Negotiating Carbon Trade & ERPA trabnsactions

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This presentation was given at a lecture to the students of the Carbon Management School (Carbon Minus India) at New Delhi

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Negotiating Carbon Trade & ERPA trabnsactions

  1. 1. Legal Issues In CDM, Carbon Transactions & Executing ERPA By: Preet Sethi Partner - Kaden Boriss Partners,Lawwers
  2. 2. Carbon Trading <ul><li>Carbon trading is basically a commercialised activity that originates from protecting the earth from harmful emission of gases from industries. Participants in carbon trading buy and sell contractual commitments or certificates that represent specified amounts of carbon-related emissions that either: </li></ul><ul><ul><ul><li>are allowed to be emitted; </li></ul></ul></ul><ul><ul><ul><li>comprise reductions in emissions (new technology, energy efficiency, renewable energy); or </li></ul></ul></ul><ul><ul><ul><li>Comprise offsets against emissions, such as carbon sequestration (capture of carbon in biomass). </li></ul></ul></ul><ul><li>People buy and sell such products because it is the most cost-effective way to achieve an overall reduction in the level of emissions, assuming that transaction costs involved in market participation are kept at reasonable levels. </li></ul>
  3. 3. Carbon Trading <ul><li>The Koyoto protocol provides three mechanisms to developed nations to meet their emission targets: </li></ul><ul><li>Joint implementation among the developed nations: Allows industrialised countries with a greenhouse gas reduction commitment to invest in emission reducing projects in another industrialised country as an alternative to emission reductions in their own countries. </li></ul><ul><li>The Clean Development Mechanism provides developed nations with CERs for implementing carbon emission reduction projects in developing nations. Developed countries can use the CERs generated by such projects to meet their emission targets under the protocol. </li></ul><ul><li>Emission trading among the developed nations under which a central authority sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit greenhouse gases are required to hold an equivalent number of credits or allowances representing the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those which emit less. </li></ul>
  4. 4. Carbon Trading <ul><li>The major feature of the Kyoto Protocol is that it sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions through the followin mechanism </li></ul><ul><ul><ul><li>Emissions trading which is known as ‘Carbon Market’, </li></ul></ul></ul><ul><ul><ul><li>Clean Developed Mechanism (CDM), </li></ul></ul></ul><ul><ul><ul><li>Joint Implementation (JI). </li></ul></ul></ul><ul><li>The “currency” for measurement and monetary exchange of these carbon-reduction obligations, is called a CER (Carbon Emission Reduction unit) equivalent to one ton of carbon dioxide equivalent emission </li></ul><ul><li>The other units which may be transferred under the scheme, each equal to one tonne of CO2, may be in the form of: </li></ul><ul><ul><li>A removal unit (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation </li></ul></ul><ul><ul><li>  An emission reduction unit (ERU) generated by a joint implementation project </li></ul></ul><ul><ul><li>A certified emission reduction (CER) generated from a clean development mechanism project activity. </li></ul></ul><ul><ul><li>Transfers and acquisitions of these units are tracked and recorded through the registry systems under the Kyoto Protocol. . </li></ul></ul>
  5. 5. Legal Aspects of Carbon Trade <ul><li>Ownership of Atmosphere : The Property Rights Issues </li></ul><ul><li>Nature of Carbon Contracts & Carbon Trade – ER’s a new ‘commodity’ </li></ul><ul><li>Ownership of Emission Reductions (ERs) and Legal Process of Transfer- If Project is “legal” in domestic jurisdiction and ERs are “certified” and “verified” by authorised agents, then ERs are legal commodities </li></ul><ul><li>Carbon Contracts Provide a documented framework within which “emission rights” are brought , sold ,acquired , transferred. </li></ul>
  6. 6. What is CDM? <ul><li>The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex B countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. </li></ul><ul><li>The CDM allows net global greenhouse gas emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries. </li></ul><ul><li>The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC). </li></ul><ul><li>Purpose of CDM: Apart from helping Annex B countries comply with their emission reduction commitments, it must assist developing countries in achieving sustainable development, while also contributing to stabilization of greenhouse gas concentrations in the atmosphere. </li></ul><ul><li>To prevent industrialised countries from making unlimited use of CDM, Article 6.1 d) has a provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. </li></ul>
