Strategic Approach to Climate Change
Greenhouse gas (GHG) emissions and climate change pose regulatory and reputation risks to the energy industry, with implications on the financial markets and corporate performance.

Talisman’s actions to address these risks includes:

1. monitoring and participating, where necessary, in the development of provincial, national and international regulatory initiatives such as the EU Emissions Trading System (ETS);
2. improving our emissions reporting systems, including third party auditing of management systems;
3. developing environmentally innovative projects such as the Beatrice Wind Farm Demonstrator Project and cogeneration facilities in Western Canada;
4. studying the use of a Clean Development Mechanism (CDM) Project in Southeast Asia to generate certified emissions reductions (CER) for use in Canada and the North Sea; and
5. investing in research and development in emissions management technology.

Talisman will continue to develop its strategy to proactively respond to stakeholder concerns and enhance long-term shareholder value. Talisman’s approach will evolve over time as the regulatory, fiscal and technological framework becomes clearer.

Canadian Regulatory Framework for Air Emissions
In April 2007, the Canadian government released its Regulatory Framework for Air Emissions, which sets out how the Canadian government intends to manage GHG and air pollutant emissions between now and 2020. The framework serves as the foundation for more detailed air emissions regulations starting in 2008.

One key component of this new framework is a set of intensity-based reduction targets for GHG emissions, which is a departure from the absolute reduction targets required under the Kyoto Protocol. The framework establishes a 2010 implementation date for greenhouse gas emissionintensity reduction targets in upstream oil and gas and other industrial sectors. By 2010, all eligible facilities are to have reduced their emissions intensity by 18% relative to the 2006 baseline. An incremental 2% reduction is required annually thereafter. Compliance options might include energy efficiency measures, emissions trading, the purchase of certain types of CDM credits and contributions to an independently managed climate change technology fund.

Alberta’s Climate Change and Emissions Management Amendment Act
In March 2007, the Alberta government introduced its Specified Gas Emitters Regulation as part of the province’s Climate Change and Emissions Management Amendment Act. This new regulation requires industrial emitters of GHG to reduce their emissions as of July 2007. Facilities that emit more than 100,000 tonnes per year of CO2 equivalent are required to measure and report their baseline emissions intensity based on the average emissions and production data from 2003 to 2005, then reduce their net emissions intensity by 12% from the baseline by the end of 2007.

Compliance options include internal reductions, purchasing Alberta-based offsets or contributing to the government-managed Carbon Research Fund at a cost of $15 per tonne. Talisman currently has only one facility, its Edson gas plant, that exceeds the 100,000 tonne threshold. While many important details are currently lacking in both the Canadian and Alberta proposals, the cost to Talisman is not likely to be material. Talisman will continue to engage the federal and provincial governments and evaluate regulations as they evolve.

EU Emission Trading Scheme Phase II Impacts
On January 1, 2008, Phase II of the EU ETS scheme came into effect. In the UK, third party verification of the Company’s carbon dioxide emissions are completed annually. Fuel gas and diesel metering upgrades have also been completed. Talisman regularly forecasts emissions, compares forecasts against actual performance and allowances and validates forecast methodologies. The Company’s CO2 allowances exceeded emissions in 2007. Forecasts predict Talisman will be in a minor deficit position in 2008. This will be rectified through capital investment or trading.

In Norway, prior to 2008, Talisman’s installations were subject to a carbon emissions tax, which was not significant to the Company. Beginning in 2008, the Norwegian government expanded its existing national emissions trading system for greenhouse gases, linking it to Phase II of the EU ETS. The expansion of the Norwegian national emissions trading system results in the inclusion of Talisman’s Norwegian installations in Phase II of the EU ETS, making emissions subject to third party verification.

Beginning in 2008, Talisman’s Norwegian installations must purchase emissions credits corresponding to their total annual emissions. Talisman must also continue to pay the carbon emissions tax in Norway. However, Talisman does not expect Phase II compliance costs to be material because the Norwegian government will reduce the carbon emissions tax to ensure that total costs of the carbon emissions tax and emissions credit purchases will be similar to the pre-2008 costs.

CO2 Emissions in Southeast Asia
Talisman’s PM-3 CAA project offshore Malaysia and Vietnam is a significant source of the Company’s global CO2 equivalent emissions, accounting for approximately 5.2 million tonnes of CO2 equivalent emissions in 2007. This represented more than half of the Company’s global CO2 emissions last year. Given that petroleum reservoirs found throughout Thailand, Malaysia, Indonesia, Vietnam and China are particularly CO2-rich, this was not unexpected. Further contributing to the increase in emissions was the startup in 2007 of the new BRE gas processing plant and the accompanying production increase.

The Company recognizes that this growing volume of emissions is a significant issue that needs to be addressed. Although standard industry practice in the region is to routinely flare gas and vent CO2, the Company believes it may have a long-term solution that would significantly reduce its CO2 venting at the project. During PM-3 CAA construction, provisions were made that would allow for the reinjection of the almost pure stream of CO2 and Talisman has begun studying if there is feasibility in reinjecting CO2 emissions into older depleted gas reservoirs near the existing facilities.

Although, currently, the fiscal and regulatory regimes throughout the region make no provision for CO2 reinjection, Talisman believes that CO2 reinjection at PM-3 CAA may qualify as a CDM project under the still-developing international climate change framework. CDM projects generate a material volume of CER credits, which could be sold into the market or used to retire regulatory obligations elsewhere. Such a CDM project at PM3-CAA would require the agreement of the governments of Malaysia and Vietnam.

Talisman continues to evaluate the potential for reinjecting CO2 at PM-3 CAA and is continuing to monitor the development of the applicable CDM mechanisms and processes. There are several evolving factors associated with a potential CDM project related to timing, process, definitions, methodologies and economics that are applicable to the geological storage of CO2. There is also uncertainty as to the long-term market value for CER credits. Talisman will continue to assess these various factors on an ongoing basis.

Talisman Recognized as a Climate Disclosure Leader
In August 2007, Talisman was listed on the TSX 200 Climate Disclosure Leadership Index. This Index is comprised of 15 companies, traded on the Toronto Stock Exchange, judged to have made the best submissions to the Carbon Disclosure Project (CDP). The CDP is a collaboration of institutional investors whose aim is to raise awareness about the risks and opportunities presented by climate change.It represents 315 global investors that have $41 trillion in assets under management. For more information, click here.