Legal Aspects of Clean Development Mechanism

Programmes of Activities

Andrew Gilder, Senior AssociateAndrew Gilder, Senior Associate

POA Capacity-building Workshop, Burgers Park HotelPretoria, Tuesday 14 August 2012

No part of this presentation should be regarded as legal advice. Carbon project developers are advised to take specific legal advice on the particular issues

associate with their own initiatives

• The CDM (carbon project) as a veneer to the conventional project

• Range of legal considerations:

CDM – the basics

• Range of legal considerations:

– Regulatory

– Contractual

• “Market-based” mechanism – incentives for greenhouse gas emissionsmitigation.

• United Nations Framework Convention on Climate Change

• Kyoto Protocol (Article 12)

CDM – the legal basis

• Kyoto Protocol (Article 12)

• Marrakech Accords – Modalities and Procedures for the CDM

• Decisions of the Executive Board

• (New) Project Cycle Procedure – 1 May 2012

• Various species of carbon credit.

• CDM: Certified Emission Reduction:

• represents the absence of one tonne of CO equivalent

Carbon Credits

• represents the absence of one tonne of CO2 equivalent

• that would, in a business as usual scenario (if there were no CDMproject), have been emitted to the atmosphere

• saleable / fungible commodity with commercial value

• is tradable on the carbon market

• incorporeal/ intangible.

In its simplest formulation, the CDM:

• permits an entity in a developing country

CDM – in a nutshell

• permits an entity in a developing country

• to implement a project activity that

• achieves greenhouse gas emissions reductions;

• contributes to sustainable development in the host country

• leads to the transfer of environmentally safe and sound technology andknow-how

• generates a carbon credit

• Project development per se: technical / financial / legal considerations

• In a CDM project: both project cycles present in the same development

Carbon / Conventional Project Cycles

• In a CDM project: both project cycles present in the same development

• Distinguish between:

– Conventional: Technical / Financial / Legal (Regulatory and Contractual)

– Carbon (CDM): Technical / Financial / Legal (Regulatory and Contractual)

CDM Project Implementation

• Exercise in regulatory complexity

• Regulatory requirements flow from:

• CDM rules:

• Validation, Registration, Verification, Certification, Issuance

• Combination of the CDM rules and the laws of the host country:

• Letter of Approval (DNA)

• Other, e.g., environmental impact assessment / stakeholderconsultation

• Laws of the host country:

• Permits and licences

Programme of Activities (POA)

A POA is:

• a voluntary coordinated action

• by a private or public entity

• which coordinates and implements a policy/measure or statedgoal (i.e. incentive schemes and voluntary programmes)

• which leads to greenhouse gas (GHG) emission reductions ornet GHG removals by sinks

• that are additional to any that would occur in the absence of thePOA,

• via an unlimited number of CDM programme activities (CPAs)

(EB 47, Annex 29, paragraph 3).

CPA

A CPA is

• a single, or a set of interrelated measure(s),

• to reduce GHG emissions • to reduce GHG emissions

• or result in net anthropogenic greenhouse gas removals by sinks,

• applied within a designated area defined in the baseline methodologies

CDM Project Activity / CDM Programme Activity

The Nature and Object of a PoA

• A PoA seeks to create projects:

– with a high replication potential

– which are developed over a longer time period.

• PoA:

– creates a larger framework structure

– which supports the inclusion of multiple and unlimited bundles ofsubprojects over time.

POA - Advantages

• Not all individual activities have to be known or identified at the moment the PoA is registered, but can be included periodically as the programme develops;

• PoAs can shorten the time needed for a project to be included in the CDM to a period of weeks rather than years;

• PoA explicitly allows for the development and inclusion of CPAs in several different host countries;

• The registration fee for a PoA is based on the total expected annual emission reductions of the CPA(s) that will be submitted together with the requests for registration of the PoA. For each CPA which is included subsequently, no fee is to be paid. Fees are to be paid by the CME to the secretariat; and

• allows innovative companies to register a PoA and open it to the inclusion of projects implemented by other project developers.

POA - Disadvantages

• The cost of setting up a PoA is significantly higher than the cost ofsetting up a normal CDM activity.

• Developing the PoA documentation and registering is likely to takesignificantly more time than for a single CDM activity.

• Developing a PoA is an investment in time and resources, without aclear return.

• A PoA should be developed only in cases where the CME has no viablealternative such as bundle and stand-alone activities. Bundling may bemore attractive in situations where the exact number and location of allsubprojects is known and these are implemented in a few years. In thiscase, a full list of individual activities can be included when the projectundergoes validation and registration, saving the costs and effort ofhaving various successive CPA inclusions.

