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What’s Driving the Carbon Markets
Why are Carbon Contracts DifferentProduct, Other Requirements to Get Value, Change of Rules, Delivery, Remedies
Model Contract Resources
GHG Drivers in Energy Contracts
Compliance Markets/RisksAlberta: Permit Commitments, SGER
BC: GHG Reduction (Emissions Standards) Act
Federal climate change plan
Regional: WCI, Midwest Accord, RGGI
US: Permit/Siting Commitments, RPS, EPA?
Voluntary Commitments
“Green” Products
The Origin of the ComplexityThe variety means different participants are looking for different outcomes
What is the product? What’s included/excluded?
If the product is intangible, what else is required to get value from the product? Reporting commitments? Quit claims?
What if the rules/markets change? Can the product be used/requalified for another system/market?
How do you effect Delivery?
Remedies
What is the Product?Voluntary Markets
In the voluntary market, the product is not definedtonnes, emission reductions, verified emission reductions, offsets, etc.
Tendency to define the product as a tangible asset, but it is intangible, maybe better described as a bundle of rights
Buyers tend to favour broad, all-encompassing definitions
Sellers tend to favour a description of the commodity, so that they know if other “attributes” are bundled into the commodity or can be sold separately
What is the Product?BC Hydro’s Phase I Bioenergy RFP EPA
“Environmental Attributes” means:
(a) all attributes associated with, or that may be derived from, the Energy and/or the Seller’s Plant having decreased environmental impacts relative to certain other generation facilities or technologies, including any existing or future credit, allowance, “green” tag, ticket, certificate or other “green” marketing attribute or proprietary or contractual right, whether or not tradeable;
(b) any credit, reduction right, off-set, allowance, allocated pollution right, certificate or other unit of any kind whatsoever, whether or not tradeable, and any other proprietary or contractual right, whether or not tradeable, resulting from, or otherwise related to the actual or assumed reduction, displacement or offset of emissions at any location other than the Seller’s Plant as a result of the generation, purchase or sale of the Energy;
(c) On-Site Emission Reduction Rights; and
(d) all revenues, entitlements, benefits and other proceeds arising from or related to the foregoing.
“On-Site Emission Reduction Rights” means any credit, reduction right, off-set, allowance, allocated pollution right, certificate or other unit of any kind whatsoever whether or not tradeable resulting from or otherwise related to the reduction, removal, or sequestration of emissions at or from the Seller’s Plant.
What is the Product?OPA’s CHP II PPA
“Environmental Attributes” means environmental attributes associated with a generating facility having decreased environmental impacts, and includes:
(a) rights to any fungible or non-fungible attributes, whether arising from the generating facility itself, from the interaction of the generating facility with the IESO-Controlled Grid, the Local Distribution System or an End-User or because of applicable legislation or voluntary programs established by Governmental Authorities;
(b) any and all rights relating to the nature of the energy source as may be defined and awarded through applicable legislation or voluntary programs. Specific environmental attributes include ownership rights to Emission Reduction Credits or entitlements resulting from interaction of the generating facility with the IESOControlled Grid, the Local Distribution System or an End-User or as specified by applicable legislation or voluntary programs, and the right to qualify and register these with competent authorities; and
(c) all revenues, entitlements, benefits and other proceeds arising from or related to the foregoing,
but which excludes,
(d) the Government of Canada’s ecoENERGY Program (or any predecessor or successor program thereto) which may be available in connection with a renewable generating facility;
(e) any right, title and interest to any nitric oxide and sulphur dioxide emission allowances, and any nitric oxide and sulphur dioxide Emission Reduction Credits, that pertain to the Facility that were available as of the date of the CHP II RFP under the Ontario Emissions Trading Program operating under Regulation 397/01 of the Environmental Protection Act (Ontario), as amended from time to time; and
(f) any tax or other benefit under the Government of Canada’s Canadian Renewable and Conservation Expenses (CRCE) or successor program which may be available in connection with a renewable generating facility.
What is the Product?Voluntary Markets
Be mindful of a broad “environmental attribute” definition that may include:
The benefits of government incentive programs
Project based emission reductions that arise at the same site as the emission source, but are generated through a different project
Obligations to report emissions in contravention of legal requirements, or that prejudice future allowance or permit allocations
Gratis allocations of allowances or permits, or credit for early action, issued in connection with the emission source generally
What is the Product?Compliance Markets
In the compliance markets, even when the product is defined the product differs:
Alberta emission offset, Alberta emission performance credits, BC emission offsets, BC Allowance Unit (BCAU), BC Emission Reduction Unit (BCERU), BC Recognized Compliance Units (RCU), California CRTs, etc.
Renewal Energy Credits / Green Tags – a different commodity, that may overlap?
Will the regional initiatives (WCI?) establish fungibility, and so provide some comparability to these different products?
What is the Product?Compliance Markets
In the compliance markets, even if know what you are selling…do you know what you are not selling?
If you sell an EPC, can you still sell the energy as renewable?
May be answered by legislation/regulation (eg. California RECs include the carbon), or by the applicable verification protocol (eg. Green-e certified energy or RECs include the carbon), but may not be clear in all cases
Is the Product Enough?Are you assured of the benefits?
Even with transfer, buyer should still consider…Title because the product is an intangible asset
Mitigate with quit claims
Mitigate with reporting obligations; vendors will want to carve out reporting for non-emissions inventory purposes, and possibly for grandfathering or other long term rights allocation based on historical performance
VerificationIdentify verifier, verification methodology and level of assurance
Include audit and inspection rights
Is the Product Enough?Are you assured of the benefits?
Even with transfer, buyer should still consider…Secondary Markets
To the extent buyer may need to make representations to a subsequent purchaser about the nature of the product in order to obtain value, include indemnity for third party claims
In the compliance markets...Consider whether there are any additional risks imposed by the regulatory system
eg. Alberta EPCs can be revoked by ex-post audit
Change of Rules/MarketsThese are nascent markets
Regulatory programs may change or consolidate
What provides value today in a voluntary or compliance market, may not provide value tomorrow (or could provide more value)
Buyer should consider preserving options for…Altering verification methodology
Altering registration/registry/delivery
Incremental costs generally borne by buyer
Seller may want option of completing initial deal if alterations preclude completion
DeliveryFor Compliance Markets, delivery effected through rules/applicable registry
For Voluntary Markets, delivery is generally effected through a transfer form or assignment, but identity of the commmodity must be evidenced though…
Documentation of emission source, reduction project, vintage; may or may not be covered in verification report
Voluntary registry transfer
RemediesTypical Remedies for Breach
General damages
LDsPurchasing compliance may not have a fixed cost forever, nor may it be available to all market participants
Replacement Cost may be difficult to calculate in an illiquid market
Replacement ProductMay be difficult to assess equivalency in voluntary markets
State of the MarketStandard Contracts
Alberta Offsets (Climate Change Central): http://www.carbonoffsetsolutions.ca/pdf/Offset_Purchase_Agreement_Sep18.pdf
VERs (ABA/EMA/Acore): http://www.acore.org/renewableenergyinfo/includes/resource-files/draft_verpa.pdf
Other Emissions Products (Emissions Marketing Association): http://www.emissions.org/publications/emissions_trader/model_so2/agreement.html
RECs (ABA/EMA/Acore): http://www.acore.org/pdfs/ABA_EMA_ACORE_Master_RECs_Agreement.pdf
Kyoto CERs (IETA): http://www.ieta.org/ieta/www/pages/getfile.php?docID=1020
Kyoto CERs (CERSPA): http://www.cerspa.org/
Questions?
Ron Ezekiel
