CCLaw Assist

Trading Carbon as a Commodity

Sale and Purchase of Carbon Credits

CCLaw Assist Workshop

South African National Climate Change Conference
18 October 2005

Paul Curnow
Senior Associate Foreign &
Commonwealth
Global Climate Change Practice Group Office

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in
professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference
to an “office” means an office of any such law firm.
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Overview

 What motivates buyers? What are the different types of

carbon credit?

 Different contracting approaches and emergence of

“standards”

 Dealing with CDM risk in emission reduction purchase

agreements

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What motivates buyers?

What are the different types of carbon

credit?

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What motivates buyers? Mandatory legal

obligation to reduce
greenhouse gas
emissions

Compliance
markets
Market for Carbon Credits
Projected €5 billion
Targeted by end 2005Voluntary or
offsets retail schemes

Offset real or contingent risks Voluntary compliance

that regulatory barriers may
arise due to significant
greenhouse emissions of a
project
targets for public
relations purposes or to
Market for Carbon Credits promote products as
“climate-neutral”
Projected €5 billion
by end 2005
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Types of carbon credits

Contractually-based credits

Buyer motivation Associated rules Species of credit Example

Early corporate to
No govt-approved “Emissions
corporate carbon
or other standard reduction”
trades
Voluntary
corporate and
Greenhouse
retail schemes “Approved Friendly
Govt-approved Abatement Unit”
verification or or “Verified 500 PPM
other standard Emission
Reductions” Kyoto
pre-compliance

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Types of carbon credits

Regulatory-based credits

Buyer motivation Associated rules Species of credit Example

Voluntary rules-based “Exchange Allowance” Chicago Climate

trading exchange or “Exchange Offset” Exchange

Created under EU Allowances

Mandatory cap & “Allowance” or
mandatory under
trade scheme “Unit”
(sometimes the EU ETS
voluntary) rules or
regulatory
framework “Abatement
Certified Emission
Mandatory certificate”,
Reductions under
baseline & credit “Project-based
Clean Development
scheme credit”
Mechanism
or “Offset”

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Structure of the carbon market

Project-based transactions Allowance-based transactions

EU Emission
JI and CDM
Trading Scheme

Voluntary UK ETS

Other
Compliance
Retail NSW Greenhouse Chicago Climate
Gas Abatement Exchange
Scheme
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Different contracting approaches

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Emerging contracting approaches

Standard sale agreement “Emission Reduction Purchase

for contractually-based Agreements” for
credits Verified Emission Reductions

“Emission Reduction Purchase

Agreements” for Kyoto Protocol Commodity and derivative market-
credits or other style agreements
statutory-based credits

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Factors influencing the adoption of different

approaches

Carbon credits from forestry

Type of carbon credit
sequestration

Type of trade Type of buyer

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Dealing with CDM risk in emission reduction

purchase agreements

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Key legal issues

Defining the commodity
 CERs delivered into a registry account?
 VERs delivered through provision of Verification
Report?
Establishing and transferring legal title
 On delivery or on payment?

Warranties and indemnities

 CDM-specific or in relation to project generally?

Default, Termination and Compensation

 Events of default and termination events
 Compensation amount – market price, liquidated
damages? ©2005 Baker & McKenzie 12
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Managing and mitigating CDM risk

Risk Mitigation Strategy

Failure to register  CERs or VERs

or non-approval of  Conditions precedent /
methdology Suspensive conditions

Inaccurate  Delivery shortfall provisions

validation/  Back-to-back with DOE
verification agreement
 Back-to-back with third party
Legal title contracts
 Warranties and
disputes representations
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regarding legal title
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Managing and mitigating Kyoto risk

Risk Mitigation Strategy

CER market risk  Different pricing structures

 Floors and ceilings

 Direct issuance into buyer’s

account
Delivery risks  Undertakings regarding
communicating with
CDM EB

Registry delays  Undertakings regarding

adding project
and failures participants
 Alternative delivery accounts
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Closing comments
 Range of motivations for buyers leads to complex
markets

 No one standard contract can accommodate range of

market variables (beyond price, quantity, delivery) not
common to all transactions

 Pioneering of standards demonstrate potential reduction

in complexity and hence increase in market efficiencies

 But different risks for different projects – still need to

tailor standards
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Questions?

Paul Curnow
Senior Associate

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in
professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference
to an “office” means an office of any such law firm.