Lee International and Climate Focus Lead Initiative for Model ERPA for Sellers

WESTBROOK, ME — Lee International in association with Climate Focus and a diverse group of independent international lawyers and legal experts proposes the development of a model Emission Reductions Sales Agreement aimed at sellers as an alternative to the buyer oriented existing Emission Reductions Purchase Agreements that currently dominate the emissions market.

The buying and selling of emission reductions generated under the Kyoto Protocol was initiated by forward thinking buyers — namely the participants in the World Bank's Prototype Carbon Fund, and the ERUPT and CERUPT tenders run by the government of the Netherlands. These early movers developed the first template emission reduction purchase contracts (ERPAs). The World Bank's original template ERPA formed the basis of the first International Emission Trading Association's (IETA) template ERPA. Since then both the World Bank and IETA have revised their template documents various times. As the carbon market has grown, these existing templates have served as the starting point for determining standard industry practice. While the pioneering work and subsequent revisions by these organizations were intended to produce legal documents that would reflect the interests of both the buyer and seller, the end products nonetheless tend to reflect the interests of the drafting organizations, all of which are buyers.

A model sales agreement for sellers will help to address this void in the market. As the carbon market continues to develop, and moves from a buyers market to a sellers market, there is a need to assist project developers and sellers in contract drafting and negotiating. CDM projects are often being developed by entities which do not have the means to obtain advice from international legal firms. Other than buying institutions, sellers are rarely represented in forums like IETA and do not have the capacity to follow the international discussions in detail. Their legal advisors in most cases are generalists without specific expertise in the carbon market.

It is important that entities selling CERs under forward contracts receive proper legal advice. The CDM provides developing country project developers with an opportunity to access a hard currency cash flow or to seek additional upfront financing resources. However, this money comes at a price. In many instances contracts under which project developers sell the CERs which are to be produced by their projects include delivery guarantees, penalties and strict enforcement clauses. These clauses can easily turn an ERPA from an asset in a liability, putting at risk the whole project, or even the company behind it. Many carbon contracts are also still missing elements common to other long term purchase agreements, such as price adjustment clauses, inflation adjustment, or limitations of liabilities.

There is therefore a need to develop an alternative carbon contract template that reflects the interests of developers of CDM projects. The purpose of the new template is to provide publicly available legal documentation that will assist sellers to participate in the international carbon market on an equal footing with more experienced buyers. The new template will do this by identifying key issues for sellers, and providing model language that can be used as the starting point or as a counter proposal in negotiations with buyers. While it is hoped such a document may form the basis of subsequent agreements with medium and smaller buyers, it is unlikely that many larger institutions will abandon their preferred precedents. An alternative model carbon contract will none the less also prove to be a valuable resource to sellers in these instances, as it can be used to understand key issues and identify the alternatives that are available.   

Lee International and Climate Focus will facilitate a process among a group of international independent lawyers which shall result in:

•  formulating advice for CDM project developers on contractual issues;

•  the drafting of a model legal document which takes into consideration the particular needs and risks of project developers.

Lee International together with its partners has identified lawyers in developing countries that will participate in the exercise. Lee International will convene a meeting among the group in which the key issues will be discussed. Lee International will serve as secretariat for this group. It will organize the preparation of a draft carbon contract, which upon completion, will be made freely available.

For more information e-mail us at .