UNDP's mitigation strategy in Africa

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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
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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/
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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

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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

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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?

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Key Terms Delivery Transfer of Title

• Delivery Quantities

Fixed Volume (Volume guarantee) Seller will deliver 250,000 credits per year
Percentage (No guarantee) Seller will deliver 80 of credits generated per year
Percentage with fixed minimum Seller will delivery 80 of credits generated per year, but no less than 250,000 credits per year

• Scheduled delivery dates
• Possibility of early delivery?
• Transfer of legal title to credits?
• Possession vs. Ownership

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Example Delivery Schedule
Verification Period Number of Credits Delivery Date
1 March 2008 31 December 2008 60,000 1 March 2009
1 January 2009 31 December 2009 100,000 1 March 2010
1 January 2010 31 December 2010 130,000 1 March 2011
1 January 2011 31 December 2011 130,000 1 March 2012
1 January 2012 31 December 2012 130,000 1 March 2013
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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

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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 partys 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

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Key Terms Defaults / Remedies

• What constitutes a default?
• Delivery failure
• Shortfall in delivery
• Late delivery
• What if the Seller isnt at fault?
• Payment failure
• Is there are cure period?
• Remedies
• Right to terminate
• Duty to provide replacement carbon credits
• Payment of damages

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More key terms

• Force Majeure
• Acts which are beyond the reasonable control of
  the parties

• Governing law
• Dispute resolution
• Assignment / Change of Control

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Will there be a Post 2012 framework?

• Lets do it says the Conference of Parties

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Post 2012 framework

• Yes says the market

Preliminary findings from IETAs 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?

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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?