Contracting for Forest Carbon : Elements of a Model ... - Forest Trends

More documents

Recommendations

Info

Legal costs make up a significant, and oftenoverlooked, share of forest carbon transactioncosts. By providing readers – whether sellers,buyers, lawyers, or other stakeholders – with anunderstanding of forest carbon legal issues, aswell as a basic familiarity with contractuallanguage, this document can help to reducethese costs.Box 2. Emission Reductions and VerifiedEmission ReductionsEmission reductions (ERs) represent net carbon(or CO2 equivalent) emission reductions oradditional carbon storage, in tons, due to aforest carbon project.Successful validation and verification ofemission reductions to an external standard –for example, the Voluntary Carbon Standard –transforms ERs into verified emission reductions(VERs), a marketable commodity.The sample agreement in this documentinvolves multiple sellers, represented in theagreement by a single individual, and a forwardpurchase of VERs on the voluntary carbonmarket. “Forward” refers to the fact that partiesagree to the purchase and sale of VERs that havenot yet been created.A forward emission reductions purchaseagreement is by no means the only way tostructure investments in forest carbon projects.Another option is to use private equity financingto give the investor some rights to eventualrevenues, and possibly a degree of control overproject activities, in return for early-stageinvestment. At the other end of the projectcycle, a buyer may make a “spot” purchase ofVERs that have already been generated andissued, virtually eliminating the buyer’s exposureto project risks and allowing the seller to ask fora higher price per VER. Different investmentand purchase options involve trade-offs betweenprice, risk, level of control, and other factors.This document discusses a forward sale of VERsas opposed to some other investment orpurchase agreement for several reasons. First, theforward sale tends to be an attractive option forforest carbon sellers that need up-frontfinancing, help with project costs, and/orsharing of project risks with an investor orbuyer. Second, an emission reductions purchaseagreement can be relatively standardized, yetremain customizable for specific transactions,making it well-suited for use in a guidancedocument such as this one. Third, forwardpurchase agreements raise forest-carbon-specificissues related to project activities, advancepayments, default and remedies clauses, andother issues, in a way that spot purchaseagreements, for example, do not. This type ofagreement therefore provides a good frameworkfor discussing negotiation and contracting issuesthat are in some way unique or specific to forestcarbon.While the authors have made every effort toensure that the information provided is relevantto forest carbon project participants generally,different issues will arise in every case. Readerstherefore should not rely upon the informationprovided here for legal advice, but should seekout experienced legal support appropriate totheir particular circumstances.Contracting for Forest Carbon | 2
Introducing the Transactionand the PartiesTitle, Introduction, and RecitalsThe forest carbon agreement will have a title,which should be simple but descriptive but neednot include the names of the parties. Theintroduction follows, in the form of a shortparagraph identifying the parties and the date ofthe agreement. The principal, legal, or registeredaddresses of the parties are generally listed here.The date of the contract should ideally be thedate of signing for the last party to sign theagreement.Next come the recitals, which include anybackground information that the parties think isrelevant. Recitals may include a description ofthe goals of the agreement along withbackground information about the project, theparties, and any relevant agreements betweenthe parties or any party and one or more thirdparties. The recitals should not contain anybinding obligations.The introductory part of the agreement endswith a lead-in sentence indicating that “theparties agree as follows,” as shown in Box 1.Box 1. Sample Beginning of an AgreementFOREST CARBON EMISSIONREDUCTIONS PURCHASEAGREEMENTThis forest carbon emission reductions purchaseagreement is dated , and isbetween Seller Representative Assn., a Braziliannon-profit association (the “SellerRepresentative”), and Investor Corp., aDelaware corporation (the “Buyer”).RECITALSThe Seller Representative and participatingmembers of the Ecosystem Service ProviderCommunity (“Participating Landholders”) areparty to an agreement dated ,concerning the authority of the SellerRepresentative to represent the ParticipatingLandholders with respect to forest carbontransactions on land under the control of theParticipating Landholders.Participating Landholders wish to undertakeland management activities in order to reduceemissions from deforestation and degradationand enhance carbon sequestration in forestsunder their control (the “Project”).The Buyer wishes to pay ParticipatingLandholders for the right to claim credit foremission reductions or additional sequestrationgenerated by the land management activities ofParticipating Landholders.The parties therefore agree as follows:PartiesIn its simplest form, a purchase agreement isbetween two parties: a buyer and a seller. Aforest carbon purchase transaction, however,may involve multiple sellers – perhaps evenwhole communities – and multiple buyers.Generally speaking, the more parties areinvolved, the higher the administrative andtransaction costs will be. The additional cost,and potential risk, can and should be mitigatedby the use of one or more intermediary entitiesto: (1) represent the sellers as a collective unit innegotiating with third parties, including buyers,(2) oversee project development andgovernance, and (3) manage collection anddisbursement of revenues.Where multiple sellers are involved, sellersshould ideally agree to be represented by a singleContracting for Forest Carbon | 3
Page 1 and 2: Contracting for Forest Carbon:Eleme
Page 3: Contracting for Forest Carbon:Eleme
Page 6: AcknowledgmentsA joint project betw
Page 12 and 13: individual or entity - a sellers’
Page 14 and 15: prior, and informed consent by all
Page 16 and 17: 3.5 Payment Mechanics. On or before
Page 18 and 19: in the agreement (see Box 11 - Defa
Page 20 and 21: qualified to perform validation and
Page 22 and 23: wrong from a regulatory perspective
Page 24 and 25: (d) A failure to deliver payment wh
Page 26 and 27: a court of law, but is binding on t
Page 28 and 29: (6) to time is to Eastern Standard
Page 30 and 31: Wrapping Up: Signaturesand AnnexesS
Page 33 and 34: Works CitedCERSPA Initiative. Certi

Contracting for Forest Carbon : Elements of a Model ... - Forest Trends

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?