KYOTO PROTOCOL IN BRAZIL RESPONDING TO CHALLENGES IN

KYOTO PROTOCOL IN BRAZIL: RESPONDING TO CHALLENGES IN CDM PROJECTS FEASIBILITY AND ARBITRATION CLAUSES IN ERPAs By Werner Grau Neto Pinheiro Neto Advogados - Brazil © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 1

CDM PROJECTS § The Brazilian role in bringing CDM into existence § Since 1997, on a domestic level: Brazilian government and civil entities § Efforts to strengthen the institutional capacity § Develop a reliable and effective framework for CDM projects © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 2

INSTITUTIONAL CAPACITY IN BRAZIL: National Designated Authority: § Inter-Ministerial Global Climate Change Commission – IMGCCC, under the Brazilian Ministry of Science and Technology Problems: § § Lack of sustainability and clear-cut criteria to be observed for CDM projects Lack of rules necessary for CDM projects approval Consequences: § § § Risks: a negative environment for CDM projects Long time to evaluate a CDM project: Brazil v. Chile Uncertainties: sustainability currently under discussion (LULUCF), taxes © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 3

BRAZILIAN SCENARIO FOR CDM PROJECTS: Executive Branch: Branch difficulties in obtaining a letter of approval for CDM projects (18 months) Judiciary Branch: Branch Brazilian courts take excessively long time to adjudicate on a dispute. Studies of the World Bank have shown that the slowness of Brazilian Justice has stood as one of the main obstacles to acceleration of the country’s economic growth, since countries with a streamlined Judiciary have more access to foreign loans and investments. © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 4

ARBITRATION IN BRAZIL Arbitration: a viable and much-awaited alternative Strenghts: celerity, confidentiality, expertise, respect for the parties’ free will However, until recently little was heard of effective use of arbitration in Brazil Possible Reasons: § cultural traits of Brazilian nation (averse to settling disputes privately) § complexity and costs inherent to arbitration § the possibility of judicial review of the arbitrator’s decision because of the need for recognition of the award by the Judiciary © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 5

ARBITRATION IN BRAZIL According to specialists, the lack of binding force of arbitration clause had long hampered the practical use of arbitration in Brazil. 1996 – Law 9307/96 - The Brazilian Arbitration Law § binding power and compulsory enforcement of the arbitration clause § the parties, whether or not Brazilian, may resolve their disputes by arbitration in accordance with the rules of any specialized arbitral body § the reliability of arbitration as an effective means of settling conflicts has received growing support from the Brazilian Judiciary © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 6

ARBITRATION IN BRAZIL § 1996: Publication of the Arbitration Law 9307/96 § 1996: Ratification of the Panama Convention (1975) § 2001: Federal Supreme Court determination constitutionality of the Arbitration Law § 2002: Ratification of the New York Convention (1958) § Currently, Brazil is amongst the countries in which arbitration is practiced as a safe, effective, and comfortable mechanism of alternative dispute resolution for © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 7

ARBITRATION IN BRAZIL § Brazil has not ratified the ICSID Convention (Washington Convention) § BITs – Brazil is a party to several BITs, and at least one MIT, within Mercosur, providing for submission of foreign investment-related disputes to ICSID rules (even though Brazil is not a signatory to the ICSID Convention) § The Brazilian and Argentine scenarios are quite different § Brazil is respecting and abiding by its Accords with IMF and the World Bank § Arbitration cases have been commenced by companies against the Argentine and Venezuelan Governments concerning investments made during the privatization process. This does not happen in Brazil. © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 8

ERPA IMPLEMENTATION IN BRAZIL: POTENTIALLY DISPUTABLE ISSUES § prices § estimated reductions are not actually attained by the project § ownership (the status of emission allowance under Brazilian Law – Canada: the community challenged the ownership of credits) § payment and delivery § brokering agreements § auditing, monitoring, and verification § expropriation of a project or its benefits Issues of regulatory uncertainty: § potential suspension or cancellation of Operating Permits § taxes © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 9

AÇÚCAR GUARANI CASE STUDY Overview – Information on the System Cruz Alta Bagasse Cogeneration Project São Paulo, 2004 § Açúcar Guarani S. A. § International Bank for Reconstruction and Development, as trustee of the Prototype Carbon Fund © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 10

