Potential legal risks need to be identified and managed by project owners in order to protect themselves from default and/or legal action. The Legal Issues Guidebook to the Clean Development Mechanism by the Capacity Development for CDM Program presents an analysis of the different types of risks related to various stages of the CDM cycle, along with potential legal and contractual approaches that could be undertaken to minimize these risks.

Host country risks for various domestic legal issues potentially faced by CDM projects and PoAs are discussed in Implementing CDM Projects: Guidebook to Host Country Legal Issues by the Capacity Development for CDM Program. This guide includes workable solutions for the issues mentioned.

Below is a list of some common legal issues that may need to be managed when developing a carbon project:

  • Official Development Assistance (ODA) – The project must not receive any funding from Annex I countries that would then revert back in the form of carbon credits.  This applies to “official governmental grant agencies” and ODA. This aspect needs to be addressed during implementation and operational phase of the project.
  • Classification of end-users – Improved cookstoves can only be disseminated to domestic users (households) and/or community institutions. Only non-commercial users in the project region can benefit from them. This stipulation is in place to so that the automatic additionality guidelines for the positive list of micro and scale CDM projects can be fulfilled; it applies to the “classification of end-user.” This aspect needs to be addressed during implementation and operational phase of the project.
  • Double Counting – The project as whole, or part thereof (specific units) must take steps to avoid double counting of emission reductions. This is in place to minimize the risk of double counting and is ensured by the following rules:
    • Each cookstove must have a unique identification number, and the end-user location should be recorded;
    • Clean cookstoves in the project must not be proposed as an individual CDM project or as a part of any CDM PoA, or any other mechanism to avail climate change mitigation benefits;
    • The end-user of an improved cookstove must renounce to the Project Owner his/her ownership right to the carbon credits generated.

Managing important contractual relationships

The project owner must secure contractual agreements with various players for the underlying activities in the carbon project cycle. Effective management of these agreements and ensuring timely receipt of products and services are important for successful project implementation.

Examples of some contracts and agreements that may be required are listed below:

  • End-user agreement, perhaps the most important contract between the end-users of the improved cookstove and the project owner;
  • Service agreements with the carbon consultant for GHG project development activities (these frequently include design documentation, validation facilitation, monitoring report, verification facilitation, among others);
  • DOE contract to appoint and govern the service of DOE(s) for Validation and Verification;
  • An Emission Reduction Purchase Agreement (ERPA) for the transaction of carbon credits with the buyer. The ERPA must identify responsibilities, rights and obligations to manage project risks and define the commercial terms of the project, including price, quantity and delivery schedule of emission reductions, as well as aspects related to ownership of carbon credits. The ERPA should also define the consequences of non-delivery and of default (some of these terms may have to be examined in detail in order to identify potential legal issues).  Sample ERPAs are available on the Forest Carbon Asia website and on the IETA website.  The samples are, however, merely indicative examples of ERPAs.  Each entity involved in carbon credit transaction activities is required to develop its own agreement document as per its requirements, legal or otherwise.
  • A CME-CPA implementer contract (for PoAs) for the inclusion of the CPA in the PoA, which governs the association of the two entities. This contract defines the roles and responsibilities of each entity, covers the ceding of rights for CERs generated from the CPA by the CPA implementer to the CME, and stipulates how sharing of CER revenues between the CME and CPA implementer will take place;
  • Service agreements with technology and design consultants, among others (if required);
  • Other commercial agreements such as contracts with vendors, sub-contractors, sellers, retailers and distributors, among others.