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

wrong from a regulatory perspective. Forexample:• The host government could impose anobligation on participating landholders toreduce their net carbon emissions,destroying the “additionality” of any carbonreductions.• The government in the buyer’s jurisdictioncould implement a mandatory greenhousegas emission reduction law that covers thebuyer but does not recognize offsets, or doesnot recognize the project’s emissionreductions.• The host government could withdraw theparticipating landholders’ rights to sell, orcould appropriate the land or the carbon.• New tax laws in either the seller’s or thebuyer’s jurisdiction could destroy the valueof the transaction.Each of these eventualities could have drasticconsequences for a forest carbon buyer and/orseller. As a result, “change of law” clauses areoften highly complex and heavily negotiated,based on specific circumstances and risks in theseller’s and buyer’s countries and the relativebargaining power of the parties. The sampleagreement classifies a change in law as a forcemajeure event not to minimize these issues, butto avoid delving into a complex set of contractprovisions that are extremely context-dependent.Failure to Make or Accept DeliveryUnder a long-term forest carbon contract,delivery of VER is likely to happen ininstallments, as provided in the sampleagreement. Parties may want to include specificlanguage on what happens if a seller fails tomake, or a buyer fails to accept, a single delivery.Generally, this type of failure does not cause abreach of the whole agreement, but simplytriggers damages for the undelivered installment.If no, or fewer than expected, VERs are issued,then this would not be considered to cause afailure to make delivery under the sampleagreement. Because the contract calls fordelivery of all VERs generated and issued duringa given period of time, a failure to make oraccept delivery can only occur if VERs aregenerated and issued, yet delivery fails to occur.Damages (in monetary fees) for an undeliveredinstallment are meant to remove any incentivefor either party to violate its delivery obligationsbecause it can get a better deal on the spotmarket or elsewhere. These damages are notusually designed as a punishment, but are meantto make the other party “whole” in terms ofputting that party in the position that it wouldhave been in, had VERs been delivered oraccepted as promised.If a seller fails to deliver VERs, it would typicallyhave to pay the buyer’s replacement cost, or thepositive cost, if any, of replacement VER abovethe agreed contract price. In other words, thebuyer will pay the contract price and no more forthe credits that it expected to receive, even if theprice of replacement VER is higher. If the priceof replacement VER is lower than the contractprice, then the seller will not owe damages.Conversely, if a buyer fails to accept delivery, itwould have to pay the seller’s replacement cost –the negative difference, if any, between thecontract price and the price that the seller is ableto get from a replacement buyer. In otherwords, the seller will get no less than the contractprice for its credits. If the price that areplacement buyer is willing to pay is higherthan the contract price, then the buyer will notowe damages.Damages also generally include interest thataccrues from the delivery date, as well as costsand fees owed by the performing party due tothe non-performance.Contracting for Forest Carbon | 14