The buyer or investor's primary obligation in a PES agreement is to provide compensation in exchange for ecosystem service provision. In turn, the seller must provide promised services and transfer all legal rights in purchased credits to the buyer in a purchase agreement. This transfer of rights is meant to ensure that the seller cannot re-sell the same credits to a different buyer. It also provides security for the seller, because rights in the credits are only transferred once full payment occurs.
One of the most difficult aspects of many ecosystem services transactions involves the question of up-front payments. A forest carbon emission reductions purchase agreement, for example, anticipates that most of the payment is due upon delivery of carbon credits. However, many forest carbon sellers, and small-scale sellers in particular, need payment up front in order to fund project activities. If advance payments are used, the buyer may require a discounted price and/or an increase in control over project activities to compensate for or mitigate increased risks.
In terms of the price for credits in a forward purchase agreement, the parties may use a fixed price or they may tie the price to an index that accounts for price fluctuations over time. A fixed price is more commonly used.
The downside of using a fixed price is that the parties cannot be sure until credits are issued whether they made a good deal, relative to the spot price for credits. The parties can limit this uncertainty by providing that the seller will share in profits when the spot price rises above, or in losses when the spot price falls below, a set threshold. This helps to reduce or eliminate the incentive for one party to break the contract due to a wide discrepancy between the spot price and the contract price.
Alternatively the parties can maintain their relative position at all times by using an indexed price, which takes price fluctuation into account by tying the price of credits to an external index such as the Bloomberg New Energy Finance Voluntary Carbon Index. The downside of an indexed price is that there is uncertain pricing until credits are issued, which creates significant risk for both parties. If an indexed price is used, a minimum price (a floor) and/or a maximum price (a ceiling) may be used to limit price uncertainty.
In a government program, payments will be set centrally by the program. How payments are determined and disbursed will depend very much upon the circumstances. If the program is paying participants for conservation, management, or restoration services, equal annual payments (such as those used in the programs analyzed) may be appropriate. If the program is purchasing REDD+ credits from the participant, payments may occur according to a regular schedule, but payment amounts will depend upon how many credits are actually verified and delivered during the relevant period.
Price and Payment Examples
Example 1 (private carbon emissions reduction purchase agreement)
Example 2 (participation agreement for government REDD+program)
These Clauses are:
Very controversial - Setting the price that is acceptable to both parties, given the risks and responsibilities assumed in the contract, is a focal point (arguably THE focal point) for negotiations
Disclaimer: Materials on this site are meant to highlight issues that should be considered in PES transactions, not to provide a substitute for experienced legal counsel. It will be essential to engage legal counsel in conjunction with any PES transaction to ensure that any agreements reflect the latest developments in the field and comply with current local and national legislation.
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