Carbon Contracts

1. Carbon Contracts RON EZEKIEL Fasken Martineau 604 631 4708 rezekiel@fasken.com

2. 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

3. 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

4. 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

5. 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

6. What is the Product? BC Hydro’s Phase I Bioenergy RFP EPA

7. What is the Product? OPA’s CHP II PPA

8. 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

9. 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?

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. State of the Market • Standard Contracts • Alberta Offsets (Climate Change Central):http://www.carbonoffsetsolutions.ca/pdf/Offset_Purchase_Agreement_Sep18.pdf • VERs (ABA/EMA/Acore):http://www.acore.org/renewableenergyinfo/includes/resource-files/draft_verpa.pdf • Other Emissions Products (Emissions Marketing Association):http://www.emissions.org/publications/emissions_trader/model_so2/agreement.html • RECs (ABA/EMA/Acore):http://www.acore.org/pdfs/ABA_EMA_ACORE_Master_RECs_Agreement.pdf • Kyoto CERs (IETA):http://www.ieta.org/ieta/www/pages/getfile.php?docID=1020 • Kyoto CERs (CERSPA):http://www.cerspa.org/

17. Questions? Ron Ezekiel