PoA Course CH5 L2

Module 2: PoA Management

Chapter 5: Legal Management

Lecture 2

Agreements with DOEs

Sale of CERs

Congratulations on Completing Chapter 5

Agreements between

CME and End-users

Agreements between CME and technology supply and support providers

Agreements between CME

and CPA Developers

Spot Trades

CERs can be sold and purchased:

Complementary Reading Material

DOEs are responsible for erroneous CPA inclusion and erroneously issued CERs

Written in local and self-explanatory language, be clear and simple, and contain:

Technology and support providers can provide support for the distribution of payments and monitoring of emission reductions

• DOEs will seek to transfer the financial responsibility and liabilities to the CME
• CME will have interest in leaving the DOE responsible for liabilities identified and addressed during validation and verification

Require CPA developer to:

Climate Focus, 2013: "The Handbook for Programmes of Activities - Practical Guidance to Successful Implementation", 2nd Edition,

Draw an agreement between CME and CPA developer specifying respective roles, tasks and obligations:

Once CERs have been issued by the CDM Executive Board, they can be traded on the “spot” market.

In this case, there is no risk from a buyer's perspective that the CERs will not actually be generated

http://www.climatefocus.com/documents/handbook_for_programme_of_activities_2nd_edition

• On a “spot” trade basis, after the CERs have been issued

• On a forward basis, with multiple future delivery dates for CERs

Roles and contract arrangements may vary between PoAs and change over time

Curnow, Paul; Hodes, Glenn, 2009: "Implementing CDM Projects - A Guidebook to Host Country Legal Issues", UNEP Risø Centre

Validation and verification contract needs to be carefully examined and negotiated

• A clear reference to the programme
• Acknowledgement of voluntary participation by the end-users
• Statement regarding the transfer of the rights to the carbon credits
• Statement that the activity is not and will not be a part of any other PoA or emission reduction project
• Statement requiring end-users to use the equipment correctly and not interfere with operation
• Statement where end users agree to facilitate monitoring

e.g. admitting DOEs for periodic inspections of equipment

• Provision whereby the CPAs can be removed from the PoA in case of non-compliance

• Engage the end-users according to the PoA's objectives and criteria
• Ensure that the CPAs does not constitute a de-bundling of another existing activity
• Ensure that the technology penetration and rolling out runs in a stable manner
• Ensure that data is monitored, collected, and transmitted to the CME

Technology Contracts

http://cd4cdm.org/Publications/ImplementingCDM_GuidebookHostCountryLegalIssues.pdf

Technology Supply and Support Structures

Forward trades

• Ensure that the CPA is in line with the programme
• Specify who is responsible for meeting eligibility criteria for CPA inclusion
• Specify who is responsible for documentation of CPA and CPA activities

Contracts on technology acquisition should include:

A)

Risk and financial liability can be shared between the CME and DOE

Default under ERPAs

Structuring the ERPA

Disputes under ERPAs

Emission Reduction Purchase Agreements

(ERPA)

The technology provider delivers the technologies or products to the CPA developer, who then pass them on to the end users

Negotiation or arbitration is quicker, simpler and cheaper than litigation

• Specifications and quantity of the technology
• The price
• Form of payment, including relevant milestones
• Technology quality standards

Risk that CERs will not be generated:

• Buyer can negotiate a reduced price

Example:

ERPAs can include arbitration provisions, if a dispute cannot be resolved through negotiation

Sellers can propose delivery of a non-guaranteed volume of CERs:

• All of the CERs generated by a project;

• A particular percentage of the CERs generated

• All CERs generated up to a specified volume cap

Test Your Knowledge

• Breaches of material obligations

e.g. delivery default by the seller, or payment default by the buyer

• Breaches of the representations and warranties given
• A party becoming insolvent

Contracts should specify who will take the responsibility of:

The contract can require end-users to properly discard old and less efficient equipment or exchange it for the new technology

Include preconditions managing key project risks e.g.