AÇÚCAR GUARANI CASE STUDY Baseline and additionality “In the event that a revision of the Baseline is required by the International UNFCCC/Kyoto Protocol Rules, including after entry into force of the Kyoto Protocol or in order to obtain the renewal of the Crediting Period, the Trustee shall arrange for such renewal of the Baseline and recover the costs of renewal from the Project Entity in accordance with Section 5. 05(c), except as any such costs, individually or in the aggregate, could render the conduction of the Project unreasonably burdensome for the Project Entity to fulfill any of its obligations assumed herein. ” © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 11

AÇÚCAR GUARANI CASE STUDY Arbitration clauses and enforceability of arbitral awards in Brazil “Any dispute, controversy, or claim arising out of, relating to, or in connection with this Agreement, or the breach, termination, interpretation or invalidity thereof (including whether the subject matter arises out of, relates to, or is in connection with this Agreement), shall be finally and exclusively settled by three (3) arbitrators in [_____], in accordance with the UNCITRAL Arbitration Rules as in force at the start of the arbitration proceedings. The appointing authority shall be the Secretary. General of the Permanent Court of Arbitration acting in accordance with the procedures set forth by the Permanent Court of Arbitration for that purpose and in force at that time. (…)” © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 12

AÇÚCAR GUARANI CASE STUDY Arbitration clauses and enforceability of arbitral awards in Brazil “(…) Either Party hereby agrees to waive any jurisdictional or venue defenses otherwise available to it. Either Party has the right to apply to any court of competent jurisdiction for provisional relief, including pre-arbitral attachments or injunctions, as may appear reasonably necessary to preserve the rights of either party, provided however that, after the arbitrators are appointed, the arbitrators shall have sole jurisdiction to consider applications for provisional relief and any provisional measures ordered by the arbitrators may be specifically enforced by any court of competent jurisdiction. ” © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 13

OTHER CDM PROJECTS IN BRAZIL AND PERSPECTIVES Pioneering Projects: § § § Nova. Gerar (Rio de Janeiro, 2001) – conversion of landfill gases into energy 1 st approved in Brazil - July 2004 (18 mo. ) Plantar (Minas Gerais, 1998) – use of charcoal in steel plant 2 Projects approved in Brazil: 1. Nova. Gerar (Rio de Janeiro) 2. Projeto Veja (Bahia) Currently: § § Ecosecurities ca. 30 CDM projects in Brazil – Nov. 30, 2004 – Carbon Fund for Latin America (new projects): will buy 3. 5 MM tons CO 2 or comparables Pointcarbon downgraded Brazil © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 14

OTHER CDM PROJECTS IN BRAZIL AND PERSPECTIVES Perspectives: Brazil is ready to make its economy boost and use CMD as an effective instrument to attain a new development model, truly sustainable on economic, environmental and social terms Pioneering projects have shown that making all this happen in Brazil is possible (Nova Gerar), even with a rather complex situation as a starting point Asia has surpassed Latin America and is gaining ground: Brazil needs urgently to regulate the processing of CDM projects so as to make them more expeditious and efficient, thus attracting investments © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 15

CONCLUSIONS Brazilian regulations are still to be developed for (i) CDM projects approval, and (ii) emissions tradings Consequences: (i) difficulty in approving projects; (ii) an uncomfortable environment for Brazil as a host country – uncertainty; (ii) Brazil’s potential loss of opportunities to implement CDM projects to other places (e. g. Asia) Despite all this, Brazil shows a great potential for growth through CDM Although the Arbitration Law is recent (1996), arbitration proceedings are generally being used in Brazilian CDM projects, in light of the advantages offered to the parties involved. © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS 16

FOR FURTHER INFORMATION, PLEASE CONTACT: Werner Grau Neto Pinheiro Neto Advogados Rua Boa Vista, 254, 9 o andar São Paulo, SP 01014 -907 Brasil Tel: (55 -11) 3247 - 8625 Fax: (55 -11) 3247 - 6120 wernergrau@pinheironeto. com. br © 2004. Pinheiro Neto Advogados. All rights reserved. PINHEIRONETOADVOGADOS JUR_SP 518941 v 1 17