Emission Reduction Purchase Agreements for Reduced Emissions from Deforestation and Forest Degradation Projects: an Analysis of the Key Issues

Abstract

This paper analyses the potential issues in the development of primary emission reduction purchase agreements (ERPAs) for emissions reduction credits created by reduced emissions from deforestation and forest degradation (REDD) projects. REDD projects are developing type of emissions reductions credits which involve providing payments for the avoidance of forest degradation and deforestation in the developing world, in order to prevent greenhouse gas emissions caused by these activities. This paper identifies, analyses and provides recommendations about the potential issues in ERPA formation which are most unique to REDD projects. In particular, this paper focuses on the allocation of various types of risk involved in REDD ERPAs, including regulatory uncertainty and certification risk, host-country risks, project risk and market risk. A great deal of uncertainty surrounds the implementation of REDD projects, which heightens the level of risk which much be allocated in ERPAs. This paper makes recommendations for early REDD ERPAs including that ERPAs should contain flexible delivery obligations for sellers, that the price per emissions reduction credit should be fixed, that any unexpected certification or host-country costs should be shared between parties and that incentives should be provided for sellers to meet any new certification standards which result from the implementation of an international REDD mechanism. This paper also recommends that international negotiators should provide more certainty to buyers and sellers through confirmation of an international REDD mechanism and the certification standards which will be required, while domestic legislators should confirm any regulations that will apply to REDD projects and should divert country performance risk away from individual projects through providing guarantees.