Carbon Contracts RON EZEKIEL Fasken Martineau

Outline What’s Driving the Carbon Markets Why are Carbon Contracts Different Product, Other Requirements to Get Value, Change of Rules, Delivery, Remedies Model Contract Resources

GHG Drivers in Energy Contracts Compliance Markets/Risks Alberta: 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 Complexity The 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 defined tonnes, 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

What is the Product? OPA’s CHP II PPA

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 Verification Identify 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/Markets These 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

Delivery For 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

Remedies Typical Remedies for Breach General damages LDs Purchasing 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 Product May be difficult to assess equivalency in voluntary markets

State of the Market Standard Contracts Alberta Offsets (Climate Change Central): VERs (ABA/EMA/Acore): Other Emissions Products (Emissions Marketing Association): RECs (ABA/EMA/Acore): Kyoto CERs (IETA): Kyoto CERs (CERSPA):

Questions? Ron Ezekiel