Confidential BUSINESS PLAN August 2008

IWC INTERNATIONAL WOOD CORPORATION FOREST & NATURAL RESOURCES MANAGEMENT

Recipient ___________________ Plan Number ___________________

ConfidentialBUSINESS PLANAugust 2008

Roy I. Schwartz, President and Director+1 954 746-8845www.iwcusa.net

© 2008 Growthink, Inc.This confidential document contains proprietary information that constitutes trade secrets. It is not to be

shared, copied, disclosed, or otherwise compromised without the prior written consent of themanagement of Growthink, Inc.

INTERNATIONAL WOOD CORP. PROPRIETARY AND CONFIDENTIAL BUSINESS PLANAUGUST 2008 DO NOT COPY OR DISTRIBUTE PAGE 2

This Business Plan (and any/all drafts and parts thereof) is/are based uponinformation supplied by International Wood Corporation, its managingexecutives, and its stockholders or membership shareholders (collectively the“Company”, and/or “management”, and is being furnished on a confidentialbasis, solely for use by prospective investors in and/or potential strategicbusiness associates of the Company (collectively “recipient”). The use ordistribution of this Business Plan to any other parties or for any otherpurposes is not authorized.Neither the author (Growthink, Inc., and its employees and contractors) northe Company, nor any of its employees, affiliates or representatives makes anyrepresentation or warranty, express or implied, as to the accuracy orcompleteness of any of the information contained in this Business Plan or inany other written or oral communication transmitted or made available to arecipient. Each of such parties expressly disclaims any and all liabilityrelating to or resulting from the use of this Business Plan or suchcommunications by a recipient or any of its affiliates or representatives.Only those specific, express representations and warranties, if any, which maybe made to a recipient in one or more definitive written agreements when, asand if executed, and subject to all such limitations and restrictions as maybe specified in such definitive written agreements, may be relied on by arecipient or have any legal effect whatsoever.Material portions of the information presented in this Business Planconstitute “forward-looking statements” which can be identified by the use offorward-looking terminology such as “may”, “will”, “expect”, “anticipate”,“estimate”, “plan”, or “continue” or the negative form thereof or othervariations thereon or comparable terminology. Such forward-looking statementsrepresent the subjective views of the management of the company, andmanagement’s current estimates of future performance are based on assumptionswhich management believes are reasonable but which may or may not prove to becorrect. There can be no assurance that management’s views are accurate orthat management’s estimates will be realized, and nothing contained herein isor should be relied on as a representation, warranty or promise as to thefuture performance or condition of the Company. Industry experts may disagreewith these assumptions and with management’s view of the market and theprospects of the Company.The sole purpose of the Business Plan is to assist a recipient in decidingwhether to proceed with further investigation, but this Business Plan does notpurport to contain all material information that an interested party mightconsider in investigating the Company. A recipient should conduct his or herown independent analysis and investigation. This Business Plan shall not beconstrued to indicate that there has not been any change in the financialcondition, business, operations, plans or other affairs of the Company sincethe date of preparation. The Company does not expect to update or otherwiserevise this Plan to reflect any such changes.


The recipient of this Business Plan acknowledges and agrees that: (a) all ofthe information contained herein or received in written or oral form from theCompany will be kept confidential; (b) the recipient will not reproduce thisPlan, in whole or in part; (c) if the recipient does not wish to pursue thismatter, it will return the Business Plan to the Company as soon aspracticable, together with any other material relating to the Company whichthe recipient may have received from the Company; and (d) proposed actions bythe recipient which are inconsistent in any manner with the foregoingagreement will require the prior written consent of the Company.THIS BUSINESS PLAN IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTEAN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.The Company reserves the right, in its sole discretion, to reject any and allproposals made by or on behalf of any recipient, to accept any such proposal,to negotiate with one or more recipients at any time, and to enter into adefinitive agreement without prior notice to other recipients. The Companyalso reserves the right to terminate, at any time, further participation inthe investigation and proposal process by, or discussions or negotiationswith, any recipient without reason.


Table of Contents

Executive Summary...........................................................5International Wood Corporation.....................................................5Products...........................................................................5Revenue............................................................................5IWC and sustainability.............................................................7Government regulations.............................................................8Management team....................................................................8Financial plan.....................................................................9Summary of financial projections...................................................9Corporate structure and headquarters...............................................9

Carbon Market Overview.....................................................10Greenhouse effect.................................................................10Greenhouse gases..................................................................10Kyoto Protocol....................................................................11Emission trading scheme (ETS).....................................................13Market structure and market players...............................................13Exchange centers..................................................................14Case studies......................................................................16

Carbon Market Analysis.....................................................18The carbon market (volumes and values)............................................18Market growth.....................................................................19Market challenges.................................................................21Key market trends.................................................................22The buyers........................................................................25The sellers.......................................................................25Market outlook....................................................................26

Chicago Climate Exchange (CCX) Overview....................................28CFI contracts (the CCX tradable commodity)........................................28CCX mission.......................................................................28CCX offsets program...............................................................28Forestry Carbon Emission Offsets..................................................29Harvest option and protocol for sustainably managed forests.......................29

Operational Plan...........................................................32Organizational structure..........................................................32Staffing..........................................................................32Implementation plan...............................................................33Management team...................................................................34


Facilities and insurance..........................................................35Financial Plan.............................................................36

Capitalization....................................................................36Use of private placement proceeds.................................................36Summary of financial projections..................................................37Exit strategy.....................................................................37

Key Investment Considerations..............................................38Proprietary knowledge.............................................................38Unique position in the market.....................................................38Ongoing relationships with key industry players...................................38Time to profitability.............................................................38Exceptional management team.......................................................38Dividends, returns, and exit strategies...........................................39

Risk Factors...............................................................40Nature of the company.............................................................40Performance risk..................................................................40Market risk.......................................................................41Competition.......................................................................41Growth and continuing operations..................................................41

Appendix A: Assumptions And Financial Projections..........................42Appendix B: Kyoto Protocol Glossary........................................47Appendix C: 1998 Appraisal Of IWC-Owned Land...............................51Appendix D: Historical Balance Sheet.......................................59


Executive SummaryInternational Wood Corporation

International Wood Corporation (“IWC” or the “Company”), along with itspredecessors and subsidiaries, owns approximately forty four thousand acres ofmanaged forest in Brazil. The Company also has options to purchase up to anadditional two million acres (from a predecessor company or directors of IWC).The Company’s forestry holdings, including options, are valued at more than$900 million.A Colorado corporation with its main office in Ft. Lauderdale, Florida, IWC isnow seeking new capital to begin various activities designed to generate salesexceeding $100 million within 5 years. The Company will accomplish this byutilizing production from existing owned forests, acquisition of new land,lumber purchased from existing local growers, the export of commodities, andthe creation certified carbon credits for sale on international markets.

Products

IWC will generate revenue from the sale of exportable lumber such as Mahogany,Teak, Cedar, Cherrywood, Jatoba, Iroko, Sucupira, Meyranti, Ipe, and otherexotic woods. The Company also plans to export pepper, cocoa, soybeans,ethanol, various minerals and metals, and other crops. Presently, more than 65percent of arboreal resources owned by the Company are at maturity andharvestable.The Company will also harvest owned and joint venture managed forests andreforestation of these areas with new growth. These managed forests will beused for the creation of carbon credits for trading on international marketsover the growth period (typically with 15- to 30-year contracts). An importantuse of the new capital is to begin the certification process for the creationof carbon credits.Long term, IWC has the potential to certify more than two million accessibleacres of manageable forest area, containing millions of tons of certifiablecarbon credits. In addition, there are coniferous woods in the Companyportfolio that are available for harvest and quick re-growth; these aresuitable for short term carbon credit contracts, as well as for use in themanufacture of plywood, blockwood, and other finished products (i.e., afterexpiration of the carbon credit contract period).


Revenue

Wood salesIWC presently owns approximately 45,000 acres (18,000 hectares) of tropicaltimberland in the states of Acre and Para in the Amazon Basin, Brazil. Thetimber includes a variety of mature tropical woods including mahogany, cedarand teak. The Company owns two sawmills in the states of Acre that will beutilized in the processing of timber. IWC also owns vehicles and maritimeequipment used to extract and process timber from the forest.The Company has the ability to obtain the required permits and governmentapprovals to harvest and export up to 40,000 cubic meters of wood per year.Elliott Sassoon and I. Motta will lead the Company’s operation in Belem, nearthe property. Mr. Sassoon and Mr. Motta have more than 25 years of experiencewith harvesting timber, and the production of exotic wood for export. TheCompany will contract with a local harvesting and processing company to carryout the Company’s operational plan. These contractors will assist in theextraction, processing, grading, packing, and shipping of goods for export.

The property currently owned by the Company has sufficienttropical hardwoods to last for approximately 40 years, basedon an annual harvest of 400 hectares (approximately 40,000cubic meters of wood products). The current market value ofthe complete inventory of tropical hardwoods is $200 million.

Each year, a 400-hectare plot will be harvested. Only the most mature andcommercially profitable trees will be harvested. At the end of the harvest,ground cover and overhang cover will be thinned and sold, and the plot will bereforested with fast-growing eucalyptus (or equivalent) tree saplings. TheCompany also holds purchase contracts with affiliated or non-affiliatedcompanies on lumber at prices established during the early growth periods ofother forest areas, and will execute these options to increase exports duringthe reforestation periods of company owned areas. The newly planted trees willadd to the carbon credit value of the land within one year of planting. Inaddition, the thinning will also increase the carbon credit value of the landduring the next annual verification cycle.While timber processing and export will take place all year, the actualharvesting of tropical wood will occur during the Brazilian dry seasonbeginning in June and lasting until the end of November.IWC plans to acquire additional land to maintain a ready supply of tropicalhardwoods. As soon as the timber operation is running smoothly, the Companyplans to explore other business opportunities, including the export and saleof medicinal herbs, cosmetic herbs, and culinary spices.There is a large and growing demand for tropical hardwoods throughout theworld. The United States is the leading importer of such woods, followedclosely by the United Kingdom, Europe, Caribbean countries, and Japan. Brazil


lumber exports are currently less than 5 percent of the world total. Due totight credit availability in Brazil, the Company will have little competitionfrom other local producers.

Carbon creditsWhile there are a growing number of Emission Trading Schemes (ETS) enabled bythe Kyoto Protocol, the Company has selected the Chicago Climate Exchange(CCX) as the most appropriate exchange for its carbon credit program. CCX,launched in 2003, is the world’s first and North America’s only active,voluntary, legally binding integrated trading system to reduce emissions ofall six major greenhouse gases (GHG), with offset projects in North Americaand Brazil.1

CCX issues tradable Carbon Financial Instrument (CFI) contracts to owners oraggregators of eligible projects on the basis of sequestration, destruction orreduction of GHGs. Projects must undergo verification from a third partyinstitution certified by CCX. Only Members, Offset Providers and OffsetAggregators can register offset projects. Providers and Aggregators must nothave significant GHG emissions. CCX has developed standardized rules governingwhat types of projects can receive CFI contracts.IWC, with its significant land holdings in Brazil, will operate as an OffsetProvider. The Company has identified a Managed Forest Project as theappropriate model for its business plan. A Managed Forest Project sustainablymanages forests such that their growth in carbon stocks exceeds their harvest.Eligible projects increase forest carbon stocks by planting after harvest ornatural disturbances. The Company’s model is based on a successful Managed Forest Project in CostaRica that was reforested using 72 percent Teak and 21 percent Pochote andother native species. The average harvest cycle in the project was 18-20 yearsfor the Teak and 24 years for the Pochote. The owner of the land, PreciousWoods, exports the wood from final harvests to India; the company sells thewood from thinnings and minor harvests as raw material. In 2006, PreciousWoods sold 22,000 metric tons of CCX CFI contracts to the World Bank to offsetits operational emissions.In general, CCX requires forest managers to engage in harvest systems thatmaintain partial forest cover, reduce soil erosion, and avoid destructiveharvesting practices. CCX requires that landowners provide evidence thatforest holdings are sustainably managed, through certification from agenciesendorsed by CCX.2

All CCX offset projects go through the same standardized registration,verification and crediting process. Verification and validation are usually

1 http://www.chicagoclimatex.com/content.jsf?id=8212 http://www.chicagoclimatex.com/images/content/File/CCX_Case_Study_Managed_Forest_Offsets.pdf


done at the same time by the same auditor and are called “project verificationand enrollment.” Credits are calculated (generated) after verification.


The CCX-mandated verification steps are as follows3:1. IWC submits a project proposal for an eligible project to the CCX,

including proof of ownership of the forestland.2. The proposal is reviewed by the CCX Committee on Offsets; they provide a

preliminary approval if the project is eligible (the project may bereferred to a scientific technical advisory committee).

3. Once approved by the Committee, IWC must obtain independent verificationby a CCX-approved verifier (including site visits) to accurately assessa project’s annual GHG sequestration or destruction potential.

4. The verification reports are reviewed by CCX staff, as well as theirregulatory service provider (FINRA) for completeness and accuracy.

5. IWC can then join the CCX and enroll the project.The baselines and methodologies for calculating emission reductions aredefined for each project type. Some baselines are project-specific (e .g.,large reforestation projects are credited relative to measured site-specificcarbon levels prior to the start of the project). Other baselines are based onperformance standards (e.g., abandoned deforestation projects in Brazil arecredited using predetermined annual deforestation rates for specific stateswithin Brazil).There is no explicit information regarding the exact timeframe forverification and accreditation. However, the Company is expecting the processto take a minimum of 6 months. Before CCX issues the credits, an independentverifier must undertake site visits and record inspections to confirm projecteligibility. The verifier inspects project performance data (e.g., treemeasurements, visual inspections) and calculations to confirm a project’sactual, annual GHG destruction, sequestration or emission avoidance. TheCompany’s offset project is subject to initial verification, as well as annualverification for the duration of its enrollment in CCX.4

A Managed Forest Project is a long-term commitment. IWC is required to sign acontract attesting that the land will be maintained as forest for at least 15years from the date of enrollment in CCX. In addition, all participants arerequired to sign a letter of good faith stating that they will maintainenrolled land in forest beyond the 15-year contract period required by theprogram.

Based on available species inventories, aerial photographs,and the review of similar offest projects, IWC believes thatthe Company’s initial 18,000-hectare Managed Forest Projectwill generate $4-6 million per year in carbon credit revenue,depending primarily on the CCX trading price.

3 http://assets.panda.org/downloads/vcm_report_final.pdf4 http://www.theccx.com/docs/offsets/General_Offsets_faq.pdf


IWC and sustainability

Amazonia contains more than 5 million square kilometers of trees andvegetation, making it the largest continuous expanse of tropical rain forestin the world. Although such forests cover only 7 percent of the land surfaceof the planet, they contain 50 percent of the plants and animals found in theworld.Due to the unique heritage of the rainforest, IWC intends to operate in themost sensitive ecological manner and will dedicate a portion of its netprofits to research that will identify new products of Amazonia. The Companywill not engage in “strip cutting” of the any Amazon lands. Instead, IWC willemploy a “select cut” technique, harvesting only mature trees with anidentifiable commercial market. After harvest, the Company will reforest withnew trees. Through the Company’s sustainability program, timber resources willbe renewed and increased.Local waterways and existing roads will be used for transporting logs tosawmills. Use of the rivers and existing road structure will be economical andconvenient, with little environmental impact.

