含羞草社区

India is developing various market mechanisms for raising climate finance. While regulated domestic markets are still being operationalised, funds, financial institutions and corporate sponsors are looking for ways to participate in carbon projects in the voluntary market. Renewable energy aside, nature-based solutions (NbS) such as reforestation, afforestation, conservation and waste management are particularly favoured. These projects are vital to meeting the challenges of climate change, biodiversity loss and sustainable development. They have the potential to generate carbon credits that can be sold in voluntary or compliance markets.

Various types of contracts may be executed by NbS project stakeholders, including landowners, project developers, investors and buyers.

NbS projects may be on land owned by governments, private entities or individuals, and may be implemented by project developers through service providers or farmers with whom they partner with. Where farmers do not own the land, project developers must secure or ensure that farmers they partner with have long-term rights to use the land for setting up and maintaining NbS projects. These agreements should align land tenure with the project life cycle and may expressly provide that the carbon rights or credits resulting from the NbS project will vest with the lessee.

If the usage rights to land are unclear, carbon credit registries, such as Verra and Gold Standard, may refuse to register the NbS project. Where land is leased from landowners, to mitigate risks agreements may include assurances from the landowner, such as a warranty of clear title, allowing termination if the land title is lost or encroached and conducting prior land title due diligence.

NbS projects with high upfront costs may be funded by various financial vehicles. These may be equity investments in exchange for project ownership or revenue sharing; grants; debt financing secured by the receivables from the sale of carbon credits, or possibly, the carbon credits themselves; or carbon prepayment or streaming agreements in which investors provide upfront financing and receive a share of future carbon credits. These financing agreements may often include covenants to manage risk. Robust financing agreements are key to getting projects off the ground, as they provide capital and allocate risks between project developers and financiers.

Where a number of entities co-develop a project, partnership or joint venture agreements may also be concluded. They determine each party’s responsibilities and set out decision-making and revenue-sharing arrangements. There may also be benefit-sharing agreements between the project developer and local communities.

Carbon credit sale agreements or emission reductions purchase agreements (ERPA) are the cornerstone of NbS projects and provide revenue certainty. They define how the sale of carbon credits will take place between a project developer and a buyer. Payments for ERPAs may be structured in different ways, including fixed-price ready delivery contracts, and pre-purchase in which buyers finance project development in exchange for future credits. ERPAs also manage risk between project developers and buyers. A project developer may be responsible for project execution, carbon credit generation, verification and delivery, thereby undertaking the risk of delays and underperformance. Regulatory and policy risks and force majeure risks may be shared between the project developer and the buyer.

In NbS projects, there is an ever-present risk of the destruction of the underlying resource that led to the generation of carbon credits. The reverse of the environmental benefit may be managed through insurance and the creation of a buffer pool, that is the extra carbon credits held with the registry but not sold.

Projects must comply with recognised carbon standards, including their verification requirements. Agreements with third-party auditors who will certify the environmental benefits attributable to an NbS project that are eligible for ?carbon credits are also required.

Project developers may engage partners to market and position their credits in the market, and carbon brokers who act as intermediaries between the project developer and potential buyers.

Undertaking an NbS project may require certain governmental approvals. The structure of the investment, partnerships and ERPAs will also have to properly account for exchange control, securities contracts, taxation and accounting considerations, especially where they involve cross-border financial flows into India or export of carbon credits from India.

Gautam Chabra is a partner at Trilegal