ERPA General Conditions

The General Conditions (GCs) are the legal underpinning of large-scale carbon transactions. They provide for general rules and procedures for the sale and payment for Emission Reductions (ER) to be generated and verified under an Emission Reductions Program.  The General Conditions will be incorporated into each Emission Reductions Payment Agreement (ERPA) by way of reference and are non-negotiable. The General Conditions were approved by the FCPF Participants Committee at its 18th meeting on November 1, 2014 in Arusha, Tanzania as per Resolution PC/18/2014/2 (Adoption of FCPF General Conditions Applicable to Emission Reductions Payment Agreements).

The Emission Reductions Payment Agreement (ERPA) is a legal document in which the Seller (e.g., a REDD+ country) and the Buyer (the Forest Carbon Partnership Facility Carbon Fund) agree on the commercial terms (e.g. volume, price, conditions of effectiveness, options, advance payments etc.) of the sale and payment for Emission Reductions to be generated and verified under an Emission Reductions Program. All commercial terms in the ERPA are negotiable.

The General Conditions build on the criteria and indicators specified in the Methodological Framework and provide, among others, for the general legal rules and procedures that are expected to be followed during Emission Reductions Program design, preparation, and, implementation. The Methodological Framework was approved by the FCPF Carbon Fund at its 8th meeting on December 9, 2013 in Paris, France, and forms a critical component to guide REDD+ Countries in designing their ER Programs for submission to the FCPF Carbon Fund.

At the 11th FCPF Participants Committee meeting (March 2012), the FCPF Facility Management Team (FMT) presented building blocks of an ERPA as well as a roadmap to GC adoption. As a first step of such roadmap, the FCPF Participants Committee was tasked with adopting, in the form of an ERPA Term Sheet, a set of basic principles that would form the basis of a subsequent effort to develop and adopt the GCs. Following detailed presentations, workshops and discussions at FCPF Carbon Fund and FCPF Participants Committee level (with active engagement of CSO and IP observers) the ERPA Term Sheet was adopted at the 13th FCPF Participants Committee meeting (March 2013). On the basis of the adopted ERPA Term Sheet (and in parallel to the development and adoption of the MF at the 8th FCPF Carbon Fund meeting (December 2013)), the FMT drafted an ERPA template (commercial terms) together with draft GCs. Following multiple rounds of presentations, workshops, discussions, Q&As and FMT outreach efforts to REDD Countries and FCPF Carbon Fund Participants (with active engagement of CSO and IP observers), the GCs were finally adopted unanimously at the FCPF Participants Committee meeting in Arusha, Tanzania, on November 1, 2014.

Once the Seller has finalized its Emission Reductions Program Document (ERPD), has submitted its ERPD to the FCPF Carbon Fund and the FCPF Carbon Fund has decided to select the ER Program into its ER Program portfolio, the Seller (e.g., a REDD+ country) and the Buyer (the Forest Carbon Partnership Facility Carbon Fund) will start negotiating the commercial terms of an ERPA. Once such ERPA negotiations are finalized and an ERPA is signed, the General Conditions will be incorporated into the ERPA by way of reference and, thereby, form an integral part of the ERPA itself.

Whereas the Emission Reductions Payment Agreement (ERPA) will cover the commercial terms of the transaction that are negotiable on a case-by-case basis, the General Conditions provide for a set of (non-negotiable) general rules and procedures that apply to each transaction. Such rules and procedures cover, among others, issues related to the sale, transfer and payment for verified ERs, the allocation of responsibilities in terms of ER Program development, ER Program Registration, ER Monitoring and ER Verification, ER Program/Sub-Project implementation and operation, application of World Bank Operational Policies (incl. environmental and social safeguards policies), benefits and benefit sharing principles, Reversals, Reversal Management Mechanisms, ER Program Buffer, transfer of Title to ERs, Events of Default and related remedies, governing law and dispute settlement.

The term “material” is used in the GCs in various contexts relating to (i) delays/problems in ER Program preparation/implementation, (ii) adverse effects on Seller’s (e.g., a REDD+ country) ability to perform its ERPA obligations, (iii) breach of contract, (iv) changes /modifications/updates to Benefit Sharing Plans and (v) contracts/permits/consents/licenses. The term is supposed to clarify that not every related trivial event triggers a certain contractual response, but only those events that are significant in terms of each party’s ability to perform its respective contractual obligations under the ERPA. The materiality test has to be assessed on a case-by-case basis taking into account the nature, consequence and significance of each such event in light of the respective other party’s contractual expectation. For a breach of contract to be ‘material’, English law requires the breach to have a “serious effect” on the benefit the other party was to receive under the contract.

The ERPA will have a term that will not go beyond the lifetime of the FCPF Carbon Fund. As per FCPF Carbon Fund Resolution CFM/12/2015/1 (Extension of the FCPF Carbon Fund), FCPF Carbon Fund participants unanimously approved to extend the lifetime of the FCPF Carbon Fund by additional five (5) years from December 31, 2020 to December 31, 2025, pending subsequent approval of such extension and its terms by the World Bank’s Board of Executive Directors. The term of an ERPA is currently expected to last at least 4 years, possibly more (if the extension of the lifetime of the FCPF Carbon Fund is approved by the World Bank’s Board of Executive Directors), but is subject to when an ERPA is actually signed.