• Make party’s obligations conditional on project registration and/or commissioning

Number of generated CERs unknown beforehand:

• Buyer reluctant to buy an unspecified number of credits

CPA developer can require specification on:

Provisions need to address:

• The rules governing arbitration

e.g. the Rules of Arbitration of the International Chamber of Commerce;

Structure the ERPA to represent the business model of the PoA e.g.:

• If CME implements the activities, the ERPA will be a contract between CME and buyer
• If the CME is a only a coordinator, the ERPA should be backed with a listing of the implementation contracts between stakeholders

Example:

Buyers and investors will require clear provisions on monitoring and reporting on the growth of the programme and CERs

• Implement a tracking system backed by a tested computer programme

Definition of clear inclusion criteria for CPAs reduces risk for erroneous CPA

http://www.iccwbo.org/Products-and-Services/Arbitration-and-ADR/Arbitration/Rules-of-arbitration/Download-ICC-Rules-of-Arbitration/ICC-Rules-of-Arbitration-in-several-languages/

Allow a “cure period” (e.g. 30-60 business days) to rectify the default

e.g. Buyer fails to make payment due to an administrative error

• A neutral location for the arbitration
• The language to be used in the arbitration
• The number of arbitrators
• The means by which the arbitrator(s) are appointed

Buyers may restrict their purchase of CERs from specific activities or issued during a certain time period

• Build a system to make the CERs distinguishable between CPAs through the Monitoring Reports

Delivering guaranteed volumes:

To test the knowledge you attained in Chapter 5, follow the link below and complete the multiple choice questionnaire:

Include room for flexibility concerning:

• Pre-agreed provisions
• Obligations
• Contract templates for CPA developers
• Distributors and end-users

The contract may include provisions on programme revenues, loan, subsidy, grant or revenue distribution depending on the incentive structure of the programme

Buyers providing advance CER purchase payments may request specific provisions in the ERPA

• Ensure that income from the programme is used to further develop and advance the PoA
• Ensure that income is used to benefit end-users

Provide warranty that seller has ownership over CERs

• Obtaining licenses and authorizations to use the technology
• Verifying the installation and testing the equipment
• Taking corrective actions in case of malfunction or damages on the technology
• Supporting end-users in the repair and maintenance of equipment and other after sales services
• Training of the end-users in the use of the technology
• Providing a disposal service of the device upon end of the use life
• (e.g. LED light bulbs)
• Ensuring the signing and collection of end-user agreements
• Monitoring of emission reductions

If the default is not solved, the other party can claim remedies specified in the ERPA e.g.:

• the right to terminate the ERPA
• the right to claim damages from the defaulting party

Liquidated damages: Calculated on the cost of entering into a replacement transaction with reference to a defined market index

Unliquidated damages: Calculated on the total losses the other party has incurred

Mitigate risks of under performance of CER creation

• Initially sell only a percentage of expected CERs
• Include milestones for the purchase of credits
• Pool CERs from multiple CPAs, to spread risks across different of activities

http://www.classmarker.com/online-test/start/?quiz=a6b51b05bd07fef1

Specifying the moment at which the title to CERs passes on to the buyer

Delays and obstacles can occur during the lifecycle of a PoA

• Keep a regular and open communication with the PoA's buyers and investors

ERPA must specify its governing law

• English law generally used in international CER transactions
• Local law may be preferred in some transactions

Too strict criteria can limit future inclusion of CPAs as the programme develops

• CME's responsibility to fulfill CDM obligations towards DOE, CDM Executive Board and UNFCCC secretariat to ensure CER generation
• Insurance that CME will not abandon the PoA, or look for a replacement during the PoA lifecycle

The technology for is not specified and CPA developer is responsible for signing contracts with technology suppliers

• The method, terms and conditions of payments, the amounts and the level of certainty need to be clearly specified

To continue learning more about PoA-DD and CPA-DD, their requirements and tools for a successfull application, continue to Chapter 6 by clicking the arrow below

Cooperation by end-users can include sharing of benefits and responsibilities such as:

Carbon revenue or rebates and tasks e.g. monitoring of equipment and collection of data

State the entitlement to CERs

Continue to Chapter 6

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