Carbon legislation And its impact on supply chain costs

World governments will meet in Copenhagen by the end of 2009 to decide the future of global carbon legislation once the first Kyoto period, the international agreement that aims to reduce greenhouse gas emissions and the presence of greenhouse gases (GHGs), expires (2012). In the U.S., a carbon cap-and-trade bill designed to set a cap on emissions of greenhouse gases has just passed the Congress. In Europe, carbon legislation has been in place since 2005. International transportation organizations like the International Maritime Organization (IMO) are preparing proposals to introduce carbon mechanisms into global shipping. How will these carbon reduction initiatives impact supply chain design and costs? These global regulations, whether in the form of cap-and-trade or a contribution fund system, will impose new cost pressures on transportation service providers who will seek low more efficient transportation modes and carriers to improve their carbon footprint. Shippers will indirectly feel the effects of this new legislation as it impacts their transport providers, as well as from increased societal pressures to contribute to a more sustainable, greener planet. As this new carbon legislation takes hold it will increasingly become a top priority for shippers to reduce carbon emissions in their supply chain to minimize bottom line impact and reflect a positive commitment to sustainability. Damco is working in partnership with First Climate to become an early mover in reducing supply chain carbon emissions and to prepare for operating in a carbon-constrained business environment. With this newsletter, we would like to give you an overview of future carbon regulations to help you assess the opportunities and risks that a low carbon economy will have on your company’s supply chain. Politics point to the a low-carbon future Science has long since shown that climate change happens due to human activities producing emissions of greenhouse gases. This fact, as well as the need to act to reduce emissions, have now been universally recognized by policy-makers, making a shift to a low-carbon future just a question of time.

Policy activity is on the move this year to address the climate change challenge. International climate talks are expected to deliver an agreement on the post-2012 policy framework in December in Copenhagen. The European Union has already committed unilaterally to ambitious emission reduction targets; the US house of representatives has recently passed a climate bill. The transport sector, which accounts for over 20% of the global carbon emissions, is the focus of policy makers and will be expected to make a major contribution to reducing emissions in Europe and in North America, as well as in other regions, including some developing countries. On the road to Copenhagen 2009 may become one of the most significant years for the international climate change policy in the last decade if a new post-2012 agreement is reached in December, as expected. One of the main issues on the table in Copenhagen is the emission reduction targets for the period beyond 2012, after the expiration of the first commitment period of the Kyoto Protocol. Another concern is the contribution by developing countries, in particular of the most advanced ones, to the global efforts toward reducing emissions. Closely linked to these issues are improvements to existing and new proposals for new market-based mechanisms that reduce the costs of emission reduction while facilitating access to carbon finance. Many industrialized countries have already made preliminary pledges on the ranges of emission targets they would be prepared to take, most of which are conditional upon a comparable level of effort undertaken by others. The initial drafts for the new agreement list the options for the main elements of the future framework, including new mechanisms such as sectoral and policy-based emission trading. The outcome of the climate talks in Copenhagen will

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commitments to be faced by businesses, as well as on the options available to business for offsetting their emissions through the international emission trading mechanisms. Bill in the pipeline – The US joins the carbon marathon President Obama and his new administration have indicated a commitment to sweeping energy policy reform that would cap greenhouse gas emissions and create a trading scheme for emissions credits. Although the US House of Representatives passed a long and complicated bill by a narrow margin in late June 2009, there is still a very long way to go on the legislation before it is even considered in the Senate or becomes law. Other agenda items on the Congressional calendar (such as health care reform, economic issues, etc.) may likely push Senate consideration of the energy bill into the 2010 time frame. The entities bound by the

