Legal Aspects of Forest Carbon Projects An overview for project participants.
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Transcript of Legal Aspects of Forest Carbon Projects An overview for project participants.
Regulatory: project & host-
country government
Organizational: intra-project
Transactional: project & buyer
Overview
Forest carbon projects raise a range of complex and overlapping legal issues, including difficult regulatory, organizational, and transactional questions
I. REGULATORY ISSUES
Between project parties and government entities, based on applicable host-country laws and regulations
Key regulatory questions:1. Do project participants have
adequate land tenure in the project area?
2. What laws apply to, and which government bodies have authority over, project activities?
3. What are relevant regulatory requirements?
4. What taxes will be assessed?
National & local government
Project participants
Supporting entities
Tenure: definition
• Land tenure - legal or customary relationship of an individual or group with respect to land and other natural resources.
• Tenure rules determine who can use what resources for how long, under what conditions.
• Adequate tenure is an essential precondition for a forest carbon project
Tenure: rights in land, forest & carbonRights in land and forest
• Minimum: – use rights sufficient to
support project activities – right to exclude
incompatible uses– for the duration of project
activities
• Customary rights may be sufficient if secure and recognized by law
Rights in carbon• Minimum:
– right to carbon benefits from project activities
– right to transfer carbon benefits
• Generally must be implied from law– May be closely tied to private
rights in land– May belong to the people as a
whole– Or another arrangement
Tenure problems
• Land title not validly vested in local users
• Land use arrangements poorly defined or recorded
• Unclear who has rights to forest carbon
Applicable law, regulatory authorities• Sources of applicable law
– Framework environmental andforestry laws
– Laws on:• land and natural resources,
including mining, timber, oil, gas• agriculture• planning and infrastructure• indigenous peoples
• Regulatory authorities– Major players: Departments or Ministries of Environment and
Agriculture– Designated National Authority (DNA)
Regulatory requirements
Will vary in each country, locality, and even project. May include:• Permits for project activities
– E.g. tree harvesting, exploitation of non-timber forest products, agricultural activities
• Environmental Impact Assessment (EIA)
• Registration of supporting entities
Sustainable forest management certification (e.g. FSC), if sought, means additional requirements
Potential taxes
Taxes may owed on the carbon credit transaction as well as underlying project activities – for example, timber harvests and sales are generally subject to tax
Types of taxes that may apply:• Sales and VAT taxes - Charged on value of good, service, or property, at the
time of its transfer• Income taxes - Based on financial income (including carbon revenue) of
persons or legal entities• Property taxes - Based on property value• Duties/tariffs - Taxes on value of imported or exported goods• Carbon revenue taxes - Apply to carbon credits or projects in some
countries– Guarantees part of carbon revenues to government
II. ORGANIZATIONAL ISSUES
Between project participants, any representative organization, and supporting entities, based upon written or oral agreements
Include:• Project governance
• Benefit sharing
• Fund management
Participating landholders,
representative organization
Financial institution
Project developer
Law firm
Advisors
Project governance & benefit sharing• Good project governance reduces costs of project administration
and risk of project failure• If project participants are numerous:
– May want to officially form an organization, consortium, or business– Should appoint an individual, entity, or small group to act on behalf of
project participants
• Project participants, supporting entities should agree in advance:– Roles and responsibilities for underlying project activities and carbon
transaction– Procedures for inclusive, transparent decision-making and dispute
resolution– Revenue-sharing with community, between project participants, and /
or with the government
Fund management
Centralized, fund management is important as the number of parties and/or complexity of the transaction increases, e.g. due to:• Numerous project participants
• Advance payments
• Use of payment “netting”
Fund management is generally entrusted to a bank or other financial institution, with specific duties, rights, and responsibilities agreed by contract
3. Transactional issues
Between forest carbon sellers and buyers or investors, based on oral or written agreements