Government regulations

IWC has secured or is in the process of securing the governmental permits,licenses and approvals necessary to harvest, process and export tropicalhardwoods at a rate of up to 80,000 cubic meters per year. The Company plansto export approximately 40,000 cubic meters from IWC lands in its firstcomplete year of operation.A long-standing Brazilian ban on the export of tropical wood logs will notaffect the Company's operations – IWC will only export processed lumber.The Company is unaware of any pending legislation in Brazil or the UnitedStates that would have an adverse impact on the proposed operations.As the Company is resident and organized under the laws of the United Statesthere is no restriction of profits or capital with respect to any aspect ofthe Company's business in Brazil.

Management team

IWC has an outstanding management team with forest management experience and asuccessful entrepreneurial track record. An important use of investmentproceeds will be the attraction of certain new key employees, includingadditional management executives. In anticipation of funding, the Company hasinitiated discussion with a few outstanding candidates for these positions.The Company’s CEO and director, David Lilly, was one of the founders of andlegal counsel to the predecessor to IWC. Roy Schwartz, the Company’s


president, is a retired Certified Public Accountant, an investor in multiplereal estate ventures, and a venture capitalist.Zafquir Latkha is an international finance expert who has been involved inmore than $500 million in development in Dubai and other Middle Easternnations, and holds an MBA from University of Miami. Harvey Scholl, Esq., theCompany’s chief legal counsel is a practicing attorney specializing ininternational investments, currently representing clients with more than onebillion dollars in international investments worldwide.Esther Bittelman, the Company’s Secretary, is director of Gorski Sober LivingCenters, and affiliated company. Dennis Thomas is president of GeothermalPower of America, Inc., and has been named businessman of the year by Inc.Magazine and Entrepreneur of the Year by Business Week. J. Bittelman is anexperienced operations manager and US Agent for the Company, specializing inpublic relations.The Company’s director of Brazilian operations, Elliott Sassoon, has more than25 years of experience in the Brazilian lumber industry. Mr. Sassoon isrecognized for implementing large forestry, pulp and paper operations inBrazil. He is well connected to Brazilian forest, lumber and environmentalentities, as well as political and governmental agencies. In the early 1980s,Mr. Sassoon served as vice president of the West Amazon Lumber ExportersAssociation.The Company’s VP of Brazilian Operations, I. Motta, has been involved in thelumber and fine wood export field for over 25 years. He is presently presidentof the Pyramid Group of Companies, with control over 720,000 hectares ofmanaged forest in Brazil. He is a recognized expert in both forestry andcarbon credit producing managed forest development.


Financial plan

IWC is seeking combined equity participation and/or credit line of $12 millionfor applying to CCX, carbon credit verification, land acquisition,construction, sales and marketing, and operating costs for the first threeyears. Interest only payments will be made on any line of credit through thefirst three years, after which any initial debt will be repaid throughpermanent financing or through a convertible debt structure. The projectedmarket value of the project after three years is $36 million.The Company has all the equipment, personnel, timber and customers to operateits business. This working capital will allow the export of approximately40,000 cubic meters per year, with a market value of approximately $5 millionannually. The present holdings of the Company will allow harvesting at thislevel for a period of 40 years.The Company plans to retain a portion of its earnings, so that IWC will beself-financed after a period of five years.

Investor opportunity. For an initial investment of $12million, the project will generate an estimated $30,000,000 inrevenue (see Appendix A) during the first three years ofoperation.

Summary of financial projections

As the principal business of the Company is sale and export of tropicalhardwoods in the global market all transactions are done in dollars. This isalso the currency used by the Chicago Climate Exchange.

2008 2009 2010 2011 2012 Carbon credits -$ 122,400,000$ 122,400,000$ 122,400,000$ 122,400,000$ Lumber sales -$ 44,000,000$ 44,000,000$ 44,000,000$ 44,000,000$ Total Revenue -$ 166,400,000$ 166,400,000$ 166,400,000$ 166,400,000$ Direct Expenses -$ 25,800,000$ 25,800,000$ 25,800,000$ 25,800,000$ Gross Profit -$ 140,600,000$ 140,600,000$ 140,600,000$ 140,600,000$ Gross Profit (%) - 84% 84% 84% 84% Other Expenses 733,750$ 4,042,200$ 4,060,920$ 4,081,248$ 4,103,854$ EBITDA (733,750)$ 136,557,800$ 136,539,080$ 136,518,752$ 136,496,146$ Depreciation $0 $0 $0 $0 $0 Income Tax Expense -$ 40,747,230$ 40,961,720$ 40,955,640$ 40,948,840$ Net Income (733,750)$ 95,810,570$ 95,577,360$ 95,563,112$ 95,547,306$ Net profit (%) - 58% 57% 57% 57%

Corporate structure and headquarters

IWC is a C corporation registered in the state of Colorado. All inquiriesshould be directed to:

Roy I. Schwartz, President and DirectorInternational Wood Corporation


8358 W. Oakland Park Blvd, Suite 100Sunrise, FL 33351+1 954 224 7475http://www.iwcusa.net


Carbon Market OverviewGreenhouse effect

If the Earth had no atmosphere, its average surface temperature would be verylow—approximately -18 deg C, rather than the comfortable 15 deg C found today.The difference in temperature is due to a family of gases called greenhousegases that affect the overall energy balance of the Earth by absorbinginfrared radiation. In its existing state, the Earth’s atmospheric systembalances absorption of solar radiation by emission of infrared radiation tospace. Due to greenhouse gases, the atmosphere absorbs more infrared energythan it re-radiates to space, resulting in a net warming of the Earth’ssurface temperature. This is the Natural Greenhouse Effect. With more greenhousegases released to the atmosphere due to human activity, more infraredradiation is trapped in the Earth's surface, contributing to the EnhancedGreenhouse Effect.Individual greenhouse gases affect the energy balance differently. In order toassist policymakers in measuring the impact of various greenhouse gases onglobal warming, the Intergovernmental Panel on Climate Change (IPCC)introduced the concept of Global Warming Potential (GWP) in its 1990 report.5 GWPreflects the relative strength of individual greenhouse gases with respect toits impact on global warming. It is defined as the cumulative radiative forceover time caused by a unit mass of greenhouse gas emitted now, expressedrelative to CO2.

Greenhouse gases

Greenhouse gases are essential to maintaining the temperature of the Earth.However, an excess of greenhouse gases can raise the temperature of a planetto lethal levels.6 Greenhouse gases are produced by many natural andindustrial processes, which today result in CO2 levels of 380 ppmv7 in theatmosphere. Based on ice-core samples and records, current levels of CO2 areapproximately 100 ppmv higher than during immediately pre-industrial times,when direct human influence was negligible.On Earth, the most abundant greenhouse gases are (in order of relativeabundance):

6. Water vapor 7. Carbon dioxide

5 http://www.hko.gov.hk/wxinfo/climat/greenhs/e_grnhse.htm6 On Venus, for example, the 90 bar partial pressure of carbon dioxide (CO2) contributes to a surface temperature of about 467 deg C (872 deg F).7 Parts per million, by volume.


8. Methane 9. Nitrous oxide 10. Ozone 11. CFCs

The most important greenhouse gases are:1. Water vapor—causes between 36 percent and 70 percent of the greenhouse

effect 2. Carbon dioxide—causes between 9 percent and 26 percent 3. Methane—causes between 4 percent and 9 percent4. Ozone—causes between 3 percent and 7 percent

Note that this is a combination of the strength of the greenhouse effect ofthe gas and its abundance. For example, methane is a much stronger greenhousegas than CO2, but present in much smaller concentrations. It is not possible to state that a certain gas causes a certain percentage ofthe greenhouse effect, because the influences of the various gases are notadditive. (The higher ends of the ranges quoted are for the gas alone; thelower ends, for the gas counting overlaps.)

Kyoto Protocol

The Kyoto Protocol is an international agreement linked to the United NationsFramework Convention on Climate Change8. The major feature of the KyotoProtocol is that it sets binding targets for 37 industrialized countries andthe European community for reducing greenhouse gas (GHG) emissions. Theseamount to an average of 5.2 percent against 1990 levels over the five-yearperiod between 2008 and 2012. Recognizing that developed countries are principally responsible for thecurrent high levels of GHG emissions in the atmosphere as a result of morethan 150 years of industrial activity, the Protocol places a heavier burden ondeveloped nations under the principle of common but differentiated responsibilities. The Kyoto Protocol was adopted in Kyoto, Japan, on December 11, 1997, andentered into force on February 16, 2005. More than 180 nations have ratifiedthe treaty to date, with the United States as the most notable exception. Thedetailed rules for the implementation of the Protocol were adopted at inMarrakech in 2001, and are called the Marrakech Accords.According to the Kyoto Protocol, GHG emissions can be reduced by:

Reducing domestic emissions, drawing on a wide range of policies andmeasures (e.g., carbon tax, carbon trading, standards, subsidies, etc.)

Trading (Article 17) emission permits Assigned Amount Units (AAUs) amonggovernments (Article 3)

8 http://unfccc.int/kyoto_protocol/items/2830.php


Purchasing emission reductions credits from Clean Development Mechanism(CDM) and Joint Implementation (JI) projects.

Emissions trading (ET)Parties with commitments under the Kyoto Protocol (Annex B Parties) haveaccepted targets for limiting or reducing emissions. These targets areexpressed as levels of allowed emissions, or assigned amounts, over the 2008-2012commitment period. The allowed emissions are divided into Assigned Amount Units(AAUs).Emissions trading, as set out in Article 17 of the Kyoto Protocol, allowscountries that have emission units to spare—i.e., emissions permitted but notused—to sell this excess capacity to countries that exceed their targets.9

Thus, a new commodity was created in the form of emission reductions orremovals. Since carbon dioxide is the principal greenhouse gas, people speaksimply of trading in carbon. Carbon is now tracked and traded like any othercommodity. This is known as the Carbon Market.

Joint Implementation (JI)The mechanism known as Joint Implementation (JI), defined in Article 6 of theKyoto Protocol, allows a country with an emission reduction or limitationcommitment under the Kyoto Protocol to earn emission reduction units (ERUs) from anemission-reduction or emission removal project in another Annex B Partycountry, each equivalent to one ton of CO2, which can be counted towardsmeeting its Kyoto target.10

Joint implementation offers Parties a flexible and cost-efficient means offulfilling a part of their Kyoto commitment, while the host Party benefitsfrom foreign investment and technology transfer.

The Clean Development Mechanism (CDM)11

The Clean Development Mechanism (CDM), defined in Article 12 of the Protocol,allows a country with an emission-reduction or emission-limitation commitmentunder the Kyoto Protocol to implement an emission-reduction project indeveloping countries. Such projects can earn saleable certified emission reduction(CER) credits, each equivalent to one ton of CO2 (tCO2), which can be countedtowards meeting Kyoto targets.The mechanism is seen by many as a trailblazer. It is the first global,environmental investment and credit scheme of its kind, providing astandardized emissions offset instrument, the CER.

9 http://unfccc.int/kyoto_protocol/mechanisms/emissions_trading/items/2731.php10 http://unfccc.int/kyoto_protocol/mechanisms/joint_implementation/items/1674.php11 http://en.wikipedia.org/wiki/Clean_Development_Mechanism


A CDM project might involve, for example, a rural electrification projectusing solar panels or the installation of more energy-efficient boilers. Themechanism stimulates sustainable development and emission reductions, whilegiving industrialized countries some flexibility in how they meet theiremission reduction or limitation targets.A CDM project must provide emission reductions that are additional to whatwould otherwise have occurred. The projects must qualify through a rigorousand public registration and issuance process. The designated nationalauthorities give approval. Operational since the beginning of 2006, the mechanism has already registeredmore than 1,000 projects and is anticipated to produce CERs amounting to morethan 2.7 billion ton of CO2 equivalent in the first commitment period of theKyoto Protocol (2008–2012).12

The CDM is supervised by the CDM Executive Board (CDM EB) and is under theguidance of the Conference of the Parties (COP/MOP) of the United NationsFramework Convention on Climate Change (UNFCCC).The CDM gained momentum in 2005 after the entry into force of the KyotoProtocol. Before the Protocol entered into force, investors considered this akey risk factor. The initial years of operation yielded fewer CDM credits thansupporters had hoped for, as Parties did not provide sufficient funding to theEB. This left it understaffed.The Adaptation Fund was established to finance concrete adaptation projects andprograms in developing countries that are Parties to the Kyoto Protocol. TheFund is financed with a share of proceeds from clean development mechanism(CDM) project activities and receives funds from other sources. In the CDM system, a Certified Emission Reduction (CER) accounts for thetrading amount (1 ton CO2 = 1 CER). Offset providers and carbon credit buyerscalculate the amount of trade by CERs. An offset providing candidate has to gothrough the 8 steps in the validation process13:

1. Project Formulation—the project is described in the project design document(PDD)

2. National approval by Designated National Authority (DNA)3. Validation by Designed Operational Entity (DOE)4. Registration5. Monitoring—systematic surveillance of project performance by project

participants6. Verification by DOE—periodic independent review of emission reductions7. Certification by DOE

12 http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php13 http://www.wbcsd.org/DocRoot/ZKZmI5uWD1gwkb3QVPV5/CDM_TERI.pdf


http://www.wbcsd.org/DocRoot/ZKZmI5uWD1gwkb3QVPV5/CDM_TERI.pdf

8. Issuance of CERs—the offset provider is required to submit a 2 percentshare of proceeds for Adaptation Fund.

Emission trading scheme (ETS)14

The World Bank, one of the main players in carbon financing, estimates thevalue of carbon traded in 2005 to be about $10 billion. The Bank believes thecarbon market has the potential to bring more than $25 billion in newfinancing for sustainable development to the poorest countries and thedeveloping world.Trading firms, brokers and banks are among those expected to make moneythrough commissions for organizing carbon deals. The Bank's own carbon financefund has more than doubled from $415 million in 2004 to $915 million lastyear.There are two main ways to exchange carbon. The first is what is called a cap-and-trade scheme whereby emissions are limited and can then be traded. UnderKyoto developed countries can trade between each other. The European Trading Scheme (ETS) is a cap-and-trade scheme and the largestcompanies-based scheme around. It is mandatory and includes 12,000 sitesacross the 25 European Union member states. It came into force in 2005 andcovers heavy industry and power generation, including non-European companies. Beside cap-and-trade, there are also voluntary cap-and-trade schemes—the ChicagoClimate Exchange (CCX) is such a scheme. (Interest in carbon trading atregional level is increasing in America, even though the U.S. governmentdecided not to ratify Kyoto.) The UK also has its own voluntary scheme, forwhich companies cut their emissions in return for incentive payments. The second main way of trading carbon is through credits from projects thatcompensate for or offset emissions. The Kyoto protocol's Clean DevelopmentMechanism (CDM), for example, allows developed countries to gain emissionscredits for financing projects based in developing countries. The JointImplementation (JI) mechanism also involves project-based schemes whereby onecountry can receive emissions credits for financing projects that reduceemissions in another developed country.

