The CDM Legal Issues Guidebook Peter Ebsen Baker

The CDM Legal Issues Guidebook Peter Ebsen, Baker & Mc. Kenzie peter. ebsen@bakernet. com

CDM Legal Issues Guidebook Contents • Disclaimer • Glossary • Explains in simple language many of the CDM and Marrakech Accords terms, plus terms which are not mentioned in the rules but have gained currency in the carbon market (e. g. Verified Emission Reduction, Allocation Statement) • Methodology • Attempts to outline issues faced in a step by step fashion drawing attention to issues from a developerspective • Surveyed global team and drew on global experience in the area. • Focus remains legal. 2

CDM Legal Issues Guidebook Contents • Chapter One: Introduction • Establishes the context of a legal issues guidebook (i. e. the development of a new area of law, under the Kyoto Protocol, which must also exist within the context of domestic legal regimes) • Legal Issues Guidebook builds on previous CD 4 CDM Guidebooks but with a focus on: • Legal requirements of CDM Projects • Interaction with domestic and international law • Identifying and managing risks • Creating contracts and transferring CERs through • Potential structures for CDM Projects 3

CDM Legal Issues Guidebook Contents (cont. ) • Key Issues for Host Country Project Developers • Complexity of developing CDM rules, limited Host Country expertise • Establishment of DNA • Attracting underlying finance to CDM Projects (i. e. addressing risk concerns of potential investors) • Transaction costs • Creating and transacting CERs (ownership of CERs etc) • Interim status of CDM “prompt start” 4

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Two: Background to the CDM • Development of CDM under international law – status of the Kyoto Protocol • Brief summary of major CDM requirements • Chapter Three: Role of CDM Entities • Briefly explains the role of the CDM Executive Board, project participants, the DNA, DOEs and CER Purchasers and the risks which each of these presents for CDM Projects • Focuses on considerations in establishing a DNA, including the requirements for DNAs under the Marrakech Accords and potential additional roles which DNA could fulfil to facilitate CDM projects 5

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Four: Legal Steps in Developing a CDM Project • Summarises legal requirements for CDM projects under Marrakech Accords, including major considerations at each stage of project cycle • Chapter Five: Qualification as a CDM Project: Legal Requirements • Key requirements for Registration • Who can participate? What types of projects are eligible? What are the key requirements (sustainable development, additionality) • Domestic law impacts on the CDM – discussion covers foreign direct investment laws, environmental laws, property laws, securities and financial regulation • A role for the DNA in facilitating CDM Investment – various barriers to investment in Host Countries and 6

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Six: Certified Emission Reductions • What is a CER? When can CDM Projects begin to generate CERs? How long can they generate CERs for? • Legal ownership of CERs – includes discussion of establishing ownership to underlying GHG emission reductions – does the Host Country own CERs or do private project participants? • Transfer of CERs through the CDM registry system • CER Pricing – includes brief discussion of current pricing and future potential 7

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Seven: Structuring and Financing a CDM Project • Project structure will depend on nature of project, number of project participants and role which CERs play in attracting finance or revenue • Once appropriate structure chosen, risks will need to be considered and allocated • Potential project structures include: • Direct sale of CERs from a Host Country driven CDM Project • Provision of debt finance in return for part payment in CERs • Equity investment in return for revenue stream from CERs • Non-recourse project finance • Technology swap in return for CERs • “Bundling” CERs with other commodities through offtake arrangements • Includes diagram of example CDM project structure 8

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Eight: Managing CDM Project Risks • All CDM Projects entail a number of risks for project participants and investors. The Guidebook discusses means of identifying, allocating and assigning risks through negotiations and contracts. • Major risk categories are: • Host Country political and sovereign risks (including change in laws, administrative burdens, currency fluctuations) • General project risks (including force majeure, risk of underperformance, market risks, cost risks) • Kyoto Protocol risks (CER price risk, Kyoto Protocol regulatory risk, community opposition, inaccurate carbon accounting, legal title disputes over CERs) 9

CDM Legal Issues Guidebook Contents (cont. ) • Chapter Nine: CDM Contracts • As with CDM project structures, CDM contracts can assign CERs in a variety of ways (e. g. spot transactions, forward sales and option arrangements). • As registry accounts finalised and CDM Executive Board begins issuing CERs, CDM contracts transacting CERs are likely to become more simple and some types of contracts may be able to be standardised. • Current CDM market has been largely influenced by several major purchasers – the World Bank and the Netherlands Government. The chapter discusses the contracting approaches of these entities to date, but also provides alternative 10

CDM Legal Issues Guidebook Contents (cont. ) • Key legal issues in CDM contracts are: • Determining what is to be transacted (i. e. only CERs or Verified Emission Reductions? ) and how delivery obligations are fulfilled • Establishing legal entitlement to CERs and transferring this entitlement to purchaser • Negotiating CER price (which will reflect allocation of various risks e. g. risk that Kyoto Protocol does not enter into force) • Including appropriate indemnities warranties and • Managing and assigning risks • Dispute resolution provisions and appropriate remedies 11

CDM Legal Issues Guidebook Contents (cont. ) • Chapter provides a table which discusses the major contractual issues from both Seller and Buyer perspective and the various contractual approaches which can be taken to address these issues. • Two annexures to the Guidebook are provided which are “shell” contracts to sell CERs from a CDM Project – these provide alternative approaches to the current market contracts and could form the basis for development by Host Country project participants to suit a particular CDM Project. 12

CDM Legal Issues Guidebook Conclusion: Legal Issues Pending • Whether the Kyoto Protocol will enter into force • Unilateral CDM Projects • Ability of Host Country private participants to hold registry accounts • Ability of Host Countries to trade CERs • Status of the “prompt start” of the CDM • Establishment of DNAs • Development of concept of “additionality” • Interaction with Host Country laws 13

UNEP Legal Issues Guidebook Contact: Martijn Wilder, Partner, Sydney martijn. wilder@bakernet. com +612 92250276 or Peter Ebsen, Frankfurt peter. ebsen@bakernet. com +496929908640