Sellers / project particip
ants
Buyers or
investors
ERPA: Purchase of verified emission reductions (VER)• Standardized document commonly used in carbon transactions• Payment largely due on delivery, but advance payments possible
Emissions Reduction Purchase Agreement
Forward Purchase• Carbon credits yet to be issued
and/or generated• Buyer shares risk• Lower credit prices• Advantages for small-scale sellers
include:– Predictable revenue– Up-front funding
Spot Purchase• Carbon credits already generated
and issued• Low risk to buyer• High credit prices
Forward purchase agreement: key challengesSome particularly important – and difficult – contract clauses in forward purchase agreements for forest carbon:• timing and structure of
payments
• allocation of project development transaction costs
• allocation of risk and delivery liabilities
• dealing with default and remedies
Price and payments: key issues
1. Setting the price• Market price• Cost of underlying project• Assumption of risk, liability
2. Fixed price vs. indexed or floating price • Fixed price is predictable• Indexed price means parties share in upside or downside of market shifts
3. Seniority among multiple buyers• May create credit tranches at different prices to create seniority among multiple buyers
4. Timing, procedure for advance payments• Up front funding is a major challenge for many projects• Advance payments expose buyer to more risk, prices likely significantly lower
Allocation of project development transaction costs
• Include costs of:– Obtaining 3rd party validation
& verification– Registration of carbon credits– Issuance of carbon credits
• May also include costs of:– Writing Project Design
Document– Monitoring project activities
• May be significant: allocation will affect price
Allocation of risk and delivery liabilities• Credits not delivered because,
e.g.:– Project underperforms– Standards body validates,
verifies few or no credits– Events outside of control of
project participants disrupt project activities
– Change in law adversely affects the project
– Credits issued, but not delivered as promised
• Risk must be allocated between buyer and seller
• Buyer generally not entitled to reimbursement for advance payments, costs– Exposed to project risks
insofar as prepaid for expected credits or paid transaction costs
Example: Force Majeure, change in law• Force Majeure
– “Act of God” outside of control of participants
– Neither party liable for loss caused by force majeure
– Termination of agreement may be available
• Insects, forest fire– High risk factors– May require proof that extra
precautions were taken before sellers excused from delivery due to forest fire, insect infestation
• Change in law– Generally very complex, heavily
negotiated
• Many possible contingencies– Carbon cap in seller’s country
destroys additionality– Carbon regulation in buyer’s
country does not recognize project’s emission reductions
– Seller’s government expropriates land or carbon
– New taxes destroy the value of the transaction for one or more parties
– Many more possibilities…
Default & Remedies
• Triggers remedies like:– Termination of agreement– Monetary damages
• Against seller:– Liability for replacement credits– Exclusion from planned
subsequent transaction– Payment withholding
• Against buyer:– Recovery of credits– Recovery of outstanding
payments
• “Event of Default,” e.g.:– Failure to ensure project
implementation as promised– Failure to pay when due– Termination or bankruptcy
of a party– Material breach of a
representation– Failure to comply with
validation, verification, monitoring obligations
Strategizing Around Legal Costs
• Specialized legal support vital to:– Assess tenure rights, strategies for legal compliance– Create robust project governance and fund
management structures– Secure carbon financing
• Legal support at key stages:– Lays a firm foundation for project activities– Avoids future costs– Reduces risks of dispute, project failure
• Limiting legal costs– Cooperation, collaboration between similar projects– Free or low cost resources from non profits,
government– Additional support for lawyers wishing to enter the field
Key Resources
• Costenbader J, ed. 2010. Legal Frameworks for REDD: Design and Implementation at the National Level. Environmental Policy and Law Paper No. 77. IUCN: Gland.
• Takacs D, ed. 2009. Key Legal Questions in Allocating Forest Carbon-as-Property, pp. 13-20 in Forest Carbon: Law + Property Rights. Conservation International: Arlington, VA.
• Hawkins S. et al. 2010. Contracting for Forest Carbon: Elements of a Model Forest Carbon Purchase Agreement. Forest Trends: Washington, DC.
• Katoomba Group Online PES Contract Toolkit: http://www.katoombagroup.org/legal_contracts.
• CERSPA Initiative: http://www.cerspa.com.