Market structure and market players

Emissions trading is poised to become one of the key tools to support thetransition to a low- carbon economy. As countries take steps toward meetingtheir commitments under the Kyoto Protocol, the global carbon market hasexperienced extremely rapid growth over the past few years. Strong market growth continued in 2007 as the market more than doubled invalue at $64 billion, compared to $31 billion in 2006 and almost $11 billionin 2005.

14 http://news.bbc.co.uk/2/hi/business/4919848.stm


http://news.bbc.co.uk/2/hi/business/4919848.stm

The following diagram shows some of the players and institutions active in thecarbon market:

Exchange centers

European Union Greenhouse Gas Emissions Trading Scheme (EU ETS)15

In January 2005, the European Union Greenhouse Gas Emission Trading Scheme (EUETS) commenced operation as the largest multi-country, multi-sector GHGemissions trading scheme in the world. The scheme is based on Directive2003/87/EC (October 2003).Allowances traded in the EU ETS are not printed but held in accounts inelectronic registries set up by Member States. A Central Administrator at EUlevel oversees these registries. The Administrator, via the Communityindependent transaction logs, checks each transaction for any irregularities.In this way, the registries system keeps track of the ownership of allowancesin the same way as a banking system keeps track of the ownership of money.The EU ETS is a major pillar of EU climate policy. The ETS currently coversmore than 10,000 installations in the energy and industrial sectors that arecollectively responsible for close to half of the EU's emissions of CO2 and 40percent of its total greenhouse gas emissions.

15 http://ec.europa.eu/environment/climat/emission.htm


European Climate Exchange (ECX)16

The European Climate Exchange (ECX) manages marketing and product developmentfor ECX Carbon Financial Instruments (ECX CFIs), listed and admitted totrading on the ICE Futures Europe's electronic platform. ECX/ICE FuturesEurope is the most liquid platform for carbon emissions trading, attractingover 85 percent of the exchange-traded volume in the European carbon market.ECX CFI Contracts include standardized futures and options based on EUAllowances (EUAs) and Certified Emission Reductions (CERs). More than 90leading businesses have signed up for membership to trade ECX products. Inaddition, several thousand ICE clients can access the emissions market dailyvia banks and brokers.ECX volumes for EUA and CER Contracts are experiencing increasing growth.Since its launch in April 2005, the ECX EUA Futures Contract alone has seenover 2 billion tCO2 traded on the platform with an underlying market value of€24 billion. The cash value of carbon traded worldwide grew from US$33 billionin 2006 to US$60 billion in 2007.17

ECX is a member of the Climate Exchange Plc group of companies. Other membercompanies include the Chicago Climate Exchange (CCX) and the Chicago ClimateFutures Exchange (CCFE). Climate Exchange Plc (CLE) is listed on the AIMmarket of the London Stock Exchange.

Nord Pool18

The business of the Nordic power exchange is to provide a marketplace fortrading in physical and financial contracts in the Nordic countries (Finland,Sweden, Denmark and Norway). Its physical market accounts for over 60 percentof the total value of the Nordic region’s power consumption. Price formationin the physical market provides players in the financial market with acredible and secure reference price for financially settled contracts. Thismakes Nord Pool’s physical and financial markets far more liquid than anyother European power exchange. Exchange services are offered through the NordPool group, which comprises Nord Pool ASA and Nord Pool Spot AS. Nord Poolalso provides a carbon market, being the first exchange in Europe to offerstandardized contracts for emission allowances (EUA) and carbon credits (CER).Nord Pool Spot AS and its subsidiaries Nord Pool Finland Oy and Nord Pool SpotAB are owned by the national grid companies Fingrid, Energinet.dk, Statnett,Svenska Kraftnät and Nord Pool ASA (twenty percent ownership for each). TheNord Pool group has offices in Lysaker (Oslo), Fredericia, Stockholm,Helsinki, Berlin and Amsterdam.The Nord Pool group has more than 420 members in total, including exchangemembers, clearing clients, members and representatives in 20 countries.

16 http://www.europeanclimateexchange.com/default_flash.asp17 Point Carbon.18 http://www.nordpool.com/en/asa/General-information/


Chicago Climate Exchange (CCX)19

Chicago Climate Exchange (CCX), launched in 2003, is the world’s first andNorth America’s only active voluntary, legally binding integrated tradingsystem to reduce emissions of all six major greenhouse gases (GHGs), withoffset projects worldwide. CCX Members are leaders in greenhouse gas (GHG) management and represent allsectors of the global economy, as well as public sector innovators. Reductionsachieved through CCX are the only reductions made in North America through alegally binding compliance regime, providing independent, third partyverification by the Financial Industry Regulatory Authority (FINRA, formerlyNASD). The founder, Chairman and CEO of CCX is economist and financialinnovator Dr. Richard L. Sandor, who was named a Hero of the Planet by TimeMagazine in 2002 for founding CCX, and in 2007 as the "father of carbontrading."CCX emitting Members make a voluntary but legally binding commitment to meetannual GHG emission reduction targets. Those who reduce below the targets havesurplus allowances to sell or bank; those who emit above the targets comply bypurchasing CCX Carbon Financial Instrument (CFI) contracts. The commodity traded at CCX is the CFI contract, each of which represents 100metric tons of CO2 equivalent. CFI contracts are comprised of ExchangeAllowances and Exchange Offsets. Exchange Allowances are issued to emittingMembers in accordance with their emission baseline and the CCX EmissionReduction Schedule. Exchange Offsets are generated by qualifying offsetprojects.

New South Wales (NSW)20

The NSW Greenhouse Gas Abatement Scheme (GGAS) commenced in January 2003. Itis one of the first mandatory greenhouse gas emissions trading schemes in theworld. GGAS aims to reduce greenhouse gas emissions associated with theproduction and use of electricity. It achieves this by using project-basedactivities to offset the production of greenhouse gas emissions.In November 2005, the Premier confirmed the Government’s commitment to extendthe NSW Greenhouse Gas Abatement Scheme to 2020 and beyond. The decision toextend the scheme recognizes the need to provide certainty to investors ingreenhouse gas abatement activities.GGAS establishes annual statewide greenhouse gas reduction targets, and thenrequires individual electricity retailers and certain other parties who buy orsell electricity in NSW to meet mandatory benchmarks based on the size oftheir share of the electricity market. If these parties, known as benchmark19 http://www.chicagoclimatex.com/content.jsf?id=82120 http://www.greenhouse.nsw.gov.au/actions/agencies/pricing_and_regulatory_tribunal/greenhouse_gas_abatement_scheme


participants, fail to meet their benchmarks, then a penalty is assigned. TheIndependent Pricing and Regulatory Tribunal of NSW (IPART) monitors theperformance of benchmark participants in its role as Compliance Regulator.

Case studies

The Pacific Forest Trust’s Forests Forever Fund21

The Pacific Forest Trust, founded in 1993 and now celebrating 15 years ofconservation and climate solutions, is the only organization solely dedicatedto conserving America’s working forests for all their public benefits—wood,water, wildlife, and a well-balanced climate. They strive to keep forestsworking by pursuing a comprehensive strategy to “retain, sustain and gain”.They help retain our forest infrastructure by raising awareness of the threatsto America’s private working forests and by directly conserving criticalforestlands in partnership with landowners and communities in California,Oregon and Washington. They lead the country in the use of working forestconservation easements that ensure productive forests stay working. They alsohelp protect the integrity of important public forests by conservingneighboring private lands threatened by development. To date, they haveconserved more than 50,000 acres of forestlands.They help both landowners and the public gain from working forests bydeveloping and promoting new forest eco-services. These forest eco-servicesserve as the basis for a sustainable business model that yields financialreturns from management practices that reduce forest-based carbon dioxide(CO2) emissions, watershed quality, and fish and wildlife habitat. In this category, the Pacific Forest Trust is especially focused on advancingthe climate benefits of forests. By leading regional and national efforts toenact climate change policies that unite conservation and management withmarket-based incentives to reduce greenhouse gas emissions, they are promotingthe positive role forests can play to help mitigate global warming. Thisleadership has led to the creation of a first-in-the-nation, California-basedprogram that allows forest landowners to register and sell CO2 emissionsreductions generated by conservation and sustainable management.

Western Oregon Carbon Sequestration Project22

Oregon was the first state to establish a regulation of GHG emissions frompower production. In 1997, Oregon passed House Bill 3283, creating the OregonClimate Trust, requiring new power plants to offset their CO2 emissions byapproximately 17 percent. Emitters may finance the Oregon Climate Trust to undertake mitigation projectsto offset emissions. Many of these offset projects include fuel efficiencyimprovements, as well as forestry sequestration projects.

21 http://www.pacificforest.org/about/index.html22 http://204.154.137.14/energy-analyses/pubs/slfinal_1.pdf


http://204.154.137.14/energy-analyses/pubs/slfinal_1.pdf

http://www.pacificforest.org/about/index.html

In April 2004, Washington passed House Bill 3141, which requires new powerplants rated 25 MW or greater to offset 20 percent of their CO2 emissions over30 years of plant operations. Similar to Oregon law, Washington power plantoperators may opt to pay a state-approved third party at the rate of $1.60 pertCO2 for offset projects. The Oregon offset rate was $0.57 per tCO2 at the inception of House Bill 3283,subject to a 50 percent increase or decrease by the Oregon Energy FacilitySiting Council in any two-year period after 2000. Although Massachusetts andNew Hampshire also have CO2 emissions restrictions for power plants in theirmulti-pollutant emissions legislation, they do not explicitly definemechanisms for power plant operators to reduce emissions. Massachusetts 310CM4 7.29, passed in April 2001, restricts CO2 emissions to 1,800 pounds perMWh by 2008 with an overall goal of reducing total plant emissions by 10percent. New Hampshire HB 284, passed in January 2002, requires a return to1990 emissions levels by the end of 2008.

Peugeot in Brazil23

Peugeot has teamed up with two service providers to implement this majorenvironmental project. The first, I'Office National des Forets (ONF), isrecognized internationally for its technical expertise and is one of theleading managers of public forests in the world. The second, Pro-NaturaInternational, is a Franco-Brazilian non-governmental organization (NGO) basedin Paris, with experience in protecting tropical forests and promoting forestmanagement systems in more than 25 countries.The program puts into action the carbon sink concept discussed at the KyotoConference on climate change and represents a tangible contribution byindustry to controlling global warming. The carbon sink concept entailsrecreating ecosystems that can absorb large amounts of the excess carbondioxide (CO2) from the atmosphere. This concept complements measures tomitigate the greenhouse effect by reducing emissions at the source.The carbon sink will be created in Juniena, Mato Grosso state. It will cover12,000 hectares (nearly twice the area of Paris) and have a carbon storagecapacity of 50,000 metric tons per year, which corresponds to 183,000 metrictons CO2 per year equivalent. ONF has provided a 40-year guarantee to Peugeot.A system of internal and external assessment through independent audits isplanned to ensure that the agreed targets are met.Special care will be taken to integrate the project into the region's socio-economic environment, as this is a key success factor. The carbon sink willnot be created from scratch but will include three components: 5,000 hectaresof deforested farm land that will be fully replanted, 7,000 hectares of oldand second-growth forest, and managed forest lands.

23 Peugeot will invest FF65 million in the project, which is the first of its kind worldwide by its size and organization. http://www.cwn.org.uk/motoring/peugeot/1998/10/981012-carbon-sink.htm


http://www.cwn.org.uk/motoring/peugeot/1998/10/981012-carbon-sink.htm

Carbon Market AnalysisClimate change captured the public’s imagination in 2007, as a major reportprepared by the Intergovernmental Panel on Climate Change (IPCC), a NobelPeace Prize and the launch in Bali of the negotiation process for a post-2012climate change regime, contributed to making climate change a key part of theglobal economic and environmental debate. January 1, 2008 also marked theformal start of the compliance period of the Kyoto Protocol and of Phase II ofthe European Union Emission Trading Scheme (EU ETS).

The carbon market (volumes and values)

The carbon market is the most visible result of early regulatory efforts to mitigate climate change. Regulation constraining carbon emissions has spawned an emerging carbon market that was valued at $64 billion in 2007.24

24 State and Trends of the Carbon Market 2008, supported by resources from the CF-Assistprogram managed by the World Bank Institute.


Market growth

The carbon market’s biggest success thus far has been to send market signalsfor the price of mitigating carbon emissions. This in turn has stimulatedinnovation and carbon abatement worldwide, as motivated individuals,communities, companies and governments have cooperated to reduce emissions.

Allowance marketsThe EU ETS market has been successful in its mission of reducing emissionsthrough internal abatement at home25, and of stimulating emission reductionsabroad. The European Commission, learning from the experience of Phase I, hasstrengthened several important design elements for EU ETS Phase II. Along withrecent EU proposals for Phase III26, these improvements include tighteremission targets, stronger flexibility provisions for compliance (at least forEU Allowances, or EUA, although not for project-based credits), more attentionto internal EU harmonization and, most importantly, longer-term visibility foraction to reduce emissions until 2020. These proposed reforms have helpedcreate confidence in emissions trading as a credible and cost-effective toolof carbon mitigation.27 In 2007, $50 billion in Phase II allowances and derivative contracts weretraded over-the counter, bilaterally, and, increasingly on exchange platformsthat publish transparent data about price formation in the markets.28 Energyutilities and industrial companies hedged their carbon exposure by buying theEUA and financial companies bought and sold the EUA for their clients (“flowtrading”) and for their own account (“proprietary trading”).

Project-based markets In 2007, buyers also continued to show a strong appetite for primary project-based emission reductions, reflected by continued growth in the projectpipeline showing that 68 countries had identified and offered to reduce 2,500million ton of carbon dioxide equivalent (MtCO2e) through more than 3,000projects. This potential supply received strong interest, mainly from privatesector buyers and investors, who in 2007 transacted 634 MtCO2e from primary

25 D. Ellerman and B. Buchner (2008). Over-Allocation or abatement? A Preliminary Analysis of the EU ETS Based on the 2005-06 Emissions Data, Environmental and Resource Economics, forthcoming.26 On January 23, 2008 the European Commission proposed the "Climate action and renewable energy package", a pillar of its climate change strategy with a vision to 2020 and beyond.27 Australia, Japan and others announced that they too would develop their ownemissions trading schemes (ETS).28 The major European carbon marketplaces are the European Climate Exchange (ECX) and the London Energy Brokers Association (LEBA). Markets and exchanges also emerged around the world, including New York, New Delhi & Mumbai, India and elsewhere.


project-based transactions (up 8 percent from 2006) for a corresponding valueof $8.2 billion, up 34 percent from 2006.

Compliance-driven market CDM accounted for the vast majority of project-based transactions (at 87percent of volumes and 91 percent of values) and JI saw transacted volumesdoubling and values tripling in 2007 over the previous year. The CDM alone sawprimary transactions worth $7.4 billion, with demand coming mainly fromprivate sector entities in the EU, but also from EU governments and Japan. Thevoluntary markets, supporting activities to reduce emissions not mandated bypolicymakers, also saw transacted volumes doubling to 42 MtCO2e and valuetripling to $265 million in 2007. There were reports of growing demand forvoluntary “pre-compliance” credits for U.S.-based forestry projects under theCalifornia Climate Action Registry (CCAR).

