ERF: Participating in Aggregated Projects - Case Studies in Aggregation Agreements

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EMISSIONS REDUCTION FUND: PARTICIPATING IN AGGREGATED PROJECTS

Case studies in aggregation agreements

Environmental plantings project

This case study is about a hypothetical aggregated environmental plantings project.It may be useful for people thinking about doing an aggregated project and who want to learn more about what an aggregation agreement might involve. It is recommended that you read it together with the “Key issues to consider in your aggregation agreement” guidance document, legal right fact sheet and “Questions to ask your aggregator” fact sheet.

In this case study project, five farmers agree to let an aggregation company undertake aproject on their land.The case study discusses issues that the farmer and aggregation company will wish to consider when setting up the contractual arrangements between them.It also considers specific issues related to sequestration projects.

This case study and the example clauses, which are attached, are not intended to be comprehensive and are provided for guidance purposes only.The information provided in this document is not legal advice. The Department recommends that any person considering entering into an aggregation agreement for participation in the Emissions Reduction Fund obtain their own independent legal advice.

Step one: Green Trees sets up an aggregated plantings project

Green Trees Pty Ltd (GT) runs an environmental plantings business in New South Wales.GT wants to undertake a project under the Emissions Reduction Fund (ERF) using the Carbon Credits (Carbon Farming Initiative) Reforestation by Environmental or Mallee Plantings – FullCAM) Methodology Determination 2014 (Environmental plantings method).[1]In order to get the scale necessary to achieve a viable project, it needs to undertake plantings across a number of different farming properties.

GT first confirms that all of the landowners it wants to invite to participate are not already part of another ERF project or operating under a government programme excluded by CFI legislation.See the Eligibility, additionality and newness section of the Clean Energy Regulator’s website for information on excluded programmes.

GT approaches five separate landowners (farmers) and invites them to participate in an aggregated environmental plantings project (project).The farmers think the proposal is good, in principle, because they would like to earn money for carbon credits without having to run a project themselves.

Figure 1. GT aggregates abatement from tree planting on five farms

GT meets with the farmers to agree on how the project will be set up. They discuss key questions such as:

Who will be the proponent for the project?
Who will do the tree planting activities?
Who will be responsible for ongoing maintenance of the trees?
Who will register the project and obtain any necessary approvals or consents required for the project?
Will the project be bid into an ERF auction and if so, who will enter the Carbon Abatement Contract with the Regulator?
Who will do the monitoring and reporting?
How will the income from the sale of the Australian Carbon Credit Units (ACCUs) be distributed and when?

They agree on the following responsibilities for GT and the farmers.

Figure 2. Project responsibilities for GT and the farmers

The structure of the project and the specific provisions of the aggregation agreements may trigger obligations on GT under the financial services and managed investment scheme provisions of the Corporations Act 2001. For example, the project may be a managed investment scheme because the owners will share in the revenue generated from the sale of ACCUs from the project. GT gets legal advice about its obligations, including about whether:

the project is a ‘managed investment scheme’ for ‘wholesale clients’ (the clients in this case would be the owners);
GT is ‘in the business’ of promoting projects that are managed investment schemes;
GT needs to hold an Australian financial services licence;
any of the owners are ‘retail clients’ under the Corporations Act 2001to whom GT needs to provide a Financial Services Guide and a Product Disclosure Statement; and
if theproject is a managed investment scheme that needs to be registered with the Australian Securities and Investments Commission (ASIC).

Depending on the advice, GT may need to get an Australian financial services licence (AFS licence)and give the owners a ‘Product Disclosure Statement.’

To get assurance that GT is compliant, the owners get GT to give them written advice saying that GT is following the rules set out in the Corporations Act 2001.

Further information about ASIC and the regulation of financial services can be found on the carbon markets page of ASIC’s website.

Step two: GT and the farmers sign aggregation agreements

This kind of project means that GT and the farmers will have responsibilities to each other for many years to come. They want to have an aggregation agreement (a legal contract that is designed to protect the interests of everyone involved).

GT prepares a standard agreement that it will sign with each farmer individually. Each agreementwill be slightly different. Each will have its own timetable (‘schedule’); show the particular part of the farm over which the trees will be planted (‘project area’); and include any other requirements specific to that farmer and their land.

In discussing the agreement, GT and the farmers talk about a number of important issues for this type of project. For example, how long it will run for; when it starts; and how will their farms be protected from any damage during planting activities.