Non-LDC POAs and the EU ETS

• EU ETS as largest buyer in the market

• Post-2012 policy:

– LDCs vs Non-LDCs

– CER eligibility in the EU ETS

– CDM project activities and POAs registered prior to 31December 2012

– Inclusion of future CPAs

• Carbon market entrepreneurial spirit:

– Registered all-purpose POAs

– Providers of CME services

POA: more role players = greater contractual complexity

• CME: Co-ordinating Managing Entity

• DNA: (Designated National Authority), which is the Host Country administrator responsible for the CDM

• EB: CDM Executive Board, which is responsible for PoA • EB: CDM Executive Board, which is responsible for PoA registration and CER issuance.

• DOE: (Designated Operational Entity), which is responsible for PoA validation, CPA inclusion and PoA verification

• CER Purchaser: Carbon Emission Reduction Credit (CER) Purchasers enter into an arrangement regarding the sale and purchase of CERs in terms of an Emission Reduction Purchase Agreement (ERPA)

POAs – contractual issues: general

• Legal relationships to be established under a PoA:

– sale and purchase of carbon credits

– financing by sponsors and investors

– purchase or lease of the applicable technology

– installation and maintenance of equipment

– agreement for the participation of end-users in the programme

• Requires a complete set of contracts to be put in place to allocate rights and responsibilities and to address risk exposure.

POAs – contractual issues: buyer / seller dynamics

• Most important allocation of rights relates to the entitlement to credits:

– Unlike stand-alone CDM projects, under a PoA CERs are typically issued to the CME not the owners of the project activities, ie the CPAs

– It is important that the entity that figures as seller in an ERPA holds all relevant rights or have comprehensive powers to transfer these rights to the buyer

– The ERPA will have the appropriate clauses to warrant the seller has unencumbered title over the carbon credits being sold

– This is an issue in PoAs because many entities may be involved and the potential for contradicting claims is high

POA contracts (1)• End-user Agreements:

– Links the ultimate beneficiaries of the programme (households, installations, single users, etc.) to the PoA.

– Usually between the CME and the end-users.

– Alternatively, if a CPA under the PoA is managed by a CPA developer, the end-users can contract with the CPA developer, which in turn will engage with the CMEusers can contract with the CPA developer, which in turn will engage with the CME

– CERs ultimately generated at the end user level – requires close integration of end-users into the PoA = key to the success of POA

– End-user agreement will contain

• clear reference to the programme;

• acknowledgement of voluntary participation;

• unequivocal statement regarding the transfer of carbon rights.

• provisions that prevent the same household or unit from participating in different emission reductions programmes (which could lead to double-counting of emission reductions).

POA contracts (2)• CME Management Agreement:

– Between a CME and a CPA developer

– Where a CPA is made up of a number of end-users organised by a separate entity (CPA developer) – the Agreement is between the CME and each CPA developer

– Agreement serves to define the rights and obligations of the CME and the CPA – Agreement serves to define the rights and obligations of the CME and the CPA developer

• Technology supply and support agreements:

– POAs frequently distinguish between the participation of technology companies in a number of ways

– Involvement will often be:

• as providers of the technology needed for the POA (for example, the firm producing solar cooking stoves, fluorescent light bulbs, digesters etc.)

• or firms that provide important parts of the PoA infrastructure

POA contracts (3)

• Agreements with validation and verification entities: A CPA can be included in a registered PoA at any time during the lifetime of a PoA. There is no formal registration at the CDM Executive Board level required. Rather—under the CDM—the validator scrutinises the CPA for conformity with the PoA-DD and, if the assessment is positive, formally includes the CPA via a simple upload on the UNFCCC website. Apart from the power to conduct spot checks, the Executive Board does not confirm, cross-examine or spot checks, the Executive Board does not confirm, cross-examine or otherwise interfere in this process.

• Emission Reduction Purchase Agreement: The central element of the contractual relationship between the carbon buyer and the programme manager or CME is the sale and purchase of carbon credits or, as commonly referred to by practitioners, the “Emission Reduction Purchase Agreement” (“ERPA”). An ERPA, whether for a programmatic CDM or conventional project, needs to clearly define the type of credit being sold and purchased, the payment and delivery mechanisms, and all relevant obligations surrounding the implementation of the project/programme and its evolution under the CDM approval cycle.

Questions?

Contact Details:

Andrew Gilder

ENS Johannesburg

Tel: 011 269 7600

Email: agilder@ens.co.za

thank youthank you