reduction obligations will mainly consist of producers and importers of combustibles and fuels. The bill that passed the House covers some landside operations and international shipping is not included in the current version of the draft legislation. Besides the Federal cap-and-trade scheme taking advances, one regional scheme (Regional Green House Gas Initiative, RGGI) is already in place in the North-Eastern states and a few other schemes have been proposed but are on hold until there is clarity what will happen on Capitol Hill. Other carbon reduction measures are also emerging. California will introduce fuel efficiency standards and another thirteen states are planning similar measures. EU experience of the foregoer The aim of the EU is to reduce its emissions by 20% to 1990 levels by 2020. If a sound international agreement is reached in Copenhagen, the EU will commit to a reduction target of up to 30%. To achieve these targets, the European Union has had an operational carbon trading scheme since 2005. The coverage of the EU’s emission trading scheme is much lower than the planned coverage in the US. The 40% of covered European emissions come mainly from large industrial installations. Shipping is not included. However, if there is no international agreement on the inclusion of shipping after 2012, the EU will move forward to cover shipping emissions possibly as early as 2013. The first three years of the EU scheme were characterised by a larger amount of emission permits allocated than what was needed. As a result the price of carbon almost vanished in April 2006. Lessons were learned and the next phase of the scheme, which started in 2008, had tighter reduction targets to give a proper price signal again. At the end of last year the EU agreed on rules for the time after 2012 giving industries, utilities and aviation (which was included in between) a longer-term view on the carbon constrained future enabling them to adapt their strategies. IMO follows the suite A recent IMO study estimated that international shipping in 2007 emitted about 2.7 per cent of the global man-made emissions of CO2 - or 870 million tonnes. By 2050 - in the absence of reduction policies - ship emissions may grow by 150 to 250 per cent (compared to 2007 emissions) as a result of growth in world trade. However, at the same time the study showed significant potential for reduction of GHGs through technical and operational measures, which

combined could, by 2050, increase efficiency and reduce the emissions rate very considerably below the current levels on a tonnes/mile basis. As the Kyoto protocol leaves it to the Annex I parties (industrialized nations) to pursue emission reductions from international shipping in IMO, the IMO and its member states have been working intensively for several years to introduce international regulations with that effect. However, the pressure is growing on the IMO member states to act as the post-Kyoto negotiations gain speed, and with the EU announcing that it will take a unilateral action if there is a failure to come up with an international approach to cut shipping emissions, in a similar fashion as it did with aviation. As we speak, the IMO is discussing a set of initiatives that show increased commitment to counter climate change. A design index for new ships as well as a shipboard energy efficiency management plan for all ships are likely to be approved in the near future. The open question is still whether the IMO can agree on a market based instrument such as an emission trading scheme or a more simple approach requiring contributions to be paid based on the amount of bunker purchased. In any case, it will be required for such an instrument to interface to the already existing mechanisms of Clean Development Mechanisms under the UN Framework Convention for Climate Change. To sum up, discussions are still ongoing in the IMO, but we should expect agreement on substantial issues before the end of 2010. First Climate and Damco cooperate in addressing climate change First Climate and Damco have combined their expertise to offer a complete service in carbon management. Damco provides a sophisticated approach to decarbonising the supply chain through their SupplyChain CarbonCheckTM service, enabling companies to identify and reduce or avoid carbon emissions along their supply chain. The resulting optimisation is good for the environment, and good for business. Some carbon emissions are unavoidable however, and offsetting is adopted as a means of compensating for these emissions, enabling the supply chain to be carbon neutral. This enables a company to contribute to the battle against climate change, and to publicly demonstrate its green credentials. Carbon offsetting has been adopted by many of the worlds leading companies as a sound mechanism to do good and to be seen doing good. First Climate supports the offsetting program through the provision of high quality carbon offsets, and a range of associated services to ensure a sound and effective carbon neutral program is put in place. The service

offered by First Climate and Damco enables companies to take a comprehensive and rigorous approach to managing carbon within the supply chain, and to implement solutions that position the organisation well for a low-carbon economy.

About Damco Damco is the new, combined brand of the A.P. Moller - Maersk Group's logistics activities. Damco offers a broad range of supply chain management and freight forwarding services to customers all over the world, and has 10,500 colleagues in 272 offices, covering over 93 countries in Africa, Asia, North America, Europe, Middle East, and Latin America. In 2008, the company had a net turn-over of USD 2.8 billion, shipped more than half a million TEUs ocean freight, air freighted over 60,000 tonnes, and handled over 50 million CBMs (equivalent to 2 million TEU) for our supply chain management customers. Damco is an independent business activity within the A.P. Moller - Maersk Group. For more information, please visit www.damco.com. About First Climate First Climate is one of the leading carbon asset management companies. With offices on five continents and more than ten years' experience in the market, it is one of the few intermediaries to cover the entire carbon credit value chain. First Climate develops, finances, and implements CDM, JI, and VER projects, purchases the resulting carbon credits, and customizes trading solutions for companies subject to the EU ETS. As investment advisor to several institutional investors, First Climate structures and develops carbon funds and related products. In the voluntary market, the company provides VERs verified according to the highest international standards. First Climate is one of the main sponsors of the Gold Standard Version 2.