China dominates, Africa emerges China was again the biggest seller, and expanded its market share of CDMtransactions to 73 percent. Countries in Africa (5 percent) and Eastern Europeand Central Asia (1 percent) emerged in the carbon market and offered buyersan opportunity to diversify their China-overweight portfolios. The share ofIndia and Brazil (6 percent) reflected a preference from some sellers favoringthe sale of already issued Certified Emission Reductions (CER), of which thereare a total of only 130 MtCO2e in the market so far.

CDM delivers on clean energyCarbon contracts from clean energy projects (energy efficiency and renewableenergy) accounted for nearly two-thirds of the transacted volume in theproject-based market, appropriately reflecting the CDM’s mission of supportingemission reductions and sustainable development. These project types typicallyuse sound, road-tested technology, are operated by utilities or experiencedoperators, and have predictable performance, resulting in CER issuances thatare expected to yield between 70-90 percent of expected Project DesignDocument (PDD) volumes, based on current expectations. This explains why theyare being targeted by buyers, now that the known industrial gas project typeshave been more or less contracted.

Prices and price differentiation The growth in transacted values reflected higher prices for primary forwardcontracts, which had an average price of €10 in 2007. Prices for primarymarket forward transactions were in the range of €8-13 in 2007 and early 2008.The generally higher prices reflected the intense competition and activity inthe global market to encourage projects that reduce global emissions. Pricesin the higher end of that range typically rewarded projects that were furtheralong in the CDM process (such as registered projects), projects that werebeing developed by experienced and established sponsors (low credit risk andperformance risk), and/or for projects with high expected issuance yields.


Spot contracts of issued Certified Emission Reductions were transacted at €16-17, a nice premium to the primary CER, but still at a discount to the EUA,reflecting a combination of the impact of the European Commission’s 2020proposal the time value of money, and some remaining procedures related to thedelay in connectivity of the International Transaction Log (ITL) to the EU.

Climate-friendly investment Analysts estimated that $9.5 billion were invested in 2007 in 58 public andprivate funds that either purchase carbon directly or invest in projects andcompanies that can generate carbon assets. The total capitalization of carbonvehicles could reach $13.8 billion in 2008, with 67 such carbon funds andfacilities. This capital inflow was characterized by a substantial increase inthe number of funds seeking to provide cash returns to investors and by morefunds getting involved earlier in the project development process, takinglarger risks through equity investment in expectation of larger returns.29 In2007 alone, CDM leveraged $33 billion in additional investment for cleanenergy, which exceeded what had been leveraged cumulatively for the previousfive years since 2002.

Secondary marketsThe biggest overall market development in 2007 and early 2008 was theemergence of the secondary markets. In 2007, as a wide range of proceduraldelays and risks of CER registration and issuances grew, the carbon marketinnovated by providing portfolio-based guarantees. In these transactions, asecondary seller, typically a market aggregator, sold guaranteed CER (gCER)contracts that were secured through a slice of its carbon portfolios. Theseguarantees were also usually credit-enhanced through the balance sheet of ahighly-rated bank engaged by the secondary seller for this purpose.30

Some banks originated CER through spot contracts and sold gCER contractsforward, making small margins on a large number of transactions. This segmenthad greater price transparency and gCER contracts were listed on majorexchanges.

Market challenges

At the end of March 2008, there were 3,188 projects in the CDM pipeline, ofwhich roughly one-third are registered (978), or in the process ofregistration (188) while roughly two-thirds are at validation stage (2,022).The project-based market became, in some ways, a victim of its own success and

29 T I. Cochran and B. Leguet (2007). Carbon Investment Funds: The Influx of Private Capital, Mission Climat Caisse des Dépôts (Paris:France).30 Some aggregators and banks also provided services warehousing, selling or swapping other tranches of the risk with partial guarantees. Some banks also structured equity- or debt-like notes to institutional investors looking for some exposure and diversification to carbon.


obtaining timely CER issuance proved to be quite challenging in 2007. Marketinfrastructure and institutions as well as regulators are struggling to keeppace with the huge momentum of CDM supply. Increased scrutiny by the CDMExecutive Board contributed to further delays.

Procedural delays in the CDM In spite of its success, or perhaps because of it, the carbon market cameunder close public scrutiny in 2007. The success of the CDM was weighed downby a creaking infrastructure that, despite efforts to streamline it, is stillstruggling to process the overwhelming response from project developersworldwide in a timely manner.Procedural inefficiencies and regulatory bottlenecks have strained thecapacity of the CDM infrastructure to deliver sufficient CER volumes onschedule, as too many projects await registration and issuance:

Out of 3,188 projects in the currently pipeline, 2,022 are at validationstage.

Market participants report that it is currently taking them up to sixmonths to engage a Designated Operational Entity (DOE), causing largebacklogs of projects even before they reach the CDM pipeline.31

Projects face an average wait of 80 days to go from registration requestto actual registration. The Executive Board has requested a review ofseveral projects received for registration, has rejected some of them,and has asked project developers to re-submit their projects using newlyrevised methodologies. There is a very short grace period allowed tograndfather the older methodology, and the additional work adds todelays and backlogs.

Projects are currently taking an average of one to two years to reachissuance from the time they enter the pipeline. Over 70 percent ofissued CER volumes come from industrial gas projects, with the vastmajority of energy efficiency and renewable energy projects remainingstuck somewhere in the pipeline.

Complex rules and the capacity constraint DOEs, who are accredited to validate and verify CDM projects, are unable tokeep up with a large backlog of projects awaiting registration, and arefinding it difficult to recruit, train and retain qualified, technical staffto apply the complex rules consistently. As a result, some projects have been31 DOEs report staffing shortages, especially for hiring and retaining trainedtechnical staff with appropriate language skills (for example, in Chinese). The process for accreditation of a new DOE, for example, a national accreditor, requires an application fee of €150,000. Since the accreditation process takes eighteen months or more, it would only make sense for a company to apply to become a DOE if it had confidence in market continuity since that would impact their long-term business viability beyond 2012.


registered incorrectly, resulting in a call for more reviews being requestedby the CDM Executive Board, which, in turn, causes even more delays.Important concerns have been voiced about CDM on issues of its additionality,its procedural efficiency and ultimately, its sustainability. Some critics ofthe CDM maintain that its rules are too complex, that they change too oftenand that the process results in excessively high transaction cost; they askfor relief from the rules. Other critics question whether certain projectactivities are truly additional, or whether CDM can create perverseincentives; they ask for even more rules.

Delays can and do impact carbon payments CDM project registration and CER issuances are generally lower and slower thanexpected and regulatory efforts to reform and streamline the process areurgently needed.9It can take between one and two years for a project to go from validation toregistration and technical delays. This does not even include the six monthsor so that it is taking to book the services of a DOE. Project delays costproject developers valuable financial resources, cost buyers valuable emissionreductions and can delay desired environmental outcomes. Delays for any reason—since payment for carbon is often linked to delivery—can put elements of thefinancing package of projects in jeopardy. This, in turn, may further impacton the expected delivery schedule, not to mention dampening the enthusiasm forfurther innovation, which is urgently needed to mitigate climate change.Clearing bottlenecks and accelerating the application of necessary procedureshas become a priority challenge.

Private companies and commercial risks There is a troubling tendency of some companies in the market to point afinger at the CDM and to hold its procedural delays to be solely responsiblefor the poor performance of their companies. In a market where the“production” of the asset or commodity is not in the control of marketplayers, but rather in the hand of a regulator, the risk of regulatory delaymust be treated as a core element of commercial risk. Some companies clearlymade incorrect and imprudent commercial decisions, for example, by taking onexcessive risk or burning too much cash, or guaranteeing too many CERs fordelivery by a certain date against penalties without adequate risk management.Their commercial contracts should balance the risks and rewards of variousparties. While the carbon regulatory infrastructure clearly needs reform, itis simply wrong to blame the regulator for all problems. Companies also haveto examine at the appropriateness of their commercial and business decisions.


Key market trends

Carbon market momentum is strong for now After some growing pains in its first phase, the EU ETS has created a robuststructure to cost- effectively reduce greenhouse gas emissions. Created byregulation, the carbon market’s biggest risk is caused, perversely, by theabsence of market continuity beyond 2012 and this can only be provided bypolicymakers and regulators. This will require increased efforts well beyondwhat is envisaged by the current policies of major world emitters.

The CDM is at a crossroads The European Commission’s post-2012 proposal, which strengthened severaldesign elements of the EU ETS, however, did not provide much comfort for theproject-based market, which, after its strongest year yet, finds itself at asignificant crossroad. By linking additional EU ETS demand for CDM and JIcredits to the success of post-2012 global climate change negotiations, theEuropean Commission proposal has the risk, surely unintended, of slowing themomentum for the project-based mechanisms. Under the proposal, the resultingissued CERs and the Emission Reductions Units (ERUs) would be less flexibleand less fungible, limiting their risk management and compliance utility vis-à-vis the EUA. The EUA spread over the secondary CER widened to nearly €10 atthe time of this writing, and even higher for most primary CER contracts. Thekey challenge is not how to reduce the success of the CDM, but rather how toraise the ambition of the world, including the EU, to set science-basedemission reduction targets and meet them cost-effectively.

Time to re-think the CDM The CDM’s biggest strength has been its ability to bring developing anddeveloped countries and the public and private sectors together to reduceemissions cost-effectively. In the years ahead, all countries will want toscale up their efforts to reduce emissions while growing their economies in asustainable manner. As the world considers scaling up serious action to combatclimate change, it would be desirable to re-think the CDM as a helpful toolfor the challenges ahead.

The forest for the trees In its next phase, the CDM needs to move up the learning curve and evolvetoward approaches and methodologies that conservatively estimate emissionreduction trends on the aggregate level, and away from the current focus ontrying to account for every last ton reduced or removed from the atmosphere.The next generation CDM should focus on catalyzing step changes in emissiontrends, and on creating incentives for large-scale, transformative investmentprograms.


Built to last Several jurisdictions, including various states, regions, and countries areconsidering whether and how to link up with international opportunities forreducing emissions. It would be helpful to find ways for them to learntogether from and build on the CDM experience so far, with the goal ofencouraging efficiency, reducing transaction costs, avoiding unnecessaryduplication and creating, from the start, compatible infrastructure withstrong linkages and inter-operability.

Global cooperation on climate change Given enough incentive and a long lead-time, developing countries can deliverlarge volumes of cost- effective emission reductions that can help meetscience-based emission reduction targets. This puts a special responsibilityon countries to cooperate under the Bali Action Plan to reach an ambitiousinternational agreement to reduce emissions. It also makes it important forthe EU, the U.S. and other major emitters to find ways to encourage thecontinued engagement of developing countries in mitigation activities.International negotiators (and regulators of domestic programs) shouldconsider providing incentives for early action with sufficient lead-time todevelop emission reduction programs and projects. The experience of the carbon market so far shows that the private sector iscapable and willing to cooperate in solving the problem, provided thatpolicies are predictable, consistent and transparent and regulations areefficient.

The EU is still far and away the major carbon marketThe EU ETS is the major market for greenhouse gas (GHG) emission allowances,and is the engine, perhaps even the laboratory, of the global carbon market.Its most notable achievement is that it helps discover the price to emit GHGin Europe. Several exchanges now transparently disclose prices at whichallowances change hands: for example, the EUA for December 2008 delivery (EUA-Dec-08) has durably traded in the €20-25 price band since May 2007. This pricesignal also encourages project developers to reduce emissions globally throughclimate-friendly CDM projects in developing countries and JI projects in AnnexB countries that generate carbon credits for sale into the EU ETS. The EU Emission Trading Scheme (EU ETS) continued to dominate the globalcarbon market in 2007, both in transaction volume and monetary value. Morethan two billion EUAs changed hands for a market value of $50 billion in 2007.This corresponds to nearly a doubling in both volume and value transacted in2005.Smaller, but also important, is the continued growth in the voluntary ChicagoClimate Exchange (CCX) which benefited from increased interest and activity asmarket players responded to state-level, regional and federal developments inclimate policy in the U.S. The pioneering New South Wales (NSW) market saw asharp increase in volumes traded, but prices slumped because of a temporary


over-supply of credits and from clarity about transition arrangements toAustralia’s proposed national emissions trading market, which is to beoperational by 2010. New Zealand launched its own ETS, covering all GHG andprogressively including all sectors, starting with forestry in 2008. Japan isreportedly still finalizing the contours of its own emissions trading scheme.

Volumes transacted in the primary market levels off In 2007, buyers continued to show strong interest in the CDM and JI, and thiswas supported by higher flows of capital into the carbon arena. Whiletransacted volumes grew slightly to 634 MtCO2e for finalized primary project-based transactions (up 8 percent from 2006), the value of all primary carbonpurchase transactions was much higher, at $8.2 billion, up 34 percent from2006, a sign of the intense competition and activity in the market.

CDM accounts for most of the project-based market activity (at 87 percent ofvolumes and 91 percent of value transacted). JI and the voluntary market as awhole each experienced a doubling of transacted volumes and a tripling oftransacted values. The dynamic of the project-based market changed in early2008, as buyers became more cautious in response to a combination of mountingdelivery and issuance challenges, higher perceived credit risks amid thegenerally bearish sentiment in the financial markets32, as well as continuinguncertainty about the role of and demand for CDM and JI in the post-2012climate regime(s).These market trends, as well as the limits to demand from the EU ETS have thepotential to leave behind, in particular, projects in poorer countries whichhave only just begun to take advantage of the carbon compliance market. Manyof these sellers have begun to look increasingly toward voluntary and pre-compliance markets for buyers. 32 Through 2006 and H1’07, the number of new projects entering the pipeline (public comment period of the validation stage in the CDM project cycle) grew extremely rapidly, from 35 to a record-breaking 176 by July 2007. Since then, this number decreased sharply and is currently around 100-120 or so.


Annual volumes (MtCO2e) of project-based emission reductions transactions(vintages up to 2012) are shown below:

The buyers

Europe dominatesFor the second consecutive year, European buyers dominated the CDM and JImarket for compliance and at the close of 2007, their market share reachedalmost 90 percent (up from 2006). Private companies have been the most activebuyers, with 79 percent of volume transacted in 2007, up slightly from 77percent in 2006. The most active buyers (large European compliance buyers withinstallations in several countries, project developers and aggregators, aswell as financial institutions with an eye to the booming secondary markets)largely operate or are administered out of London, which, at 59 percent, isstill considered the carbon finance hub of the world (up from 54 percent in2006).

