methods

Our analysis suggests that large, freeallocations are not necessary to protect

generators financial health


102/122

21

generators financial health

Source: FPL Group in collaboration with The Brattle Group

Note: Points represent leading consolidated regulated and non-regulated generatorsoperating within the Eastern transmission interconnect

A carbon fee offers substantialadvantages over cap & trade

A CO2 fee beginning initially at a modest level ($10/ton) increasing


103/122

22

2 g g y ($ ) gover 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 accompanyfree allocations

Provides a reliable source of revenue to underwrite R&D andother programs to benefit consumers

Is relatively easy to administer, avoiding unnecessary costs

Is equitable and efficient, with limited (and known) economicimpact

Easily allows border adjustment tariffs on imports, credits onexports

Provides economic benefit for early action

Proper recycling of CO2 revenues isrequired if the economy is not to be

damaged


104/122

23

damaged

Carbon

Fee

Consumers

R&D

TransitionProtection forImport/Export

Sectors

Modified Cap & Trade

A modified Cap & Trade can mitigate recognized problems


105/122

24

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

Our bottom line

The issue is real and needs addressing


106/122

25

The stakes are huge Politically, 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


107/122

Q&A Session


108/122

Appendix


109/122


110/122


111/122

Threats of terrorism and catastrophic events that could result from terrorism may impact the operations of FPL Group and FPL in unpredictable ways.

FPL Group and FPL are subject to direct and indirect effects of terrorist threats and activities. Generation and transmission facilities, in general, have beenidentified as potential targets. The effects of terrorist threats and activities include, among other things, terrorist actions or responses to such actions or threats,the inability to generate, purchase or transmit power, the risk of a significant slowdown in growth or a decline in the U.S. economy, delay in economic recovery inthe U.S., and the increased cost and adequacy of security and insurance.

The ability of FPL Group and FPL to obtain insurance and the terms of any available insurance coverage could be affected by national, state or local events andcompany-specific events.


112/122

31

FPL Group's and FPL's ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national, state or local eventsas well as company-specific events.

FPL Group and FPL are subject to employee workforce factors that could affect the businesses and financial condition of FPL Group and FPL.

FPL Group and FPL are subject to employee workforce factors, including loss or retirement of key executives, availability of qualified personnel, collectivebargaining agreements with union employees and work stoppage that could affect the businesses and financial condition of FPL Group and FPL.

The risks described herein are not the only risks facing FPL Group and FPL. Additional risks and uncertainties not currently known to FPL Group or FPL, or thatare currently deemed to be immaterial, also may materially adversely affect FPL Group's or FPL's business, financial condition and/or future operating results.


113/122


114/122

Key Business Risks & Opportunities

in Climate ChangeJ h P H ld


115/122

1

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 ChangeNew York, 13 April 2007

Business risks from climate change

climate-change damage to firms assets &operations


116/122

2

p

climate-change damage to firms customers &

markets liability for firms contribution (by commission or

omission) to climate-change risks

financial

reputational

competitive disadvantage under climate policies

competitive disadvantage from failure to exploitthe opportunities presented by climate change

Business opportunities from climate change

new/improved products & services for a climate-challenged world


117/122

3

g

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

Mitigation products and services

management of soils, vegetation, land use forest preservation & management


118/122

4

p g

husbanding soil carbon through agricultural practices

improved efficiency of energy end use transport (better vehicles, mode switching, planning)

buildings (improved envelopes, HVAC, lighting)

manufacturing (process improvements, motors)

low- and no-carbon electricity, heat, fuels

finding & transporting natural gas wind, solar-thermal, & photovoltaic electricity

food-non-competitive biofuels

Adaptation products & services

fresh water supplies water-use-efficiency technologies in agriculture,


119/122

5

water use efficiency technologies in agriculture,industry, buildings

desalination / purification technologies

floods & droughts

water storage & distribution infrastructure

other agriculture/forestry impacts

development/deployment of more drought-, pest-, and

pathogen-resistant crops, trees

other pest- and pathogen-control measures

Adaptation products & services (continued)

human health countermeasures against disease-carrying mosquitoes


120/122

6

g y g q

improved treatments for malaria, dengue, West Nile

improved treatments, infrastructure against heat stress

storms & sea level

storm-resistant construction

raised, strengthened, & additional dikes & storm-surgebarriers

How much money?

Yardstick

2005 world economic product: $42 trillion (MER)$59 t illi ( )


121/122

7

$59 trillion (ppp)

Energy

2005 energy costs at retail: ~$5 trillion

replacement cost of world energy system: ~$15 trillion

annual investment in world energy system: ~$0.7 trillionpublicly & privately funded energy RD&D: ~$0.03 trillion

Carbon dioxide

damage estimates $50-500/tC $0.5-5 trillion/yravoidance costs from -$500/tC (profitable) to +$200/tC;avoiding 7 GtC/yr in 2050 at $50/tC $0.35 trillion/yr

Some key references

National Commission on Energy Policy, Ending the Energy

Stalemate: A Bipartisan Strategy to Meet Americas EnergyChallenges, December 2004 http://www.energycommission.org

John P Holdren The energy innovation imperative Innovations:


122/122

8

John P. Holdren, The energy innovation imperative, Innovations:

Technology/ Globalization/Governance, Vol. 1, No. 2, Spring 2006

http://bcsia.ksg.harvard.edu/BCSIA_content/documents/Innovations_The_Imperative_6_06.pdf

Intergovernmental Panel on Climate Change, Climate Change 2007:

The Physical Science Basis. Summary for Policy Makers.

February 2007. http://www.ipcc.ch/SPM2feb07.pdf

UN Scientific Expert Group on Climate Change & Sustainable

Development, Confronting Climate Change: Avoiding the

Unmanageable and Managing the Unavoidable, United Nations

Foundation, February 2007 http://www.unfoundation.org/SEG/

Intergovernmental Panel on Climate Change, Climate Change 2007:

Climate Change Impacts, Adaptation, and Vulnerability, Summary

for Policy Makers. April 2007. http://www.ipcc.ch/

business of climate change

Documents