Figure 3. Owner concerns and specific provisions in agreement to address

How long will the agreement be? / It is agreed that the length of each agreement will be 27years. This is because for projects that ‘sequester’ carbon, like this one, the trees need to stay in the ground for a period of 25 years and because the first reporting period is two years after project registration, the trees need to stay in the ground for at least 27 years (the ‘permanence period’). / NA
When will the agreement start? / One of the farmers has been approached by another tree planting company who has offered different payment arrangements. Because the farmer has already reached an in principle agreement with GT he is prepared to stay with GT but he also wants to ensure that GT will progress the project as soon as possible.
He therefore asks for a ‘condition precedent’ clause to be inserted into the agreement requiring GT to register the project and get a Carbon Abatement Contract within sixmonths of the date of the agreement.If these events are not achieved within that period, the farmer has the right to walk away from the agreement and enter an agreement with the other company. / Clause 2
Is this going to interfere with normal farming operations? / The farmers want to ensure that the planting activities being undertaken by GT do not impact on their farming operations and do not cause any damage to their land.
Accordingly, they request that an ‘indemnity’ clause be inserted into the aggregation agreement.The clause requires GT to reimburse the farmers for any damage which GT causes to the farmers’ land, plant or equipment.It also indemnifies the farmers for any breach of applicable laws by GT, such as occupational health and safety or environmental laws.However, the clause is drafted in such a way that the indemnity cannot be relied on by the farmers if their own actions actually cause the damage or breach. / Clause 8

Example agreement clauses

The aggregation agreement which is finally prepared by GT’s lawyers covers a number of important matters. These matters are explained in more detail in the “Key issues to consider in your aggregation agreement” guidance document. For a list of the example ‘clauses’ see Attachment A.

Step three: GT and the farmers do the project

The farmers each sign their aggregation agreement with GT. GT registers the project under the ERF and enters into a Carbon Abatement Contract with the Regulator after successfully bidding at an ERF auction.The price GT bids is based on a range of considerations and reflects what GT thought necessary to conduct the project. GT then starts planting the trees on the farmers’ properties in accordance with the schedules attached to the aggregation agreements.

Two years after the project starts, the first offsets report and audit report is submitted to the Regulator and the first ACCUs from the project are issued. The farmers receive payment from GT in accordance with the payment arrangements set out in the aggregation agreements.

Significant reversal — fire

It will be important for participants in an aggregated sequestration project to consider how matters, such as a significant reversal of the stored carbon, will be dealt with between the parties and where any liability will rest.Owners may also want to consider their options for removing their land from a project. See also: “Key issues to consider in your aggregation agreement” guidance document on the question about selling your land while in a project.]

Five years after the start of the project, a fire occurs on one of the farmers’ land. GT finds out that the fire was caused by a lightning strike.The fire causes a ‘significant reversal’ (because it covers more than 5 percent of the project area).

‘Force majeure’ or fault?

The fire was caused by a lightning strike, which is a natural event that no one is responsible for.

GT uses the ‘force majeure’ clause in its Carbon Abatement Contract with the Regulatorto avoid future delivery obligations under that contract for ACCUs that would have been earned from the trees lost in the fire.

Because there was nothing the farmer or GT could have done to prevent it, GT is unlikely to be issued with a relinquishment notice by the Regulator.However, GT would be expected to take “reasonable steps” to re-establish the carbon stores, which would probably mean replanting the lost seedlings or else a relinquishment notice could be issued and a carbon maintenance obligation may be imposed if the notice is not complied with.A carbon maintenance obligation is used to prevent action that results, or is likely to result, in a further reduction in carbon stores below the amount stored on the land at the time the carbon maintenance obligation was declared.

If the project had been caused by someone doing something wrong, like a farmer failing to maintain a fire break, the reversal would not be covered by ‘force majeure.’ GT would then likely be issued with a ‘relinquishment notice’ from the Regulator, asking GT to return the ACCUs that were previously earned for the carbon that had been sequestered in the trees and which had now been lost as a result of the fire.

In that case, GT would be exposed to the financial consequences of returning the ACCUs.Under the aggregation agreement, GT has the benefit of an indemnity which applies if the actions of the farmer cause a “significant reversal”.GT could use this indemnity to claim recovery of the costs from the farmer.

The amount claimed by GT would likely cover the costs involved in purchasing the number of ACCUs set out in the relinquishment notice, and to cover lost income because the project is not earning as many ACCUs.GT would need to purchase these ACCUs through the secondary market and the price it would need to pay for these ACCUs could be higher than the price it received for the ACCUs under the Carbon Abatement Contract.

More information

More detail about aggregation projects under the ERF can be found at

Note: While the Commonwealth has made reasonable efforts to ensure the accuracy, correctness or completeness of the material, the Commonwealth does not guarantee, and accepts no liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of this material. Any references to the potential costs or benefits of undertaking an activity in accordance with an emissions reduction method are estimates only. This material is not a substitute for independent professional advice and entities should obtain professional advice suitable to their particular circumstances.