JapanJapan is back in the carbon compliance market with its 2007 market sharenearly doubling from 6 percent to 11 percent of the market, with both publicand private sector intensifying their activity. The Government of Japan hasbeen regularly increasing its funding to the Kyoto Mechanisms CreditAcquisition Program since its inception in April 2006, roughly doubling itsbudget every fiscal year. For FY08, the amount committed for purchases ofKyoto credits through 2008-12 now exceeds JPY80 billion ($815 million). InApril 2008, Japan’s New Energy and Industrial Technology DevelopmentOrganization (NEDO) announced that about 23 million CERs had been contractedsince FY06, an important marker toward the minimum 100 MtCO2e target.Expectations of Japan’s 2010 GHG emissions are likely to be revised upward toinclude an additional 19-34 MtCO2e per year (95-170 MtCO2e over the whole


Kyoto period), suggesting the likelihood of higher purchases, including fromthe Japanese private sector. A key towards the achievement of the Kyoto target by Japan is the coordinationbetween the Government’s Kyoto Protocol Target Achievement Plan and theKeidanren Voluntary Action Plan, a voluntary commitment by major industries tostabilize CO2 emissions from fuel combustion and industrial process at 1990level by 2010. In late 2007, major industries announced that they wouldtighten their targets under the Keidanren Voluntary Action Plan, therebyassuming responsibility for 45 to 76 percent of the additional Kyoto gap. Partof these additional efforts could also translate into extra demand for Kyotounits, including CDM and JI.33

The sellers

China dominatesFor the third consecutive year, China was the world leader in CDM supply witha 73 percent market share in terms of 2007 transacted volume (compared to 54percent market share in 2006). Leading 62 percent of primary CER supply so farunder contract, China is still the destination of choice for buyers ofcredits, who cite its large size, economies of scale in origination, and itsfavorable investment climate. Buyers generally reported the ability to closeprimary forward carbon transactions in the range of €8-11, with one or twonotable transactions at above €13 in the last few months. China consolidated its position as the pre-eminent carbon supplier, byquadrupling its number of projects in the pipeline from January 2007 to March2008. China is well ahead of other countries in the CDM pipeline with 53percent of potential CER supply until 2012, and, with 1104 projects, alsopulled ahead of India in the number of projects in the CDM pipeline.34 Chinaalso nearly doubled its expected CER deliveries by 2012 over that period oftime.

India, Brazil and Africa Brazil and India, at 6 percent market share each, transacted the highestvolumes after China, although this represented a drop in volumes for each from2006 levels. Africa followed with 5 percent of the market. Compared to theirposition in the CDM pipeline, India and Brazil have a relatively low marketshare of transactions. Market participants repeatedly cited high priceexpectations in these two countries, and reported that project sponsors

33 To illustrate, the steel federation now intends to purchase 44 MtCO2e (up from 18 MtCO2e) over the 2008-2012 period and the federation of electric powercompanies (who are struggling with their target under the Keidanren VAP) announced they would increase their acquisition objective four-fold to 120 MtCO2e.34 India (15 percent) and Brazil (7 percent) are the only two countries other than China with a share of the CDM pipeline volume of greater than 5 percent.


focused on transacting issued CERs at attractive prices in the range of €15-16.50 instead of selling (riskier and therefore less remunerative) forward CERstreams. With CER issuances gradually ramping up and the market infrastructurefor spot CER transactions being operational35, one could reasonably expecthigher volumes of spot primary transactions reaching the market in the comingyears. This may also indicate an inclination away from the conventional,stand- alone ERPAs from the past, with implications for their value as projectfinance instruments. The location of CDM projects worldwide is shown below:

A number of countries entered the project pipeline for the first time,particularly in Sub Saharan Africa and Central Asia; transacted volumes grewseveral-fold in a number of other countries, most notably in Malaysia andIndonesia. Although they account for a much smaller share of the primary CDMmarket, some countries in Africa (Kenya, Uganda and Nigeria), Asia (Malaysia,Philippines and Thailand) as well as in Eastern Europe and Central Asia(Uzbekistan), reported sharp increases in transaction volumes. Projects inAfrica have contracted to supply about 50 MtCO2e to the market so far, withmore than 20 MtCO2e transacted in 2007 alone.

Market outlook

The prospects for the carbon market must be seen in the context of broadereconomic trends and outlook. Earlier this year, the liquidity crisis in the

35 At least outside EU jurisdiction, with a number of countries successfully connected to the ITL and eligible and some transactions reported. In addition,exchanges have been set up in India and Brazil.


U.S. turned into a full-blown credit crisis and recession or economic slowdownis widely expected. The broader credit crunch has driven investors (such ashedge funds and pension funds) to a “flight to quality” where they are seekinga hedge against expectations of rising inflation and a falling U.S. dollar.36

“Tangible” assets have become attractive and there is currently a broaderemergence of many commodities (including oil, agricultural commodities, gold)as an asset class of interest to investors.The carbon market is correlated with energy markets, but it differs inimportant ways from other booming commodity markets, notably because there isno natural demand for carbon reductions. Long-term expectations of futurepolicy and regulation are the primary source of the carbon market’s demand andaction by regulators determine much of the available supply in terms ofallocation of sufficient allowance. Policymakers and regulators bear thebiggest responsibility for the continuation of carbon market momentum bysetting expectations for their role in long-term climate change mitigation.The carbon markets are currently witnessing their own flight to quality, wherecompliance certainty, flexibility and fungibility are valued very highly. Thistrend will favor EUAs, and the EU ETS market will likely continue to expand inthe coming years. Both EUAs and issued CERs will likely be more attractive forcompliance in the coming years. The spread between the two may or may notpersist, but they will each continue to trade at a premium to other, lesssecure assets offered on the market. A swap market is emerging, as companieswill want to manage their portfolios across compliance assets, vintages andcontract types. A market for delayed or otherwise distressed CDM assetsemerged and another market for distressed companies is emerging.

Price differentiation Stronger price differentiation across project-based assets and contracts willoccur, for example between issued and forward CERs, with a higher spread forprojects earlier in the regulatory process. A tiered CDM market is likely toemerge, providing risk management and arbitrage opportunities, such as:

Private buyers (primarily EU-based power companies, banks, Japaneseutilities and trading houses) will likely compete and offer the highestprices for the finite number of issued CERs until theregistration/issuance backlog is cleared.

Project aggregators will likely transact the most secure tranches oftheir portfolios as secondary guaranteed CERs on exchanges or throughtheir bankers (to European industrials and the Japanese private sector)at a slight nominal discount to issued CERs.

36 Unlike many other commodities, there is no “natural” or “intrinsic” demand for carbon reductions as an asset with intrinsic value and fundamental analysis is heavily informed by the impact of regulation and the expectation of future regulation.


Private and sovereign buyers will likely offer slightly lower prices forearly delivery forward CER contracts from high-yielding project typesoffered by credit-worthy/experienced developers.

Hedge funds will likely buy across the line, including some post-2012vintages, as well as partially guaranteed CER contracts, at a discountto the gCER.

Sovereign buyers, pre-compliance buyers expecting regulation beyond 2012and voluntary market buyers will likely continue to support purchasesfrom more complex projects with strong sustainable developmentattributes or from countries not well represented in the market.

A CER or VER produced under reputable standards such as the GoldStandard will likely command the highest prices, followed by pre-CDMVERs, and CCX.

Sovereign buyers, who also have the option(s) to contract and bank AAUs,and this potential competition could have the effect of influencingprimary CER prices generally lower.

Market continuity beyond 2012 Created and driven by regulation, the carbon market’s biggest risk today iscaused, perversely, by the absence of market continuity beyond 2012, and onlypolicymakers and regulators can create that continuity. Market continuitydepends on the sense of urgency by policymakers in beginning to addressclimate change seriously.


Chicago Climate Exchange (CCX) OverviewChicago Climate Exchange (CCX), launched in 2003, is the world’s first andNorth America’s only active voluntary, legally binding integrated tradingsystem to reduce emissions of all six major greenhouse gases (GHGs), withoffset projects worldwide. CCX Members are leaders in greenhouse gas (GHG) management and represent allsectors of the global economy, as well as public sector innovators. Reductionsachieved through CCX are the only reductions made in North America through alegally binding compliance regime, providing independent, third partyverification by the Financial Industry Regulatory Authority (FINRA, formerlyNASD). The founder, Chairman and CEO of CCX is economist and financialinnovator Dr. Richard L. Sandor, who was named a Hero of the Planet by TimeMagazine in 2002 for founding CCX, and in 2007 as the "father of carbontrading."CCX emitting Members make a voluntary but legally binding commitment to meetannual GHG emission reduction targets. Those who reduce below the targets havesurplus allowances to sell or bank; those who emit above the targets comply bypurchasing CCX Carbon Financial Instrument (CFI) contracts.

CFI contracts (the CCX tradable commodity)

The commodity traded at CCX is the CFI contract, each of which represents 100metric tons of CO2 equivalent (tCO2e). CFI contracts are comprised of ExchangeAllowances and Exchange Offsets. Exchange Allowances are issued to emittingMembers in accordance with their emission baseline and the CCX EmissionReduction Schedule. Exchange Offsets are generated by qualifying offsetprojects.

CCX mission

To facilitate the transaction of GHG allowance trading with pricetransparency, design excellence and environmental integrity

To build the skills and institutions needed to cost-effectively manageGHGs

To facilitate capacity-building in both public and private sectors tofacilitate GHG mitigation

To strengthen the intellectual framework required for cost effective andvalid GHG reduction

To help inform the public debate on managing the risk of global climatechange

Benefits of Membership:


http://www.chicagoclimatex.com/../../../content.jsf?id=23




http://www.chicagoclimatex.com/content.jsf?id=524


Be prepared: mitigate financial, operational and reputational risks Reduce emissions using the highest compliance standards with third party

verification Prove concrete action on climate change to shareholders, rating

agencies, customers and citizens Establish a cost-effective, turnkey emissions management system Drive policy developments based on practical, hands-on experience Gain leadership recognition for taking early, credible and binding

action to address climate change Establish an early track record and experience with the growing carbon

and GHG market.

CCX offsets program

CCX's integrated greenhouse gas (GHG) reduction and trading system includes afull portfolio of offset projects. CCX issues tradable Carbon FinancialInstrument (CFI) contracts to owners or aggregators of eligible projects onthe basis of sequestration, destruction or reduction of GHG emissions.All CCX offsets are issued on a retrospective basis, with the CFI vintageapplying to the program year in which the GHG reduction took place. Projectsmust undergo third party verification by a CCX-approved verifier. Allverification reports are then inspected for completeness by the FinancialIndustry Regulatory Authority (FINRA, formerly NASD).Offset projects can be registered by Members, Offset Providers and OffsetAggregators. Offset Providers (e.g., IWC) and Offset Aggregators (i.e.,companies that aggregate projects from smaller landowners) do nothave significant GHG emissions. Entities that have significant GHG emissionsare eligible to submit offset project proposals only if they have committedto commit their own emissions to the CCX Emission Reduction Schedule asMembers. Offset projects involving less than 10,000 metric of CO2 equivalentper year should be registered and sold through an Offset Aggregator. The termsof the business and legal relationships between aggregators and offset projectowners are left to the discretion of those parties.CCX has developed standardized rules for issuing CFI contracts for thefollowing types of projects:

Agricultural methane Coalmine methane Landfill methane Agricultural soil carbon Rangeland soil carbon management Forestry Renewable energy













Ozone depleting substance destruction Other project types, to be approved on a project-by-project basis.

Forestry Carbon Emission Offsets

CCX has been a leader and innovator in developing simple, standardized rulesfor issuing CFI contracts for forest carbon sequestration. Eligible projectson CCX may exist under all four of the mitigation measures outlined by theIntergovernmental Panel on Climate Change (IPCC):

Maintaining or increasing forest area: reducing deforestation anddegradation

Maintaining or increasing forest area: afforestation/reforestation Forest management to increase stand- and landscape-level carbon density Increasing off-site carbon stocks in wood products and enhancing product

and fuel substitution.All managed forest offset projects and afforestation projects that do notutilize the carbon accumulation tables must obtain project approval of the CCXForestry Committee. Managed Forest Projects (such as the Company’s) areprojects that sustainably manage forests such that their growth in carbonstocks exceeds their harvest.

Harvest option and protocol for sustainably managed forests

IWC must comply with the following CCX protocol for Managed Forest Projects:1. All privately owned, forested lands are eligible for the sustainably

managed forest program. Project owners and aggregators must provideevidence of sustainable forest management of all their managed forestland through certification from agencies or schemes that have beenendorsed by the PEFC1 (e.g., SFI), the Forest Stewardship Council, orother certification programs approved by the CCX Committee on Forestry.

2. Project owners may earn XFOs issued for managed forest projects on thebasis of verified documentation for the net changes in carbon stocks(expressed in metric tons of carbon dioxide) on eligible sites includedin the project during each of the years between the establishment of thebaseline through the end of the contract. The net change in carbonstocks is defined by the equation: Net change in Carbon Stocks = (increases inCarbon Stocks due to growth) minus (the quantity by which Carbon Stocks decreased due toharvest, pest, fire and adverse weather events). If an offset provider reports forthe calendar year a net decrease in Carbon Stocks from the previouscalendar year, the project owner or aggregator must surrender CarbonFinancial Instruments in an amount reflecting net decreases in CarbonStocks from the previous year. Offset providers or aggregators may usebanked allowances for compliance in this situation.




3. Payments to aggregated sustainably managed forestry pool participantswill be based on the project’s percentage net contribution to pool XFOsover the life of the contract. Interim payments will be based on thecalculated average net contribution to the pool.

4. Quantification of net changes in forest carbon stock must involve aModel-based Accounting Approach. Managed forest projects will be issuedor debited CCX CFI’s on the basis of verified net annual change inforest carbon stocks through the CCX Market Period (2003-2022). Growthand yield Model estimates of net annual changes in carbon from forestryproject will be discounted to account for variance in model estimates bythe minimum of 20% or two times the reported statistical error of thebaseline inventory data. Forest inventories that will be input into thegrowth-and-yield model to estimate annual carbon sequestration must havea 90% confidence interval at a minimum for the estimated mean woodvolume.

5. The quantification of changes in carbon stocks will be adjusted toreflect acquisition or disposition of forest land on an annual basis:

o When forested land is acquired, the enrolled landowner may includeeligible forest carbon accumulation provided that it meets all ofthe criteria set forth in this document. When forest parcels arepurchased, the carbon stocks on the purchased forest are notcounted as growth for the year they are purchased, but are addedinto the baseline so that the net growth may be calculated in thesubsequent year.

o If a landowner disposes forested land, the offset provider will bepenalized by the total amount of offsets issued by CCX forsequestrated carbon from those acres for entire length of timethat the land has been enrolled in the program. However, disposedland from one pooled participant to another pooled participantthat is also enrolled within CCX will not be penalized in thisfashion. Under such conditions, a transfer of credits may berequired.

6. Database records, model inputs and all enrolled land are subject tothird party verification requirements by CCX-approved verifiers. If anenrolled participant’s project land does not conform to the managedforest offset performance requirements, such event shall be promptlyreported to CCX. CCX will then cancel all CCX CFIs in an amount equal tothe quantity of forest offsets previously issued to the project. Theowner of the non-conforming forest project shall be prohibited fromfurther participation in CCX.

7. Project participants must establish a baseline of forest carbon stocksfor purposes of calculating net changes in forest carbon stocks andsubsequent issuance of CFIs. Once established, this baseline will serveas the reference year for all purposes in the managed forest projectpool during the CCX market period. The baseline is established as thebiomass level in the enrolled parcels on December 31 of the year


preceding their eligibility for enrollment. Participants are eligible toearn CFI’s based on verified documentation of net changes in forestcarbon stocks from the baseline year. Project proposal filing mustpresent sufficient data on forest inventories and management activitieson enrolled forestland while establishing the baseline. Baselines aresubject to audit by a CCX approved verification agency.