The General Conditions clarify that Emission Reductions contracted for under the FCPF ERPA, as well as any underlying reduced tonnes of CO2e, may only be used or claimed once. Therefore, Sellers (e.g., REDD+ countries) are not entitled to sell, claim or otherwise use contracted ERs a second time after they have been transferred to and paid for by the Carbon Fund. The Seller may only use or claim the reduced tonnes of CO2e (underlying ERs contracted and transferred under the ERPA) for compliance with domestic commitments if and in so far as the Trustee, following consultations with Carbon Fund participants, has provided its express prior written consent.

The General Conditions require the Seller (e.g., a REDD+ country) to share a significant part of certain eligible benefits (called ‘Monetary and Non-Monetary Benefits’) achieved in connection with the implementation of the ER Program (including received payments for transferred ERs and advance payments) with beneficiaries. For this purpose, based on the benefit sharing arrangements designed by the Seller and included in the ERPD and in accordance with the Methodological Framework (MF), the Seller has to develop and submit to the World Bank a Benefit Sharing Plan (BSP) in form and substance satisfactory to the World Bank. The MF states in its Indicator 30.1 that a BSP would be expected to include certain elements (e.g. categories of potential beneficiaries and how such beneficiaries are identified; eligibility requirements to receive benefits; criteria, processes and timelines for benefit distribution; and monitoring provisions for BSP implementation). The MF further states, among others, that (i) the BSP is prepared as part of the consultative, transparent and participatory process for the ER Program, and reflects inputs by relevant stakeholders, including broad community support by affected Indigenous Peoples and (ii) the design and implementation of the BSP comply with relevant applicable laws, including national laws and any legally binding national obligations under relevant international laws.

The GCs require the Seller to ensure throughout the term of the ERPA and in accordance with the MF its ability to transfer to the Buyer ‘title to ERs’, ie. full legal and beneficial title and exclusive right to any ERs generated under the ER Program within the ER Program Accounting Area and contracted for under the ERPA. The GCs clarify that transfer of title only refers to the ERs themselves, and shall not affect any beneficial, legal or customary interests or rights in the land and territories within the ER Program Accounting Area. In order to assess the Seller’s ability to transfer title to generated, verified and contracted ERs, the Seller shall demonstrate such ability to the Buyer prior to ERPA signature as well as prior to any transfer of generated, verified and contracted ERs and shall report on such ability in any ER Monitoring Report. In the event that, prior to any ER transfer, the Buyer determines, in its reasonable opinion, that the Seller was unable to demonstrate, in full or in part, its ability to transfer title to ERs, the Buyer will determine, following consultations with the Seller, the amount of affected ERs and notify the Seller accordingly. The Seller will not be entitled to transfer and the Buyer will not be obligated to accept the transfer of and make payment for such affected ERs.

In accordance with the Methodological Framework, the Seller (e.g., a REDD+ country) is expected to identify in the ERPD certain non-carbon benefits that the ER Program is expected to achieve during ER Program implementation. The Seller is further expected to identify in the ERPD certain non-carbon benefits that are deemed to have ‘priority’ status. Therefore, non-carbon benefits play an important role in the FCPF Carbon Fund’s quality assessment of each ER Program and its ultimate decision whether or not to select an ER Program into its ER Program portfolio. Under the GCs, the Seller is encouraged to generate and/or enhance the ‘priority’ non-carbon benefits and is expected to provide information on its efforts to generate and/or enhance such ‘priority’ non-carbon benefits as part of each ER Monitoring Report and Interim Progress Report. However, the GCs are silent on the price the Buyer will have to pay for any generated, verified and transferred ERs contracted for under the ERPA. As a commercial term, the price negotiations will be part of the ERPA negotiations, not the (non-negotiable) General Conditions. At the 12th FCPF Participants Committee meeting (June 2012), the FCPF Participants Committee adopted by Resolution PC/12/2012/3 the ‘Recommendations of the Working Group on the Methodological and Pricing Approach for the Carbon Fund of the FCPF’ (FMT Note 2012-8) which state in its ‘Pricing Element 4’ that “[t]he ERPA price negotiation process offers an opportunity for non-carbon benefits to be taken into consideration, although there would be no systematic quantification of non-carbon benefits for pricing under the Carbon Fund.”

The ER Program Buffer serves as a tool to help manage certain risks during ER Program implementation, including the level of uncertainties related to the estimation of ERs to be generated during the ERPA term under an ER Program and the risk of reversals. Prior to each transfer of ERs under the ERPA, and in addition to the amount of contracted ERs to be transferred to the Buyer, a certain amount of Buffer ERs generated and verified under the ER Program during the preceding Reporting Period will be transferred and deposited for each covered risk category into the ER Program Buffer. In the event that any covered risk materializes during the ERPA term, an amount of such deposited Buffer ERs, equivalent to the amount of contracted ERs affected by such risk event, will be cancelled in order to ensure that the contracted, and already transferred ERs, remain unaffected by such risk event. The details of how the ER Program Buffer will operate will be specified in the ‘ER Program Buffer Guidelines’ that are to be adopted by the FCPF Carbon Fund following the review and feedback provided by a Review Group which includes representatives from FCPF Carbon Fund, REDD Countries and observers.