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Overview of BioCF ERPA terms

Overview of BioCF ERPA terms. December 15, 2005 The World Bank, Washington, DC. What is an ERPA?. An Emission Reductions Purchase Agreement: A Purchase and sale agreement Not a loan or credit Payment upon delivery of asset (Emission Reductions) Asset creation

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Overview of BioCF ERPA terms

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  1. Overview of BioCF ERPA terms December 15, 2005 The World Bank, Washington, DC

  2. What is an ERPA? • An Emission Reductions Purchase Agreement: • A Purchase and sale agreement • Not a loan or credit • Payment upon delivery of asset (Emission Reductions) • Asset creation • Project registered by the CDM Executive Board (for CDM projects) • Emission reductions verified and certified by a third party • ERs issued by the EB • No Bank financing involved in the carbon purchase – the Bank signs an ERPA as Trustee for a carbon fund

  3. Bank Carbon Funds – public and private funding BioCF - $53.8 million - 14 participants (5 public participants) PCF - $180 million CDCF - $128.6 million Italian Carbon Fund - $45 million Danish Carbon Fund - $75 million Spanish Carbon Fund - $221 million Umbrella Carbon Facility - $500+ million first tranche Single donor funds: Netherlands CDM Facility - $172 million Netherlands European Carbon Fund - $40 million (managed with IFC)

  4. ERPA purpose • Identify basic terms – price, volume, delivery schedule • Identify responsibilities • Trustee: payment, arrange for verification, EB communication • Sponsor: • establish and operate the project (create and maintain ERs) • operate in compliance with the Kyoto monitoring plan, Environmental Management Plan and other covenants • Establish rights • Trustee: receive ERs, option, cost recovery, default remedies • Sponsor: receive $, default remedies • Risk allocation

  5. BioCF Regulatory risks Registration risk Methodology Additionality Baseline risk (registration and renewal) Issuance of CERs Project Sponsor Project risks Financing, establishing and operating project Generating ERs ERPA – Basic risk allocation (VERs) • Country risks • Host Country “Letter of Approval” • Forest definition • Risk allocation can vary by contract

  6. Regulatory Risks Baseline risk mitigation Conservative Baseline Annual purchase amount no more than 80% of expected amount EB Communication rights Project Risks Payment on delivery Seniority Purchase 1st ERs “Sweeping” Option – fund management risk mitigation tool Default provisions ERPA – Risk mitigation • Country risks • LOA and forest definition -- condition of • ERPA purchase and sale • Letter of No Objection

  7. Long term permanence obligations (e.g., contracts to 2037) Permanence strategy to mitigate risks from fire, pest, illegal logging, weather “Reserve” ER pool – a form of self insurance “Hold Back” – withholding payment until pre-set time (commercially difficult) “Permanence Payment” – lower ER price and Trustee sets aside amount to fund permanence obligations Pre-signing legal due diligence Title to forests and carbon Long-term control over land Permanence – a LULUCF risk

  8. ERPA remedies – Project sponsor defaults • Transfer failure – remedies designed to keep project operational. Trustee can: • take delivery in a later year • decrease contract amount and increase option • terminate if transfer failure persists for 3 years, and recover costs • Intentional breach - right to costs and damages; termination • Others – right to terminate and recover outstanding costs

  9. General Conditions and ERPA • ERPA – project-specific terms (purchase volume; price; preconditions; special reps & warranties and covenants) • General Conditions – standardized purchase and sale terms • Terms vary between fund, and VER and CER contracts • CER contract – seller taking regulatory risk

  10. Project Structures IBRD IBRD Intermediary Sponsor Sub-S Sub-S Sub-S

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