Emissions Reduction Fund: Case studies in aggregation agreements - Environmental plantings case study is licensed by the Commonwealth of Australia for use under a Creative Commons Attribution 4.0 Australia licence with the exception of the Coat of Arms of the Commonwealth of Australia, the logo of the agency responsible for publishing the report, content supplied by third parties, and any images depicting people. For licence conditions see:

This report should be attributed as ‘Emissions Reduction Fund: Case studies in aggregation agreements - Environmental plantings case study, Commonwealth of Australia 2015’.

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Attachment A. Example clauses from GT aggregation agreementsand relevant sections from the “Key issues to consider in your aggregation agreement” guidance document

Clause / Matter / GT example clause / Section in the guidance document

1

/ The agreement will need to include a number of defined terms.The defined terms used in these example clauses are set out in the next column. /

(a)ACCU means an Australian Carbon Credit Unit as defined in the CFI Act.

(b)GT’s Agents means a consultant, contractor, employee, auditor or agent acting on behalf of or engaged by GT in connection with the project.

(c)Carbon Abatement Contract means a contract entered into between GT and the Regulator under the CFI Act for the delivery of the ACCUs from the project.

(d)CFI Act means the Carbon Credits (Carbon Farming Initiative) Act 2011.

(e)Consents meansthe consents required to be obtained from Eligible Interest Holders in connection with the project under the CFI Act.

(f)Eligible Interest Holders has the same meaning as in the CFI Act.

(g)Environmental Plantings Method means the Carbon Credits (Carbon Farming Initiative) Reforestation by Environmental or Mallee Plantings – FullCAM) Methodology Determination 2014.

(h)Farmer means [insert the full name of individuals or corporation] being the [registered proprietor/lessee/insert other right of Farmer to lawfully occupy the Site] of the Site.

(i)project means the GT Enviromental Plantings project.

(j)project area means [insert description of the area of the Site over which the project is to be carried out].

(k)Regulator means the Clean Energy Regulator.

(l)Regulatory Approvals means any approval, consent or licence required by a law to carry out the project.

(m)Service Provider means a person engaged by GT to carry out all or part of the project on behalf, and at the direction, of GT.

(n)Site means [insert the full legal description of the parcel of land or the building, or the part of land or building over which the Farmer has legal rights].

/ Sections 1 and 2

2

/ The agreement won’t start unless a number of things happen (known as ‘conditions precedent’). /

2.1This agreement is subject to the following conditions precedent being fulfilled within 6 months of the last date on which a party signed this agreement:

(a)GT receives registration of the project under the CFI Act; and

(b)GT has entered into a Carbon Abatement Contract with the Regulator.

2.2If any condition precedent is not satisfied or waived within the time specified, either party may terminate this agreement by giving written notice to the other party and the parties are released from their obligations under this agreement on and from the date of that notice.

/ Section 7

3

/ GT can go onto the farmer’s land at certain times and in certain ways. /

3.1The Farmer grants GT and GT’s Agents a non-exclusive licence to:

(a)access and enter the project area;

(b)carry out the project on the project area; and

(c)bring vehicles, machinery, plant and equipment required for the project onto the project area.

3.2In carrying out the project under clause 3.1(b), GT must carry out the activities set out in clause 5.1.

3.3In exercising its rights under this licence, GT must, and must ensure that GT’s Agents:

(a)comply with all applicable laws, including the Regulatory Approvals, and the terms of this agreement;

(b)not disrupt other activities undertaken by the Farmer on the Site; and

(c)comply with the reasonable directions of the Farmer in relation to minimising any impact of the project on the other activities undertaken by the Farmer on the Site.

3.4GT must not use the project area for any purpose other than for carrying out the project in accordance with this agreement.

3.5Within one month after termination of this agreement, GT must:

(a)vacate the project area;

(b)remove all of its vehicles, machinery, plant and equipment used for the project from the project area, which does not otherwise form a fixture on the project area or is not otherwise required by the Farmer for its ongoing use of the Site; and

(c)ensure the project area is left clean and tidy and in a condition appropriate for its ongoing use by the Farmer.

/ Section 9

4

/ The farmer gives GT ‘legal right’ to the carbon abatement that comes from planting trees on his or her land for the period of the agreement. /

4.1The Farmer grants GT the legal right to carry out the project.

4.2GT must carry out the project in accordance with this agreement, and has full responsibility for carrying out the project.

4.3The Farmer acknowledges that GT may engage one or more Service Providers to carry out the project on behalf, and at the direction, of GT.

4.4The Farmer must:

(a)as soon as reasonably practicable, deliver to GT any documents or information reasonably required by GT to become registered as the project proponent for the project under the CFI Act; and