  7. 7. The CDM Project Process <ul><li>An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that the project will contribute to sustainable development. </li></ul><ul><li>Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country) must make the case that the carbon project would not have happened anyway (establishing additionality). </li></ul><ul><li>Then it must establish a baseline estimating the future emissions in absence of the registered project. </li></ul><ul><li>The case is then validated by a third party agency, called a Designated Operational Entity (DOE), to ensure the project results in real, measurable, and long-term emission reductions. </li></ul><ul><li>The EB then decides whether or not to register (approve) the project. If a project is registered and implemented, the EB issues credits, called Certified Emission Reductions (CERs, commonly known as carbon credits, where each unit is equivalent to the reduction of one metric tonne of CO2e, e.g. CO2 or its equivalent), to project participants based on the monitored difference between the baseline and the actual emissions, verified by the DOE. </li></ul>
  8. 8. CDM in India <ul><li>India is a Party to the United Nations Framework Convention on Climate Change (UNFCCC) </li></ul><ul><li>Central Government constituted the National Clean Development Mechanism (CDM) Authority for the purpose of protecting and improving the quality of environment in terms of the Kyoto Protocol. </li></ul><ul><li>The National Clean Development Mechanism (CDM) Authority receives projects for evaluation and approval as per the guidelines and general criteria laid down in the relevant rules and modalities pertaining to CDM in addition to the guidelines issued by the Clean Development Mechanism Executive Board and Conference of Parties serving as Meeting of Parties to the United Nations Framework Convention on Climate Change. </li></ul>
  9. 9. Approval Process - NCDMA Source: http://cdmindia.nic.in
  10. 10. Negotiating Carbon Transactions <ul><li>The 3 C’s of a Contract </li></ul><ul><ul><li>C larity </li></ul></ul><ul><ul><ul><li>C ertainty </li></ul></ul></ul><ul><ul><ul><ul><li>C ode of Conduct </li></ul></ul></ul></ul>
  11. 11. Negotiating, Drafting & Executing ERPA Or Carbon Trade Document <ul><li>Key Contractual Provisions </li></ul><ul><ul><li>Parties </li></ul></ul><ul><ul><li>Recitals or Whereas Clauses </li></ul></ul><ul><ul><li>Definition of Terms </li></ul></ul><ul><ul><li>Delivery Mechanism Transfer of Title </li></ul></ul><ul><ul><li>Price and Terms of Payment </li></ul></ul><ul><ul><li>Shortfall or Failure to Deliver </li></ul></ul><ul><ul><li>Evidencing the validity of the ERs being contracted </li></ul></ul><ul><ul><li>Risk </li></ul></ul><ul><ul><li>Anticipation of changes in future regulatory framework etc. </li></ul></ul><ul><ul><li>Warranties and Representations </li></ul></ul>3 C’s
  12. 12. <ul><li>Key Contractual Provisions </li></ul><ul><ul><li>Liabilities and Indemnities </li></ul></ul><ul><ul><li>Default,Termination and Remedies </li></ul></ul><ul><ul><li>Progress Reports and Audit Rights </li></ul></ul><ul><ul><li>Confidentiality </li></ul></ul><ul><ul><li>Arbitration and Dispute Resolution </li></ul></ul><ul><ul><li>Force Majeure </li></ul></ul><ul><ul><li>Third Parties </li></ul></ul><ul><ul><li>Compliance of Local/Domestic Laws </li></ul></ul><ul><ul><li>Taxes, Levies and Charges </li></ul></ul>Negotiating, Drafting & Executing ERPA Or Carbon Trade Document 3 C’s
  13. 13. <ul><li>Key Contractual Provisions - Miscellaneous provisions  </li></ul><ul><ul><li>Entire agreement </li></ul></ul><ul><ul><li>Assignment </li></ul></ul><ul><ul><li>Governing law and enforceability </li></ul></ul><ul><ul><li>Jurisdiction </li></ul></ul><ul><ul><li>Variation /amendments </li></ul></ul><ul><ul><li>Successors and Assigns </li></ul></ul><ul><ul><li>Severability </li></ul></ul><ul><ul><li>Delay or Omissions </li></ul></ul><ul><ul><li>Waiver </li></ul></ul><ul><ul><li>Public Relations </li></ul></ul><ul><ul><li>Survival </li></ul></ul><ul><ul><li>Notice </li></ul></ul>Negotiating, Drafting & Executing ERPA Or Carbon Trade Document 3 C’s
  14. 14. ERPA <ul><li>The Emission Reduction Purchase Agreement is a vital document for the developer of a CDM project. </li></ul><ul><li>This agreement usually involves two countries; however, it may occur between a country and a large corporation.  </li></ul>
  15. 15. Likely Pitfalls For Sellers in EPRA <ul><li>This can be because of advantages that the buyer has : </li></ul><ul><ul><li>The buyer is very experienced, having negotiated numerous ERPAs </li></ul></ul><ul><ul><li>Often, the buyer insists on using its standard agreement </li></ul></ul><ul><ul><li>The buyer has much greater knowledge about the market </li></ul></ul><ul><ul><li>The buyer is more familiar with the language used </li></ul></ul><ul><li>Or because of disadvantages on the seller side: </li></ul><ul><ul><li>Often too optimistic about the likely results of the project </li></ul></ul><ul><ul><li>May be too busy for detailed ERPA negotiations </li></ul></ul><ul><ul><li>May not be confident dealing in a new area of business </li></ul></ul>There have been many instances of project developers signing very unfavourable ERPAs, and in doing so, taking on unnecessary risks, and not receiving a sufficiently high level of reward.
