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Emission Reduction Purchase Agreements

Emission Reduction Purchase Agreements. Presented by Adam Shepherd Regional Workshop on Legal, Institutional and Financial aspects of Carbon Finance Istanbul, Turkey 21-22 January 2008. Overview of an ERPA?. Parties Generally bilateral Project Proponent (Seller) Buyer

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Emission Reduction Purchase Agreements

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  1. Emission Reduction Purchase Agreements Presented by Adam Shepherd Regional Workshop on Legal, Institutional and Financial aspects of Carbon Finance Istanbul, Turkey 21-22 January 2008

  2. Overview of an ERPA? Parties • Generally bilateral • Project Proponent (Seller) • Buyer • Others parties may include: • Guarantor • Custodian / Trustee • Additional buyers • What is an ERPA? • Emission Reductions Purchase Agreement • Contract for the sale of carbon • Forward sale vs. Spot sale • No “market standard” • Templates exist - World Bank, IETA Primary & Secondary ERPAs Secondary ERPA Primary ERPA Buyer Project Proponent Buyer Credits / $$ Credits/ $$

  3. Key ERPA Terms Key terms should be included in an ERPA: • Define the carbon commodity • Purchase volume • Unit Price • Payments • Delivery • Options • Project implementation / operation • Costs & Taxes

  4. Key Terms – Define the carbon commodity • What do the parties intend to sell / purchase? • CERs = Certified Emission Reductions • VERs = Verified Emission Reductions • ERUs = Emission Reduction Units • Many other trading units • Why is it important to define the “carbon credit” • Eligibility of carbon credit for future use (compliance, trading) • Avoid the risk of double selling • Ensure validity of the carbon credits

  5. Key Terms – Pricing & Payments Purchase price • Unit price per carbon credit • Fixed prices • Floating price • Differential pricing structures • Currency $ £ € • Forecasted value • Sellers – Currency of project costs? • Buyers – Currency to on-sell carbon credits? Payments • Payment upon delivery • Advance payments • Interest?

  6. Key Terms – Delivery & Transfer of Title • Delivery Quantities • Scheduled delivery dates • Possibility of early delivery? • Transfer of legal title to credits? • Possession vs. Ownership

  7. Example Delivery Schedule

  8. Key Terms – Option for Additional Credits • What is an option? • A contractual right granted by the Seller to Buyer to purchase some or all additional carbon credits. • Seller has the choice to exercise the option • Timing for exercise of the Option? • Quantity of “Additional” carbon credits • Option granted over all Additional Credits • Option granted over fixed number / percentage of Additional Credits • One-off vs. Multiple options • Option to purchase additional credits generated each year • Option to purchase additional credits in the final year

  9. Key Terms – Costs & Taxes A carbon contract should allocate responsibility for costs and taxes Costs • Project development and commissioning • CDM process costs – validation, verification, DNA fees for Letter of Approval • Each party’s individual costs for performance • Contracting costs Taxes • Administration Share of Proceeds • USD 0.10 per CER for the first 15,000 tonnes of CO2 equivalent for which issuance is requested in a given year; and • USD 0.20 per CER for the any amount in excess of the first 15,000 tonnes of CO2 equivalent for which issuance is requested in a given year. • Adaptation Share of Proceeds – 2% of Carbon Credits upon issuance • Domestic taxes – Income, Business, Land, Imports

  10. Key Terms – Defaults / Remedies • What constitutes a default? • Delivery failure • Shortfall in delivery • Late delivery • What if the Seller isn’t at fault? • Payment failure • Is there are cure period? • Remedies • Right to terminate • Duty to provide replacement carbon credits • Payment of damages

  11. More key terms • Governing law • Dispute resolution • Assignment / Change of Control • Force Majeure • “Acts which are beyond the reasonable control of the parties…”

  12. Will there be a Post 2012 framework? • “Let’s do it” says the Conference of Parties:

  13. Post 2012 framework • “Yes” says the market: Preliminary findings from IETA’s recent Market Sentiment Survey indicate that more than 90% of respondents believe that the GHG Market is an established instrument that will continue post 2012. (State and Trends of Carbon Market 2007, pg 38) • How do the parties to an ERPA address the possibility of a Post-2012 framework? • Granting Buyer an option over credits generated Post-2012 • Granting Buyer a Right of First Refusal • Right to match the price offered by a third party?

  14. ERPA Workshop – Practical Exercise • Handout – ERPA checklist • Handout – Template ERPAs • World Bank template • International Emissions Trading Association (IETA) template • Exercise – Review the Term Sheet • Is this a CDM, JI or Voluntary project? • Is the type of carbon credits defined? • Is the Buyer guaranteed delivery of a quantity of carbon credits? • What key ERPA terms are missing?

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