CONTRACTING FOR CARBON Legal Framework for JI Projects under the Kyoto Protocol

CONTRACTING FOR CARBON

Legal Framework for JI Projects under the Kyoto Protocol

A Major Legal Challenge

• First Bank Private Public Fund to Fund to provide returns to donors/contributors

• Designed to buy something that does not exist

• From people who may not be able to sell it

• Which Bank cannot own

• Rules keep changing

Joint Implementation

Requirements for Participation:

• National inventories and registries

• Project baselines and inventories

• Additionally of the project

• Credit sharing

• Host country approval

Art. 6 KP

6 (1) For the purpose of meeting its commitments under Article 3, any Party included on Annex I may transfer to, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources […]

6 (3) Any Party included in Annex I may authorize legal entities to participate, […], in actions leading to the generation, transfer or acquisition under this Article of emission reduction units.

Emission Reductions Generated by JI projects before 2008

Forward selling of creditsAdvantage: e.g. market development, providing start-up

capital for mitigation measures.Condition:Transparent registries for recording and tracking

forward sales, as well as transparent emissions inventories

The Multiple Lives of an Emission Reduction

Emission Reduction

•Generated by a Project

•Verified by an independent entity

Assigned Amount Units

National Registry

Emission Reduction Units

Adding a Project Identifier

Emission Reduction Units

Account of Parties or Private Entities

converted

converted

transferred

ERs-AAUs-ERUs

• Selling Party issues ERUs by converting AAUs previously issued by that Party and held in its national registry

• AAUs will be converted in an ERUs by adding project identifier to the serial number and changing the type indicator to indicate ERU

• Upon such issuance the Party will transfer ERUs to account of project participants and Parties

• It also will notify the Secretariat transaction log

Selling Forward ERs I

2008 2012

ERUs

Emission Target

Hot Air

Selling Forward ERs II

Selling Forward ERs

20082008 20122012

PCF Legal Documents

Basic Approach

Emission Reductions

(Host Country + Project Entity)

Payments (PCF)

World Bank /PCF

UNFCCC rules

Host government (transferring

country)

Project entity

PCF : Actors involvedPCF : Actors involved

Annex 1 Government (acquiring country) –

PCF Participants (Gov. + Priv.)

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

4. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

PCF Key Legal Instruments

• Letter of Project Endorsement

• Letter of Intent

• Host Country Agreement

• Emission Reductions Purchase Agreement

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

4. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

16

Letter of Project Endorsement Host Country endorses further development of

the project for the purposes of the UNFCCC/KP

Host Country:

• Signals Commitment to render aid and assistance (e.g. registration of the ERs in any international or national regulatory regime)

• Approves projects for KP purposes

• Allows access to information

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

3. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

Letter of Intent

• Project Sponsor agrees– To reserve exclusive right to ERs generated by the

project– To recover project preparation costs in case project

sponsor decides not to negotiate an ERPA

• PCF Trustee agrees – To purchase ERs under specific terms

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

3. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

Host Country Agreement

PCF Trustee Host Country

Obligation to enter into an ERPA

Obligation to transfer ERs

Main Elements of Host Country Agreement (HCA)

PCF commits to

– buy ERs

Host Country commits to

– authorize the transfer of ERs by the Project Entity to the PCF

or

– transfer ERs to the PCF

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

3. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

Emission Reductions Purchase Agreement

PCF Trustee Project Entity

Purchase Price (net of costs)

Exclusive Right of Certification and Verification of purchased ERs (ERs)

Transfer of ERs

Main Elements of Emission Reductions Purchase Agreement (ERPA)

• Purchase of ERs from the Project Entity / Payment for achieving ERs

• PCF commits to arrange for initial and periodical verification, validation and certification.

• Transfer of ERs

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

2. Host Country Agreement and ERPA

Legal Agreements for PCF Projects

3. Subsidiary Agreement

PCF Trustee

Project Entities

3. Letters of Project Approval

4. Standard Emission Reductions Purchase Agreements

Legal Agreements for PCF Projects

Model for Small Projects

Host Country

1. Umbrella Agreement

2. Letter(s) of Intent

PCF Trustee

2. Host Country Agreement

Legal Agreements for PCF Projects

Model for working with Intermediaries

Host Country

Intermediary

1. Intermediary Agreement

3. Standard Letters of Project Approval

Project Entities

4. Emission Reduction Purchase Agreements