8. All issuance of CFIs for Exchange Forestry Offsets to CCX-eligibleforestry projects shall require the placement of 20 percent of earnedExchange Forestry Offsets in a Forest Carbon Reserve Pool. A ForestCarbon Reserve Pool will be established for the entire pool of Projectsrepresented by each offset provider. CFIs held in a Forest CarbonReserve Pool shall remain the property of the Project Owner (oraggregator), and all remaining CFIs not terminated by CCX (in the eventof a catastrophic loss) shall be released to the Project Owner (oraggregator) during 2022. CFIs in the Forest Carbon Reserve Pool thathave been in the reserve pool for a minimum of 5 years (regardless ofvintage) shall be transferred from the reserve pool to the active salespool. All remaining CFIs shall be transferred to the active sales poolnear the end of the final year of the contract. CFI contracts in theForest Carbon Reserve Pool will be used to compensate for anycatastrophic losses. A project owner shall never be liable for thereturn of CFIs caused by a catastrophic loss in excess of the owner’scontribution to the Carbon Reserve Pool.

9. The commitments and obligations of the offset provider (seller) that arecreated by the CCX contract terminate December 31, 2022.


Operational PlanOrganizational structure

The current organizational structure of the Company consists of: David Lilly (CEO and Director) Roy Schwartz (President and Director) Esther Bittelman (Vice President and Director) Joshe Bittelman (Vice President and Director) Zee Latkha (CFO/COO) Harvey Scholl, Esq. (Chief Legal Counsel and Director) Dennis Thomas (VP Energy Division and Director) Elliott Sassoon (Director of Brazilian Operations) I. Motta (VP Brazilian Operations)

Staffing

Although IWC intends to remain a lean organization by minimizing overheadcosts, the organizational structure will expand as the Company’s Brazilianoperation develops, most notably in the operations and sales areas.Specifically, the Company expects to add the following key managementpositions, once funding is received:

Carbon Market Project Manager—responsible for managing all interactionswith CCX

Sales Director—responsible for all interactions with internationallumber wholesalers.

Development plan2008. The remainder of 2008 will be used to register with CCX, complete thecarbon credit verification process, and establish the Company’s timberharvesting, processing and export operation in Brazil.2009. Tropical hardwoods will be harvested using the “select cut” method,selecting only mature trees with a viable commercial export market. Harvestingwill commence in June and end in November. Processing of timber and sale ofprocessed wood products will begin in June and continue all year thereafter.The annual harvest and revenue are summarized below:

AreaHarvested

Volume of Wood Sales Price Revenue


Annual Harvest 400 hectares 40,000 m3 $120/m3 $4.8million

Carbon credit revenue will begin in Q1 of 2009. This revenue is estimatedbelow:

AreaAvailable

CO2 Tons(est.) Credit (est.) Revenue

Annual Credit 18,000hectares 80/hectare $4/ton $5.8

million

2010-2012. For the existing forestland, the operation will continue withannual revenues at or exceeding the 2009 levels above. During this period, IWCwill actively look to acquire additional forestland in Brazil to add to theCompany’s portfolio, using the same business model. The most likely scenario wouldbe to exercise the Company’s existing option to purchase an additional 2 million acres (from apredecessor company) for approximately $6 million.

Implementation plan

Brazilian harvesting operationElliott Sassoon will lead the Company’s operation in Belem, near the property.The Company will contract with a local harvesting and processing company tocarry out the Company’s operational plan. These contractors will assist in theextraction, processing, grading, packing, and shipping of goods for export.The direct expense related to the subcontracted harvesting (only) operation isestimated at $125 per cubic meter.

Carbon credits operationThe administration of the Company’s Managed Forest Project will be managedthrough the IWC corporate headquarters in Florida, although Mr. Sassoon andMr. Motta will be responsible for managing all on-site CCX verification, CCXaudits, and related appraisals.

Corporate financial controlsFinancial controls will be managed at the Company’s corporate headquarters inFt. Lauderdale, Florida.

Wood export and sales operationHarvested timber will be processed locally in Brazil, and the wood productssold in the international market. Mr. Sassoon has long standing relationshipswith purchasers of tropical hardwood in the United States, Caribbean, Europeand Asia. The direct expense related to the sales of wood products isestimated at 7 percent of the selling price.


WarehousingAll lumber will be sold wholesale to lumber wholesalers in the United Statesand internationally. Company management has been engaged in the lumberbusiness for more than 25 years, and possesses contacts and relationships withprincipal lumber wholesalers in the United States and internationally.

MonitoringTo initiate an improved understanding of the Company’s carbon stocks, IWC willassign an internal monitoring team to develop and implement the following:

Sensor and field-based methods for measuring carbon in above- and below-ground tree biomass, soil, litter, dead biomass, and understoryvegetation (to see if these are likely to be significant sources ofemissions)

Estimates Allometric relationships/equations and area-based biomass estimates of

standing and below-ground biomass Factors to directly and/or indirectly estimate biomass (from total

volume) for forests Representative permanent plots Stocks in forests.

Management team

IWC has an outstanding management team with forest management experience and asuccessful entrepreneurial track record. An important use of investmentproceeds will be the attraction of certain new key employees, includingadditional management executives. In anticipation of funding, the Company hasinitiated discussion with a few outstanding candidates for these positions.

David Lilly—CEO and DirectorThe Company’s CEO and director, David Lilly, was one of the founders of andlegal counsel to the predecessor to IWC. A graduate of UCLA and the GeorgeWashington University Law School, Mr. Lilly is a former member of theCalifornia Bar Association, now retired.

Roy Schwartz—President and DirectorRoy Schwartz is a Certified Public Accountant, an investor in multiple realestate ventures, and a venture capitalist. Mr. Schwartz is currently presidentof Gorski Sober Living Center. He has more than 15 years of experience as amember and officer of the Board of Trustees of the House of Hope, the premierlevel 2 addiction recovery rehabilitation treatment Center in Broward County,Florida. Previously, Mr. Schwartz operated dental centers and new cardealerships. He is also active as a partner in a South Beach hotel leased toan International Hostel operator.


Zee Latkha—COO/CFOZee Latkha holds an M.B.A. from the University of Miami, and has operated inthe international world of finance for the last ten years. He has managed andco-developed more than $500 million in projects in Dubai and other MiddleEastern countries. He is the Chief Financial Officer and Chief OperationsOfficer for G.S.L.C. and manages substantial real estate in the United States.He holds licenses in both the real estates sales and mortgage areas.

Dennis Thomas—VP Energy Division and DirectorDennis Thomas is the president of Geothermal Power of America, Inc., anaffiliated company. He has been named Businessman of the Year by Inc. magazine andEntrepreneur of the Year by Business Week magazine in the 1990s. He hassuccessfully founded and sold various public companies since the 1980s, and isconsidered an expert in the area of public finance.

Harvey Scholl—Chief Legal Counsel and DirectorHarvey Scholl, Esq., is a practicing attorney in south Florida, representinginternational clients with net worth exceeding $1 billion. Mr. Schollmaintains an exclusive private practice with limited private clients. He hasbeen involved in structuring international investments throughout the worldover the last 25 years.

I. Motta—VP Brazilian OperationsI. Motta is considered an international expert in Brazilian managed forestoperations. He has managed over $1 billion in forests in the thirty years hehas resided and worked in Brazil. He is currently responsible for theoversight of timberlands in Brazil for numerous individuals and companies,with a total land area exceeding one million acres.

Joshe Bittelman—Director Public RelationsMr. Bittelman is currently Manager of Sober Living Operations for Gorski SoberLiving Center, Inc. (G.S.L.C.) the parent company of IWC. He is an experiencedoperations manager, skilled at acquiring and converting real estate holdingsin the US for G.S.L.C. He is also an experienced public relations manager, andis currently the Operations Manager at Rehab Specialty Builders, a for-profitgroup specializing in the acquisition and conversion of non-performing realestate assets in the financial and real estate investment sectors.

Elliott Sassoon—Director of Brazilian OperationsElliott Sassoon has more than 25 years of experience in the Brazilian lumberindustry. Mr. Sassoon is recognized for implementing large forestry, pulp andpaper operations in Brazil. He is well connected to Brazilian forest, lumberand environmental entities, as well as political and governmental agencies. Inthe early 1980s, Mr. Sassoon served as vice president of the West AmazonLumber Exporters Association.


Mr. Sassoon is a resident of Sao Paulo, Brazil. He graduated from the LyceeFrancais De Paris (France), the Institute De Educacao Caetano De Carnpos(Brazil), and the University Faculdade Integrada, Colegio Moderno (Brazil).Mr. Sassoon speaks Portuguese, French, Spanish, Italian, Hebrew, Arabic andEnglish. From 1995 to 1996, Elliott was President and CEO of PacificoIndustrial Import-Export, Ltd. From 1980 to 1994 he was President of Vale DoNilo Agro-Industries. For the past 20 years, Mr. Sassoon has served as aconsultant to or officer of the Para Association of Banak Exporters, theEurope-Brazil Lumber Association, Brazilian Forest and River Department,China-Brazil Lumber Chamber of Commerce, and the Amazons Cocoa ExportersAssociation. He is past president and director of both Norwest S/A andInternational Wood Corporation.Elliott has a proven track record planning and implementing complex logisticsand manufacturing operations (e.g., logging, milling, logistics, shipping,etc). He also brings to IWC his expertise and privileged global relationshipsin banking and finance .

Board of Directors IWC has assembled a Board of Directors to provide advice and consultation tomanagement in matters relating to its operations. As of the date of thisdocument, the Board of Directors includes:

David Lilly Roy Schwartz Zee Lakha Dennis Thomas Harvey Scholl, Esq. I. Motta Joshe Bittelman Esther Bittelman—a retired international motion picture production and

distribution company owner. Abu Shaikhani—the managing director of the Memon Group of Companies and

the uncle of Zee Lakha. He has been involved in over $5 billion ininvestments in Dubai, and continues to raise capital in internationalmarkets for real estate, export, import and IT projects worldwide.

Facilities and insurance

IWC has leased office space in Sunrise, Florida of approximately 3,000 squarefeet. In addition, the Company will lease operational space for theheadquarters of its operation in Brazil.Post-funding, the Company will acquire policies for key person insurance,business overhead expense, disability, and fidelity bonds. The Company will


acquire appropriate fire, theft and comprehensive insurance coverage, general,errors and omissions, and liability coverage as needed.All subcontractors will be surety bonded for performance and payment.


Financial PlanIWC is seeking combined equity participation and/or credit line of $12 millionfor applying to CCX, carbon credit verification, land acquisition,construction, sales and marketing, and operating costs for the first threeyears. Interest only payments will be made on any line of credit through thefirst three years, after which any initial debt will be repaid throughpermanent financing or through a convertible debt structure. The projectedmarket value of the project after three years is $36 million.The Company has all the equipment, personnel, timber and customers to operateits business. This working capital will allow the export of approximately40,000 cubic meters per year, with a market value of approximately $5 millionannually. The present holdings of the Company will allow harvesting at thislevel for a period of 40 years.The Company plans to retain a portion of its earnings, so that IWC will beself-financed after a period of five years.

Capitalization

International Wood Corporation has been operating since 1998, with Mr. Sassoonas its President and Director. On May 30, 2008, Gorski Sober Living Centers,Inc. (“Gorski”), a Delaware corporation located in Ft. Lauderdale, Florida,issued 2,000,000 of its common shares in exchange for 19,421,444 common sharesof Elliott Sassoon, the principal shareholder of International WoodCorporation at that time. These shares represent approximately 75 percent ofthe issued and outstanding shares of the Company. Gorski is a private company that has approximately 30 shareholders.37 Theshareholders controlling Gorski now have indirect control of IWC. Theseshareholders are EB Financial Trust (3,333,333 shares); Roy Schwartz andSpouse (3,333,334); Roy Schwartz Trust38 (6,666,667); Roy Schwartz FamilyTrust (3,333,334); Joshe Bittelman Trust39 (3,333,333); Esther Bittelman(3,333,333); ESOP40 (1,571,669); Tresa Watson (50,000); Harvey Scholl(50,000); and Richard Davela (50,000).

37 Gorski had 25,247,004 common shares issued as of February 28, 2008.38 Roy Schwartz is the trustee of this trust with power to vote the shares.39 Esther Bittelman, the grandmother of Joshe Bittelman, is the trustee of this trust with power to vote the shares.40 Esther Bittelman is the administrator of the Employee Stock Option Plan with power to vote the shares until such time as they are transferred to an employee.; as of July 28, 2009, no shares had been transferred.


Use of private placement proceeds

IWC intends to utilize the new funding for applying to CCX, carbon creditverification, land acquisition (i.e., exercising the Company’s existingoptions to purchase 2 million hectares of forestland for approximately $6million), construction, sales and marketing, and operating costs for the firstthree years.In its first year of operation, the Company will have the following one-timestartup costs:

Use AmountCompany startup $175,000Register with CCX as an Offset Provider $100,000Site and CCX appraisals and audits $100,000Third-party accreditation per CCX $150,000Initial working capital plus FY1 operating expenses $2,025,000

TOTAL FUNDS USED TO START $2,550,000

IWC management believes the net proceeds of this placement will be sufficientto finance the Company’s operational plan through 2010. The Company managementteam’s goal is to fund its operation from revenues after that time.Requirements for additional capital will depend on profitability of operationsand the rate of development and land acquisition. If future sales (both woodand carbon credits) do not meet expectations, or if there are unforeseendelays, or if costs and expenses exceed those estimated, proceeds may not besufficient to adequately finance operations for this period. In such case, IWCmay require additional financing.

Summary of financial projections

Financial assumptions and projections are summarized in Appendix A. As theprincipal business of the Company is sale and export of tropical hardwoods inthe global market all transactions are done in dollars. This is also thecurrency used by the Chicago Climate Exchange.

Exit strategy

IWC is a public company and hopes to do a registration statement to tradeshares on US or international markets in the 2009-2012 timeframe, or tocontinue operating independently while issuing dividends to Companyshareholders. Also, IWC land and properties could be sold to help financefuture developments.


Key Investment ConsiderationsManagement believes that the potential rewards more than compensate for therisks inherent in the development of IWC—for an appropriate accreditedinvestor. Any development venture has certain inherent risks. The followingsection details some of the issues that an investor should consider inevaluating IWC. In particular, management believes that these factors minimizerisk and maximize the Company’s chance of success and ultimate returns forinvestors.IWC has:

In-house knowledge and capabilities unique to the industry Important relationships with the local government and other agencies Exceptional management experience The benefit of a fast-growing carbon market A unique business model focused on conscientious and sustainable use of

the Amazon rainforest.

Proprietary knowledge

The Company is unique in its depth and breadth of timber harvestingexperience, including export, milling, logging, shipping, and logistics. TheCompany’s founders first began working on IWC in 1998, and together have morethan 25 years of collective experience in forest project development andmanagement in Brazil.

Unique position in the market

By design, IWC is positioned to generate revenue from multiple categories,including carbon credit sales, wood product sales, and other forest productsales (herbs, spices, etc.). Most other related developments have one primarytarget market (e.g., lumber wholesalers) and revenue source (e.g., lumbersales).In addition, IWC is unique in that it holds options to purchase an additional2 million acres of forestland (from a predecessor company) for approximately$6 million.

Ongoing relationships with key industry players

The Company’s Director of Brazilian Operations has more than 25 years ofexperience in the Brazil forest products industry, and has developed ongoingstrategic business relationships with important partners—including governmentagencies, civic leaders, politicians, and international lumber wholesalers.


