The cost of carbon in California has risen sharply while the equivalent in the European Emissions Trading System has so far gained little from yesterday's long-awaited reform proposals

London, 26 July 2012 – A reduction in regulatory uncertainty in California, and concern about a nuclear

power outage, have helped to push the price of a carbon allowance in the US' most populous state to
more than double that in the much longer‐established European Union Emissions Trading System.

The value of a California Carbon Allowance (CCA) for delivery in December 2012 closed at $19.50 per
metric ton of CO2 equivalent (EUR16.04/tCO2) on 24 July, the highest closing price of the year so far.
The price for European Union Allowances (EUAs) for delivery in December 2012 closed at EUR7.20/tCO2
on the same day.

The much higher price in California may be surprising to Europeans, given perceptions about American
reluctance to take action on climate change. Ironically, the California scheme was almost derailed earlier
this year by legal action taken by an environmental action group (the Association of Irritated Residents)
who insisted that the scheme was not strict enough.

The price of EUAs has remained low despite the European Commission's release yesterday of its
proposal for changes to auctioning volumes in Phase III of the EU ETS, which begins in 2013. These
changes, if approved by both Parliament and the Council, would delay some of the auctioning volume
originally intended for the early years of Phase III, into the later years. The changes were proposed by
the European Commission in response to widespread criticism that the price in the EU ETS is too low to
promote the necessary investments in clean energy.

In the long term, Bloomberg New Energy Finance expects prices in both the Californian and EU ETS to
rise significantly, since the emission reduction targets in both parts of the world for the period beyond
2020 are likely to continue to strengthen. At the moment the firm's base case forecast for the spot price
of an allowance in 2020 in both markets is the same, at EUR45/tCO2 ($55/tCO2). The fact that the
forecasts are the same is purely coincidental and belies significant structural differences in the two
markets; the EU ETS has access to the Kyoto market for international credits whereas California does
not; and the largest sector in the EU ETS is the power sector while transportation is the largest emitter in
the California market.

Matthew Cowie, head of carbon market research at Bloomberg New Energy Finance, commented,
"While it appears that Europe has the political will to give the EU ETS more teeth in the long term, the
process of fixing the problems continues to suffer delays. A month ago most market participants thought
that changes to the Auctioning Regulation could be in place by the end of 2012, but most commentators
now expect that this will take well into 2013 to accomplish. This market needs both ambition and
structural stability in order to regain its lost importance."

Michel Di Capua, head of North American research at Bloomberg New Energy Finance, commented,
"After several failed attempts to introduce cap‐and‐trade at the national level, there's a widespread
belief that carbon markets are dead in North America. Not so. We are on the verge of seeing the
emergence of a meaningful tradable market that over the long run will transform California's power,
industrial, and transport sectors. The business community should take note; this market will impact some
of the country's largest utilities and some of the world's biggest oil and gas players, among others."

Futures contracts for the California market have been trading since 2011. Its underlying spot market is
due to begin in 2013. The EU ETS saw the first futures trading in 2003, and the start of spot trading in
2005.

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