Legal due diligence for BioCF projects

The World Bank, Washington, DC

February 5th, 2008

Monica T. RestrepoCounsel, Legal Department

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Nature of Land Use, Land Use Change and Forestry (LULUCF) Projects

Carbon credits – Removal and storage of carbon from the atmosphere into forests.

Value of credits - based on maintaining storage in forests (i.e. protection from logging, fire & land use change).

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Rationale for Legal Due Diligence

The Nature of LULUCF projects give rise to a particular set of risks.

The Legal Due Diligence seeks to address and minimize these risks to protect long term value of carbon assets purchased by BioCF.

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Issues - Risks

1. Legal Ownership of Carbon

2. Legal Rights and Interests in the Land where the Carbon is stored.

3. Permanence

4. Forestry Rights and Ownership of the Timber

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1. Legal Ownership of Carbon

Why is there a risk?– It is not clear who owns the carbon: the owner of the trees,

the owners of the land, both, or neither. – Kyoto rules do not say who owns sequestered carbon– Most countries do not have LULUCF-related legislation

Due diligence looks at:– Is it possible to own or register right to the carbon, separate

from the timber and the land?– Has there been any other carbon-sink project

(sequestration) undertaken in the host country? How was the issue addressed?

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1. Legal Ownership of Carbon

Possible mitigation measures:– If right to carbon cannot be separated – representation as to

ownership of land and all rights.– If right is susceptible of being separated from land and

timber rights – representation regarding no assignment of such right.

– Condition precedent – evidence from owners of land that they have waived all rights to carbon assets.

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2. Legal Rights and Interests in the Land where the Carbon is Stored

Why is there a risk? – Security of carbon sequestered relies on security of legal

title or legal control of the land.

Due diligence looks at:– Who has legal title to the land? What type of legal title? (i.e.

ownership, lease).– Does any third party have a security interest over the land

or any of its products?– Are there any indigenous claims to the land?– Under what circumstances can the Host Country alter, seize

or repossess land or land rights?

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2. Legal Rights and Interests in the Land where the Carbon is Stored

Possible mitigation measures:– Undertake title search to ascertain legal ownership of the

land– Representation from Project Entity - no actions, suits or

proceedings pending or threatened against or affecting the holding of the land – material adverse effect on Project Entity and its obligations.

– Condition precedent – acknowledgment from landowners

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3. Permanence

Why is there a risk? – Value and validity of sink credits depends on ongoing

storage or “permanence” of the carbon within the relevant boundaries.

– Carbon stored could be released by harvest, fire or pest.

Due diligence looks at:– Laws or risk management procedures to prevent pest, fire

or illegal logging.

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3. Permanence

Possible mitigation measures:

- Covenants regarding maintenance of carbon pools (not to allow cutting of trees except for sustainable forestry practices).

- Verification right to check on permanence.- Covenant by Project Entity - Verifier is provided with full

access to project and relevant information.

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4. Forestry Rights and Ownership of the Timber

Why is there a risk? – Timber is a commodity with an immediate market value.– Timber may give rise to legal rights separate from the

carbon and the land.– Conflict between desire to harvest timber and desire to

manage carbon.

Due diligence looks at:– Who has legal right to harvest timber? Is right separate from

legal owner of the land?– Is there customary right to access and utilize timber?– Is the land subject to concession agreement with the

government?

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4. Forestry Rights and Ownership of the Timber

Possible mitigation measures:

- Representations regarding ownership of land in ERPA.- If right to timber can exist separate from right to land –

covenant regarding no assignment of such right.

- Contracts with third parties to preserve desired use.

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Examples of Due Diligence and Risk Mitigation

Colombia

Risks1. Risks to title (land disputes/ 3rd party interests)

2. Insufficient detail in contractual relationship between Project Entity and Landowners

Mitigation 1. Detailed provisions in third party contracts

2. Representation – no actions affecting ownership of the land

3. Condition precedent – acknowledgement from landowners assignment of carbon rights

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Examples of Due Diligence and Risk Mitigation

India

Risks1. Risks to title

2. Conflict between timbers rights and carbon rights

Mitigation 1. Detailed representations - title to land, land free of

encumbrances and landowners have right to grow trees on land.

2. Detailed provisions in third party contract regarding assignment of carbon rights to Project Entity/Project.

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Examples of Due Diligence and Risk Mitigation

Uganda

Risks1. Change of land use by the National Forest Authority (NFA)

(owner of the land).

2. Right and title to carbon.

Mitigation 1. NFA will not issue any leases inconsistent with Project.

2. Representation that government owns land and rights to carbon

3. Covenants regarding prior right of Trustee to review terms of any license to communities