Co-authored by Chris Borg.
The past year or so has seen the gradual emergence of standard documentation for the trading of credits in voluntary carbon markets. Two initiatives are of particular importance.
At the end of last year, the International Swaps and Derivatives Association (“ISDA”) published new industry documentation for the trade of verified carbon credits (the “VCCs”). The 2022 ISDA VCC Transactions Definitions (the “VCC Definitions”), and related template confirmations, should support the global VCC trade across different Standards and Registries. Parties need to incorporate the VCC Definitions into the confirmation for a transaction. ISDA has published template confirmations for physically settled spot, forward and option transactions. However, the VCC Definitions only apply to the trading and retirement of VCCs on the secondary market.
The set of standardised Emission Reduction Purchase Agreements (“ERPAs”) relating to the sale and purchase of carbon credits from removal and reduction projects, published by the International Emissions Trading Association (“IETA”) earlier this year, is the first to cover primary offtake. The primary ERPA is a framework agreement for the sale of VCCs directly from project owners or developers to initial buyers in the primary market. It accommodates the specific requirements of Verra and the Gold Standard, the leading Standards. The standardised documentation for voluntary carbon markets prepared by the IETA also includes Contingent and Non-Contingent ERPAs.
While parties may have spent time developing their own preferred forms, the rise of standard forms sponsored by trade associations is to be welcomed.
Standardised documentation can help market scale, create liquidity and accelerate growth. Using standard documents enables parties negotiating transactions to recognise and address more quickly the issues on which they agree and disagree. Put simply, it helps negotiate deals more quickly and efficiently.
Standard documentation does not standardise deals. The variety of uses of standard documentation developed by the Loan Market Association and ISDA amply shows this. Parties are still able to develop bespoke terms which are program-, project- or counterparty-specific. But they tend to spend less time and resource working out whether apparent differences between their own starting point documentation and that of the counterparty matter for their negotiation.
The detailed documentary review process that most trade associations sponsoring standard documents follow can also foster market confidence through the assurance it gives that the documents are well drafted and address the relevant issues.
One of the greatest difficulties in voluntary markets is the lack of standardisation and that there are so many different types of voluntary credit often trading in small volumes. Standard documentation won’t solve that issue, but it may contribute to better understanding of the features of different credits and possibly to credits coalescing around a smaller number of reference types, each defined based on relevant criteria.