Fundamentals of Emission Reductions Purchase Agreements HCC Annual Meeting February 15, 2004

Why Contract? Contracts form the basis of the market For a well functioning market, contracts should: –Define the product –Set out rights and responsibilities –Allocate risk

Buying Carbon… Poses unique challenges because: The product does not exist Purchased in an ill defined market From people who do not know what or whether they can sell Where the rules are constantly changing

National Legislative Framework / Agreement / Authorization Host Country Agreement (JI only) Emission Reductions Purchase Agreement Legal Agreements for Carbon Finance Projects Letter of Intent World Bank Project Entity Host Country

ERPA The ERPA Creates the Product Defines Delivery Establishes Price and Terms of Payment MonitoringVerificationCertification Project Operation Implementing MP Enabling Verification CalculationTiming Deduction of Costs

Creating the Product WB purchases Verified Emission Reductions (not CERs) Defined as “reductions in GHG below a defined baseline” WB is responsible for: –Developing the baseline –Renewing the baseline –Creating the monitoring plan –Selecting an Operational Entity to verify and certify the VERs

Defining Delivery Delivery = receipt by the WB of: –A Verification Report; or –Annual ER Report (if Verification waived) Project Entity required to: –Operate project including: Meeting specified milestones in construction and/or generation Maintaining all relevant permits and licences Applying reasonable industry standards –Implement monitoring plan –Co-operate to obtain verification WB required to: –Contract the Operational Entity –Communicate with the Executive Board

Price and Payment Price is fixed Payment on “delivery” (receipt of Verification Report not CERs) Upfront Payment exceptional and dependent on unconditional letter of credit WB costs of project preparation, verification, certification, supervision deducted from amount paid to Project Entity WB costs capped

Risk and Responsibilities World Bank Responsible for: –Payment –Baseline –Verification Assumes risks: –KP –Baseline Project Entity Responsible for: –Constructing and Operating Project –Generating ERs Assumes risks: –Project

What happens if…. WB approach different to private sector: Underdelivery? –Right to adjust delivery schedule –Penalty only in event of fraud, gross negligence, wilful misconduct (eg 3 rd party sales) Default? –Bankruptcy, insolvency Termination to be avoided!

Questions? Carbon Finance Legal Team –Thomas Duvall (Chief Counsel) –Mina Guli –Aimee Christensen –Heather Batzel –Robert O’Sullivan