Time to profitability

The Company’s revenues today are minimal. However, beginning in 2009, IWC willbegin generating revenues from CCX carbon credit sales. In addition, theCompany’s first wood products revenue will commence in mid-2009.

Exceptional management team

As the IWC model has been in development since 2007, the Company’s managementteam has market awareness far greater than might be expected. Company managersexhibit a blend of ingenuity, creativity, and marketing savvy that isdifficult to develop or hire. Their experience positioning, developing,marketing and supporting IWC in its early stages has provided the foundationthat will help the Company succeed.

Dividends, returns, and exit strategies

Return on investment will come from the Company’s multiple revenue streams.Modest income is assumed for 2008, as the Company prepares for a 2009 treeharvest and registers with CCX as an Offset Provider. Although no guaranteescan be made, IWC estimates pre-tax operating margins (i.e., net income dividedby income) to ultimately be close to 50%. Return on equity is expected to besubstantially higher. It is unlikely that dividends, if available, will bepaid to interest holders prior to 2010. Payment of dividends will depend onearnings, financial condition, alternative investment opportunities, and thejudgment of the Board of Directors with respect to prevailing conditions andfuture plans. There is no guarantee that dividends will be issued.


Risk FactorsParticipation in IWC involves a high degree of risk. These risks include, butare not limited to, the risks described below and elsewhere in this businessplan. Risks fall into the following categories:

Risks associated with the nature of the Company, its assets andstructure

Risks associated with failure of the Company or its employees to perform Risks inherent in the carbon credit market Risks associated with competition Risks associated with any inability of the Company to fund future

growth.

Nature of the company

New business venture. The Company is a growth stage company with a limitedhistory of operations, an insignificant revenue base, and relatively smallcapitalization through funding from private sources. No assurance can be giventhat the Company will meet its financial targets. However, the Company hassuccessfully completed ten years of operation (as a predecessor company), andhas met or exceeded all development milestones and business goals during thisstage.Dependence on key employees. The Company is highly dependent upon the servicesof David Lilly, Elliott Sassoon and I. Motta. The loss of either Mr. Lilly,Mr. Sassoon or Mr. Motta could have an adverse effect on the Company. Althoughthe Company will execute employment agreements with Mr. Lilly, Mr. Sassoon andMr. Motta, such agreements may not ensure the continued availability of theirservices. IWC will also be dependent upon the services of other key employees,some of whom have yet to join the Company. Although the Company may havesigned employment agreements with these employees, such agreements may notensure the continued availability of their services.

Performance risk

Carbon credit business failure. In order for the Company to realize itsrevenue projections, the Company will need to be granted status as a CCXOffset Provider and the initial IWC project will need to be verified as aManaged Forest Project by the CCX. While the Company has a very strongunderstanding of the Chicago Climate Exchange procedures, terms andconditions, the Company may ultimately fail to acquire the appropriate statusand verification. In this case, IWC would have only wood products to develop,and the net income would fall far short of the Company’s current financialprojections (due to the unavoidable direct costs inherent to the timber


harvesting operation). Management believes this risk to be small due to itsexperience and performance to date, but no guarantee of performance can begiven.Failure of strategic partners to perform. The Company’s success depends onacquiring, integrating and maintaining relationships with the community,harvesting subcontractors, and financial institutions. The continued health,stability and productivity of these relationships are essential to theCompany’s reputation as a superior forest management company, and to thegoodwill attributed to the IWC brand. Any contractual or operational failureof one of the partnerships may have an immediate and potentially detrimentalimpact on IWC. Management believes this risk to be extremely small due to thediligent selection process used to evaluate and contract with initialpartners.


Market risk

Carbon credits. For the past few years, awareness of global warming has beengrowing, resulting in a new eco-tourism sector, as well as multiple competingEmission Trading Schemes (ETS) such as the Chicago Climate Exchange (CCX).While the United States has not ratified the Kyoto Protocol, it has provided astable basis for the growth of carbon credit trading. No guarantees can begiven that this trend will continue, or that the global economy will staystrong and stable.Delicate balance of the IWC business model. The Company’s goal ofbalancing harvesting and carbon sequestration may prove difficult to achieveand/or maintain. The financially optimum silviculture strategy is a highlycomplex balancing. The model is sensitive to minute changes in the timber andcarbon markets. Growth cycles, thinning strategies, and relevant politicalclimates must also be taken into account. The ratio of land reserved forharvest to land dedicated to carbon sequestration must comport withsustainable management practices. Company management feels this risk ismitigated due to more than 25 years of experience in the Brazilian forestproducts and forest management industries.

Competition

The existing credit situation in Brazil will prevent much local competition tothe timber harvesting operation of the Company. Due to the recent visibilityof (and financial returns available to) the carbon credit market, however,many international companies – including many large global investment banks –have started to look at the feasibility of Managed Forest Projects in Brazil.Any of these companies, with access to substantial startup capital, couldbecome formidable competitors to the Company. In addition, a flood of suchprojects on the carbon credit exchange could drive the unit price downward dueto simple supply and demand economics. This would have an adverse affect onthe Company’s revenue.IWC management feels that it has a time-to-market and experiential advantageover any impending competition.

Growth and continuing operations

Future capital needs. The Company believes that the investment proceeds willbe sufficient to finance IWC operations through 2010. After that period,requirements for additional capital will depend on profitability and growthrate.Need for additional employees. The Company will need to hire additionalqualified personnel to carry out its planned development. Locating, recruitingand retaining such personnel could be difficult due to the vocational andgeographical qualifications required. In particular, the Company’s success


will depend on successfully recruiting and retaining qualified employees withappropriate experience in real estate, carbon markets, and project financing.


Appendix A: Assumptions And Financial ProjectionsKey financial assumptionsThe financial projections are built upon the following basic assumptions.(Note that “FY1” stands for “Fiscal Year One” or 2008.)All revenue assumptions are based only and conservatively on the Company’s original owned plotof 18,000 hectares (16,000 hectares are usable timberlands).Carbon credit revenue. An estimated 85% of the project area timber (16,000 hectares, per the appraisal given in Appendix C) will not be harvested over the 15-year contract term. Thus, 13,600hectares will be used to earn the carbon credit. Per CCX estimates, the IWC forest earns 20 tons of carbon credit per hectare per quarter. The “per ton CO2” unit price depends on the CCX market.The price on July 23, 2008, was $3.9 per ton CO2. It is assumed that the first carbon credit revenue will be earned in Q1 2009.

CO2 credit Q1 Q2 Q3 Q4FY1 -- -- -- --

FY2-FY5 272,000 tons 272,000tons

272,000tons 272,000 tons

Lumber sales revenue. An average of 400 hectares will be harvested annually.After the harvest, IWC will replant eucalyptus or equivalent fast-growingtrees, and thin the area to increase carbon credit potential. In order toavoid the rainy season, harvesting take place each year (beginning in 2009) inQ2 and Q3 only. The average sales price of IWC-harvested wood products is $120per cubic meter. All wood products sales are based on air-dried products and not kiln-dried.

Wood harvested Q1 Q2 Q3 Q4FY1 -- -- -- --

FY2-FY5 -- 20,000 m3 20,000 m3 --

Revenue sources not included in financial projections. Many potentiallysignificant revenue sources have been intentionally omitted from the Company’sfinancial projections. This was done to simplify the revenue model, and tointentionally show conservative revenue projections. The following revenuesources are not included in the financial projections:

Commodity sales revenue from peppercorns, cocoa beans, cloves, etc. Revenue from selling raw material from post-harvest thinning of the

forestland. Revenue from ethanol sales Revenue from geo thermal projects in the US Revenues from purchased lumber in Brazil for export Revenues from US Investments.


One-time expenses. The following startup expenses occur one time. For the sakeof simplicity, it is assumed that each will be paid uniformly throughout FY1.

One-time expenses

FY1

Company startup $175,000Register as "Offset Provider" with CCX $100,000Appraisals for the carbon credit $100,000Third-party accreditation, carbon reduction formula $200,000

Direct costs related to timber harvesting.

Direct costs

FY1-FY5

Harvesting cost 65% of lumber selling priceCost to sell lumber 7% of lumber selling price

Salary expenses. Salary expenses are shown for the first five years of operation. All executive salaries are discounted or partial in FY1.

Salary expenses

FY 1 FY2-FY5

President $30,000 $120,000CFO $30,000 $100,000

VP Brazil $60,000 $120,000Office Coordinator $40,000 $50,000

Sales Director $50,000 $100,000Sales Assistant $17,500 $35,000

Maintenance Technician $10,000 $30,000


Other costs. There are fees associated with trading carbon credits; these feesdepend on the amount of carbon credits and carbon credit revenue. Eucalyptussaplings are planted post-harvested. Insurance & professional fees and theother remaining expenses are assumed to increase 10% annually.

Other costs

FY1 FY2-FY5

Brazil Property Tax (due quarterly) 1.2% of net income generated from wood sales

Quarterly/annual CCX inspection $3,000 per quarter +2% in FY3 and FY5

Administrated Fee for UN CDM Council $0.2 per carbon credit ton

Other Fee for UN CDM Council 2% of carbon credit revenueEucalyptus Sapling $200 per hectareInsurance & Professional fees $30,000 per quarter +10% annuallyOther Expenses $12,000 per quarter +10% annually

Other assumptions. Other assumptions used in the Company’s financialprojections include:

The corporate tax rate in US is 30% (annually) The corporate tax rate in Brazil is 1.2% (quarterly) The IVA tax in Brazil is 1.2% of lumber sales revenue (quarterly) The Social Contribution Tax in Brazil is 1.08% of taxable income

(annual).


Income statement forecastThe following is a summarized, consolidated income statement forecast for IWC,through 2012.

Income statement2008 2009 2010 2011 2012

RevenuesCarbon credits - $122,400,000 $122,400,000 $122,400,000 $122,400,000Lumber sales - $44,000,000 $44,000,000 $44,000,000 $44,000,000

Total Revenue - $166,400,000 $166,400,000 $166,400,000 $166,400,000

Harvest Cost - $5,000,000 $5,000,000 $5,000,000 $5,000,000Transportation Cost - $7,000,000 $7,000,000 $7,000,000 $7,000,000Industrialization Cost - $4,000,000 $4,000,000 $4,000,000 $4,000,000Receiving, grading, packaging, shipment Cost - $8,000,000 $8,000,000 $8,000,000 $8,000,000Administration Cost - $1,800,000 $1,800,000 $1,800,000 $1,800,000

Total Direct Cost - $25,800,000 $25,800,000 $25,800,000 $25,800,000

GROSS PROFIT - 140,600,000$ 140,600,000$ 140,600,000$ 140,600,000$ Gross margin (%) - 84% 84% 84% 84%

Other Expenses Property Tax (on net income from wood sales) - $218,400 $218,400 $218,400 $218,400Quarterly/annual CCX inspection $6,000 $12,000 $12,240 $12,240 $12,485Administrated Fee for UN CDM Council (CER amount) - $544,000 $544,000 $544,000 $544,000Other Fee for UN CDM Council (CER amount) - $2,448,000 $2,448,000 $2,448,000 $2,448,000Eucalyptus Sapling (per hectare) - $80,000 $80,000 $80,000 $80,000One-time expenses $525,000 - - - -Insurance & Professional fees $60,000 $132,000 $145,200 $159,720 $175,692Other Expenses $24,000 $52,800 $58,080 $63,888 $70,277Salaries & Wages $118,750 $555,000 $555,000 $555,000 $555,000

Total Other Expenses $733,750 $4,042,200 $4,060,920 $4,081,248 $4,103,854EBITDA $(733,750) $136,557,800 $136,539,080 $136,518,752 $136,496,146

Depreciation - - - - -PRETAX INCOME $(733,750) $136,557,800 $136,539,080 $136,518,752 $136,496,146

Net Operating Loss $(733,750) $(733,750) - - -Use of Net Operating Loss - $733,750 - - -Taxable Income - $135,824,050 $136,539,080 $136,518,752 $136,496,146Income Tax Rate in US - $40,747,230 $40,961,720 $40,955,640 $40,948,840Income Tax Rate in Brazil $(8,805) $1,638,694 $1,638,469 $1,638,225 $1,637,954Social Contribution in Brazil - $366,725 $368,656 $368,601 $368,540IVA Tax in Brazil - $1,320,000 $1,320,000 $1,320,000 $1,320,000

NET INCOME $(724,945) $92,485,151 $92,250,236 $92,236,286 $92,220,813Net Profit Margin (%) - 56% 55% 55% 55%


Balance sheetThe following is a summarized, consolidated balance sheet forecast for IWC,through 2012.

Balance sheet

2008 2009 2010 2011 2012

ASSETSCash $1,947,347 $84,422,189 $176,673,985 $268,911,965 $361,134,662Other Current Assets $0 $10,200,000 $10,200,000 $10,200,000 $10,200,000Total Current Assets $1,947,347 $94,622,189 $186,873,985 $279,111,965 $371,334,662

Fixed Assets $76,459,287 $76,459,287 $76,459,287 $76,459,287 $76,459,287Accum Depreciation $0 $0 $0 $0 $0Net assets $76,459,287 $76,459,287 $76,459,287 $76,459,287 $76,459,287

TOTAL ASSETS $78,406,634 $171,081,477 $263,333,272 $355,571,253 $447,793,950

LIABILITIES & EQUITY Current Liabilities $122,292 $311,983 $313,543 $315,237 $317,121Total Liabilities $122,292 $311,983 $313,543 $315,237 $317,121

Share Capital $79,009,287 $79,009,287 $79,009,287 $79,009,287 $79,009,287Retained earnings ($724,945) $91,760,206 $184,010,442 $276,246,728 $368,467,541Total Equity $78,284,342 $170,769,494 $263,019,729 $355,256,016 $447,476,829

TOTAL LIABILITIES & EQUITY $78,406,634 $171,081,477 $263,333,272 $355,571,253 $447,793,950

Cash flowThe following is a summarized, consolidated cash flow forecast for IWC,through 2012.