  16. 16. ERPA’s Key Elements <ul><li>The key elements in any ERPA will cover the following areas: </li></ul><ul><ul><li>Quantity of CERs to be delivered </li></ul></ul><ul><ul><li>Price per unit </li></ul></ul><ul><ul><li>Delivery schedule </li></ul></ul><ul><ul><li>Consequences of non-delivery </li></ul></ul><ul><ul><li>Other default events </li></ul></ul>ERPAs are usually long-term agreements and need to cover a range of potential scenarios, so they will generally be more complex than this, often extending to 30 – 40 pages.
  17. 17. IETA Model ERPA <ul><li>The International Emissions Trading Association is an independent, non-profit organisation dedicated to the establishment of effective systems for trading in greenhouse gas emissions by businesses. It has carried out lengthy consulting work among potential buyers of CERs, lawyers and participants in the emission trading market to develop template ERPAs, which can be used as a standard for all market participants. </li></ul><ul><li>IETA ERPA professes to be a neutral document but many of its clauses tend to favour the buyer, rather than the seller. </li></ul><ul><li>Most buyers will have a template agreement similar to this, so it is important for potential CER sellers to be aware of how these types of agreement work, so that they can negotiate for clauses and wordings that are more favourable to them. </li></ul>
  18. 18. IETA Model ERPA <ul><li>Most of the key terms of the Agreement are described in detail in the Code of CDM Terms, which is an attachment to the Agreement. The Agreement itself is relatively brief, and mostly refers to the Code of CDM Terms for the contractual conditions, and to separate Schedules for the commercial terms. Therefore, when reviewing draft agreements from a Buyer under this format, it is essential to read the Code of CDM Terms first </li></ul><ul><li>Emission Reduction Purchase Agreement v3.0 </li></ul><ul><li>This largely refers to items described in more detail in the Code of CDM Terms. Where options are available under the Code of Terms, the Agreement may specify which option is to be used in this Agreement, but in many cases, the Agreement refers to Schedule 1, which again refers back to the Code of CDM Terms. Nonetheless, the main Agreement should be studied carefully, with reference to the other sections, in order to ensure that the overall arrangements are in line with the Seller’s understanding. </li></ul>
  19. 19. CRM ERPA- salient feature <ul><li>Sale and Purchase agreement </li></ul><ul><li>Object is the “commodity” of ERs </li></ul><ul><li>Amount, Price and Delivery/Payment Schedule </li></ul><ul><li>Defines who does what with regard to: </li></ul><ul><ul><li>Validation </li></ul></ul><ul><ul><li>Registration </li></ul></ul><ul><ul><li>Verification & Certification </li></ul></ul><ul><li>Provisions on payment for ERs and reparation/ supervision cost recovery (if any). </li></ul><ul><li>Payment generally upon delivery, some advance payments possible </li></ul><ul><li>Events of Defaults and Remedies E.g. under delivery of ERs </li></ul><ul><li>Other than for willful breach, no tough penalties, preferred option to amend ER delivery schedule </li></ul><ul><li>ERPAs typically do not include “delivery guarantee” from seller. </li></ul>
  20. 20. THANK YOU <ul><li>Kaden Boriss Partners Lawyers </li></ul><ul><li>Kaden Boriss Building, 495, Udyog Vihar, Phase – V, Gurgaon, Haryana, INDIA Tel: +91 124 40404193 Fax: +91 124 40404194 Email: [email_address] </li></ul>

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