Cash flow forecast

2008 2009 2010 2011 2012

CASH FLOW FROM OPERATIONSNet Income (Loss) ($724,945) $92,485,151 $92,250,236 $92,236,286 $92,220,813Change in Working Capital $122,292 ($10,010,309) $1,560 $1,694 $1,884Plus Depreciation $0 $0 $0 $0 $0Net Cash Flow from Operations ($602,653) $82,474,842 $92,251,796 $92,237,980 $92,222,697

CASH FLOW FROM INVESTMENTSTotalAssets $0 $0 $0 $0 $0Net Cash Flow from Investments $0 $0 $0 $0 $0

CASH FLOW FROM FINANCINGCash from Equity $2,550,000 $0 $0 $0 $0Net Cash Flow from Financing $2,550,000 $0 $0 $0 $0

Net Cash Flow $1,947,347 $82,474,842 $92,251,796 $92,237,980 $92,222,697Cash at Beginning of Period $0 $1,947,347 $84,422,189 $176,673,985 $268,911,965Cash at End of Period $1,947,347 $84,422,189 $176,673,985 $268,911,965 $361,134,662


Appendix B: Kyoto Protocol Glossary Additionality: According to the Kyoto Protocol, gas emission reductionsgenerated by Clean Development Mechanism and Joint Implementation projectactivities must be additional to those that otherwise would occur.Additionality is established when there is a positive difference between theemissions that occur in the baseline scenario, and the emissions that occur inthe proposed project. Afforestation: The process of establishing and growing forests on bare orcultivated land that has not been forested in recent history. Assigned Amount Unit (AAU): Annex I Parties are issued AAUs up to the level oftheir assigned amount, corresponding to the quantity of greenhouse gases theycan release in accordance with the Kyoto Protocol (Art. 3), during the firstcommitment period of that protocol (2008-12). AAUs equal one tCO2e. Banking or carry over: Compliance units under the various schemes to manageGHG emissions in existence may or may not be carried over from one commitmentperiod to the next. Banking may encourage early action by mandated entitiesdepending on their current situation and their anticipations of future carbonconstraints. In addition banking brings market continuity. Banking betweenPhase I and Phase II of the EU ETS is not allowed but will be allowed betweenPhase II and further Phases. Some restrictions on the amount of units that canbe carried over may apply: for instance, AAUs may be banked with norestriction by a Kyoto Party while the amount of CERs that can be carried overis limited to 2.5% of the assigned amount of each Party. Baseline: The emission of greenhouse gases that would occur without thecontemplated policy intervention or project activity. Biomass Fuel: Combustible fuel composed of a biological material, for example,wood or wood by- products, rice husks, or cow dung.Carbon Asset: The potential of greenhouse gas emission reductions that aproject is able to generate and sell. Carbon Finance: Resources provided to projects generating (or expected togenerate) greenhouse gas (or carbon) emission reductions in the form of thepurchase of such emission reductions. Carbon Dioxide Equivalent (CO2e): The universal unit of measurement used toindicate the global warming potential of each of the six greenhouse gases.Carbon dioxide — a naturally occurring gas that is a byproduct of burningfossil fuels and biomass, land-use changes, and other industrial processes —is the reference gas against which the other greenhouse gases are measured. Certified Emission Reductions (CERs): A unit of greenhouse gas emissionreductions issued pursuant to the Clean Development Mechanism of the Kyoto


Protocol, and measured in metric tonnes of carbon dioxide equivalent. One CERrepresents a reduction of greenhouse gas emissions of one tCO2e. Chicago Climate Exchange (CCX): Members to the Chicago Climate Exchange make avoluntary but legally binding commitment to reduce GHG emissions. By the endof Phase I (December, 2006), all Members will have reduced direct emissions 4%below a baseline period of 1998-2001. Phase II, which extends the CCXreduction program through 2010, will require all Members to ultimately reduceGHG emissions 6% below baseline. Among the members are companies from North America as well as municipalitiesor U.S. States or Universities. As new regional initiatives began to takeshape in the U.S., membership of the CCX grew from 127 members in January 2006to 237 members by the end of the year while new participants expressed theirinterest in familiarizing themselves with emissions trading. Clean Development Mechanism (CDM): The mechanism provided by Article 12 of theKyoto Protocol, designed to assist developing countries in achievingsustainable development by permitting industrialized countries to financeprojects for reducing greenhouse gas emission in developing countries andreceive credit for doing so. Conference of Parties (COP): The Meeting of Parties to the United NationsFramework Convention on Climate Change. Eligibility Requirements: There are six Eligibility Requirements forParticipating in Emissions Trading (Art. 17) for Annex I Parties. Those are:(i) being a Party to the Kyoto Protocol, (ii) having calculated and recordedone’s Assigned Amount, (iii) having in place a national system for inventory,(iv) having in place a national registry, (v) having submitted an annualinventory and (vi) submit supplementary information on assigned amount. AnAnnex I party will automatically become eligible after 16 months have elapsedsince the submission of its report on calculation of its assigned amount.Then, this Party and any entity having opened an account in the registry canparticipate in Emissions Trading. However, a Party could lose its eligibilityif the Enforcement Branch of the Compliance Committee has determined the Partyis non-compliant with the eligibility requirements. Emission Reductions (ERs): The measurable reduction of release of greenhousegases into the atmosphere from a specified activity or over a specified area,and a specified period of time. Emission Reductions Purchase Agreement (ERPA): Agreement that governs thepurchase and sale of emission reductions. Emission Reduction Units (ERUs): A unit of emission reductions issued pursuantto Joint Implementation. This unit is equal to one metric ton of carbondioxide equivalent.European Union Allowances (EUAs): The allowances in use under the EU ETS. AnEUA unit is equal to one metric ton of carbon dioxide equivalent.


European Union Emission Trading Scheme (EU ETS): The EU ETS was launched onJanuary 1, 2005 as a cornerstone of EU climate policy towards its Kyotocommitment and beyond. In its first phase from 2005 to 2007, the EU ETSregulates CO2 emissions from energy- intensive installations representing some40% of EU emissions. Those emissions are capped at 6,600 MtCO2 over the 2005-2007 period. Following this pilot phase, Phase II of the EU ETS (extendingfrom 2008 to 2012) should see a tighter constraint on obligated installations,given that the decisions so far rendered on 19 NAPs set on average the annualcap at 5.8% below 2005 verified emissions (adjusted for Phase II perimeter).To meet their compliance requirements, installations may use EUAs, CERs andERUs (the latter for Phase II only). Supplementarity rules restrict the use ofCERs and ERUs in Phase II, at different levels in each Member State. Furtherinformation may be found at http://ec.europa.eu/ environment/climat/emission.htm Greenhouse gases (GHGs): These are the gases released by human activity thatare responsible for climate change and global warming. The six gases listed inAnnex A of the Kyoto Protocol are carbon dioxide (CO2), methane (CH4), andnitrous oxide (N20), as well as hydrofluorocarbons (HFC-23), perfluorocarbons(PFCs), and sulfur hexafluoride (SF6).High quality emission reductions: Emission reductions of a sufficient qualityso that, in the opinion of the Trustee, at the time a project is selected anddesigned, there will be a strong likelihood, to the extent it can be assessed,that PCF Participants may be able to apply their share of emission reductionsfor the purpose of satisfying the requirements of the UNFCCC, relevantinternational agreements, or applicable national legislation. Host Country: The country where an emission reduction project is physicallylocated. Internal rate of return: The annual return that would make thepresent value of future cash flows from an investment (including its residualmarket value) equal the current market price of the investment. In otherwords, the discount rate at which an investment has zero net present value. International Transaction Log (ITL): The ITL links together the nationalregistries and the CDM registry and is in charge of verifying the validity oftransactions (issuance, transfer and acquisition between registries,cancellation, expiration and replacement, retirement and carr-over). It is thecentral piece of the emissions trading under the Kyoto Protocol. It iscurrently undertaking tests with a number of registries. Joint Implementation (JI): Mechanism provided by Article 6 of the KyotoProtocol, whereby a country included in Annex I of the UNFCCC and the KyotoProtocol may acquire Emission Reduction Units when it helps to financeprojects that reduce net emissions in another industrialized country(including countries with economies in transition). Kyoto Mechanisms (KM): The three flexibility mechanisms that may be used byAnnex I Parties to the Kyoto Protocol to fulfill their commitments throughemissions trading (Art. 17). Those are the Joint Implementation (JI, Art. 6),


Clean Development Mechanism (CDM, Art. 12) and trading of Assigned AmountUnits (AAUs). Kyoto Protocol: Adopted at the Third Conference of the Parties to the UnitedNations Convention on Climate Change held in Kyoto, Japan in December 1997,the Kyoto Protocol commits industrialized country signatories to reduce theirgreenhouse gas (or “carbon”) emissions by an average of 5.2% compared with1990 emissions, in the period 2008-2012. Monitoring Plan (MP): A set of requirements for monitoring and verification ofemission reductions achieved by a project. National Allocation Plans (NAPs): The documents, established by each MemberState and reviewed by the European Commission, that specify the list ofinstallations under the EU ETS and their absolute emissions caps, the amountof CERs and ERUs that may be used by these installations as well as otherfeatures such as the size of the new entrants reserve and the treatment ofexiting installations or the process of allocation (free allocation orauctioning). New South Wales Greenhouse Gas Abatement Scheme (NSW GGAS): Operational since1st January 2003 (to last at least until 2012), the NSW Greenhouse GasAbatement Scheme aims at reducing GHG emissions from the power sector. NSW andACT (since 1st January 2005) retailers and large electricity customers havethus to comply with mandatory (intensity) targets for reducing or offsettingthe emissions of GHG arise from the production of electricity they supply oruse. They can meet their targets meet their targets by purchasing certificates(NSW Greenhouse Abatement Certificates or NGACs) that are generated throughproject activities.Offsets: Offsets designate the emission reductions from project-basedactivities that can be used to meet compliance – or corporate citizenship –objectives vis-à-vis greenhouse gas mitigation. Operational Entity (OE): An independent entity, accredited by the CDMExecutive Board, which validates CDM project activities, and verifies andcertifies emission reductions generated by such projects. Pre-Certified Emission Reductions (pre-CERs): A unit of greenhouse gasemission reductions that has been verified by an independent auditor but thathas not yet undergone the procedures and may not yet have met the requirementsfor registration, verification, certification and issuance of CERs (in thecase of the CDM) or ERUs (in the case of JI) under the Kyoto Protocol. Buyersof VERs assume all carbon-specific policy and regulatory risks (i.e. the riskthat the VERs are not ultimately registered as CERs or ERUs). Buyers thereforetend to pay a discounted price for VERs, which takes the inherent regulatoryrisks into account.Primary transaction: A transaction between the original owner (or issuer) ofthe carbon asset and a buyer.


Project-Based Emission Reductions: Emission reductions that occur fromprojects pursuant to JI or CDM (as opposed to “emissions trading” or transferof assigned amount units under Article 17 of the Kyoto Protocol). Project Design Document (PDD): A project specific document required under theCDM rules which will enable the Operational Entity to determine whether theproject (i) has been approved by the parties involved in a project, (ii) wouldresult in reductions of greenhouse gas emissions that are additional, (iii)has an appropriate baseline and monitoring plan. Project Idea Note (PIN): A note prepared by a project proponent regarding aproject proposed for PCF. The Project Idea Note is set forth in a formatprovided by the PCF and available on its website www. prototypecarbonfund.org.Reforestation: This process increases the capacity of the land to sequestercarbon by replanting forest biomass in areas where forests have beenpreviously harvested. Registration: The formal acceptance by the CDM Executive Board of a validatedproject as a CDM project activity. Secondary transaction: A transaction where the seller is not the originalowner (or issuer) of the Carbon asset. Sequestration: Sequestration refers to capture of carbon dioxide in a mannerthat prevents it from being released into the atmosphere for a specifiedperiod of time. Supplementarity: Following the Marrakesh Accords, the use of the Kyotomechanisms shall be supplemental to domestic action, which shall thusconstitute a significant element of the effort made by each Party to meet itscommitment under the Kyoto Protocol. However there is no quantitative limit tothe utilization of such mechanisms. While assessing the NAPs, the EuropeanCommission considered that the use of CDM and JI credits could not exceeded50% of the effort by each Member State to achieve its commitment.Supplementarity limits may thus affect demand for some categories of offsets. UK Emission Trading Scheme (UK ETS): Launched in March 2002, the UK ETS wasat the time the first domestic economy-wide GHG trading scheme. Participationwas on a voluntary basis and combined incentives (reduction by 80% of theClimate Change Levy for some participants, under the Climate Change Agreement,or CCA), penalties (withholding of fiscal abatement, contraction ofallowances) and flexibility (through an exchange). Only credits under the UKETS can be traded. On the whole, the Scheme is scheduled over its duration(2002-2006) to reduce emissions by 11.9 million tCO2e for “DirectParticipants”. Installations eligible for the EU ETS have joined the EU ETSfrom 1st January 2007 onwards. The UK ETS registry will remain open for CCAParticipants to trade through the voluntary market to meet their targets.United Nations Framework Convention on Climate Change (UNFCCC): Theinternational legal framework adopted in June 1992 at the Rio Earth Summit toaddress climate change. It commits the Parties to the UNFCCC to stabilize


human induced greenhouse gas emissions at levels that would prevent dangerousmanmade interference with the climate system. Validation: The assessment of a project’s Project Design Document, whichdescribes its design, including its baseline and monitoring plan, by anindependent third party, before the implementation of the project against therequirements of the CDM. Verified Emission Reductions (VERs): A unit of greenhouse gas emissionreductions that has been verified by an independent auditor. This designatesemission reductions units that are traded on the voluntary market. Verification Report: A report prepared by an Operational Entity, or by anotherindependent third party, pursuant to a Verification, which reports thefindings of the Verification process, including the amount of reductions inemission of greenhouse gases that have been generated.


Appendix C: 1998 Appraisal Of IWC-OwnedLand


Appendix D: Historical Balance Sheet

March 31, June 30, Sepember 30, December 31, March 31, June 30, Sepember 30, December 31,2002 2002 2002 2002 2003 2003 2003 2003

ASSETSCURRENT ASSETS

Cash 262 - - - - - - - Real estate for sale 400,000 - - - - - - - Machinery and equipment 495,000 495,000 495,000 495,000 495,000 495,000 495,000 495,000 Timber and timberlands 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000

TOTAL ASSETS 52,911,262 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000

LIABILITIES AND STOCKHODERS EQUITYCurrent Liabilities

Accounts payable 92,517 - - - - - - - Shareholder laon 195,000 - - - - - - - Accrued expense 68,000 - - - - - - -

Total current liabilities355,517 - - - - - - - STOCKHOLDERS' EQUITY

Common stock, $0001 par value,50,000,000 shares authorized25,189,205 shares issuedand outstanding. 2,519 2,519 2,519 2,519 2,519 2,519 2,519 2,519

Additional paid in capital 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780

Deficit accumulated during the development stage. (636,554) (681,299) (681,299) (681,299) (681,299) (681,299) (681,299) (681,299)

Total stockholders' equity52,555,745 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000

TOTAL LIABILIYIES ANDSTOCKHOLDER'S EQUITY 52,911,262 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 # 52,511,000

Balance Sheets (all amounts in US$)

March 31, June 30, Sepember 30, December 31, March 31, June 30, Sepember 30, December 31,2004 2004 2004 2004 2005 2005 2005 2005

ASSETSCURRENT ASSETS

Cash - - - - - - - - Real estate for sale - - - - - - - - Machinery and equipment 495,000 495,000 495,000 495,000 495,000 495,000 495,000 495,000 Timber and timberlands 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000 52,016,000

TOTAL ASSETS 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000

LIABILITIES AND STOCKHODERS EQUITYCurrent Liabilities

Accounts payable - - - - - - - - Shareholder laon - - - - - - - - Accrued expense - - - - - - - -

Total current liabilities- - - - - - - - STOCKHOLDERS' EQUITY

Common stock, $0001 par value,50,000,000 shares authorized25,189,205 shares issuedand outstanding. 2,519 2,519 2,519 2,519 2,519 2,519 2,519 2,519

Additional paid in capital 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780 53,189,780

Deficit accumulated during the development stage. (681,299) (681,299) (681,299) (681,299) (681,299) (681,299) (681,299) (681,299)

Total stockholders' equity52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000

TOTAL LIABILIYIES ANDSTOCKHOLDER'S EQUITY 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 52,511,000 # 52,511,000


Confidential BUSINESS PLAN August 2008

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