Gain-Share Incentive for Reducing GHG Emissions
This clause incentivises a counterparty to reduce greenhouse gas emissions in exchange for a gain-share payment calculated by reference to the value of the goods or services it provides.
What this clause does
This clause introduces a gain-share payment into a contract. Receiving a gain-share payment in exchange for reducing greenhouse gas emissions during the contract term is a powerful incentive for a party to decarbonise – especially in sectors that operate on narrow margins (like construction) or commercial environments undergoing aggressive cost savings.
Clauses
[Drafting note: capitalised terms relate to a defined term in this clause or a defined term in the main agreement that this clause is designed to be inserted into.]
1. Measure, manage and report GHG Emissions
1.1 From [insert date OR the date of this Agreement] and for the duration of the Term, Party B shall measure, manage and report its GHG Emissions in accordance with the provisions of [this clause [ ] OR these clauses [ ] to [ ] ].
1.2 [From the date of this Agreement OR Within [number] days of the date of this Agreement] Party B shall formally adopt and implement the Carbon Footprint Standards.
1.3 Party B’s board shall nominate 1 (one) of its directors to be responsible for ensuring that Party B complies with the Carbon Footprint Standards and requirements of this clause [1] during the Term.
1.4 Within 3 (three) months after each anniversary of the date of this Agreement, Party B shall submit a GHG Report to Party A.
2. Contents of GHG Report
2.1 This clause [2] sets out the minimum requirements for the contents of the GHG Report.
2.2 The GHG Report shall report and [where appropriate] explain for the GHG Reporting Period:
2.2.1 the industry best practices on managing and reducing GHG Emissions that Party B has applied, and how Party B has applied them;
2.2.2 Party B’s measured Scope 1, 2 and 3 Emissions;
2.2.3 the measured Services Carbon Footprint;
2.2.4 the measured Supply Chain Carbon Footprint; [and]
2.2.5 the reduction in GHG Emissions achieved by Party B measured against the Scope 1, 2 and 3 Emissions stated in the GHG Report for each preceding GHG Reporting Period [; and
2.2.6 [insert additional requirements]].
3. Verification
3.1 In order to ensure the accuracy and reliability of the GHG Report, Party B shall cooperate and collaborate with Party A as reasonably required on:
3.1.1 how Party B measures, manages and reports on its GHG Emissions;
3.1.2 Party B’s preparation of each GHG Report; and
3.1.3 the other obligations on Party B under this clause.
3.2 If Party A reasonably requires it and notifies Party B within [number] days] of the date of a GHG Report (and not more than once in relation to any GHG Reporting Period), Party B shall appoint an independent external auditor or verification authority (as agreed between the parties) to certify its GHG Report.
3.3 Party B shall meet all costs associated with the external auditing and verification of the GHG Reports commissioned in accordance with clause [3.2].
4. Reduction of GHG Emissions
4.1 Party B will reduce its GHG Emissions by no less than the percentage shown in clause 4.2 in each GHG Reporting Period to which a GHG Report relates.
4.2 Party B will reduce the Services Carbon Footprint by [●] percent each GHG Reporting Period (when compared to the previous GHG Reporting Period) for the duration of the Term.
5. Gain-Share Mechanism
5.1 Where Party B reduces the Services Carbon Footprint by more than the percentage stated in clause [4.2] in a GHG Reporting Period then the following gain-share mechanism shall apply (the Gain-Share Mechanism):
Total Reduction = the absolute reduction in Carbon Footprint between [year] and [the following year] [as stated in the GHG Report]
Additional Reduction = Total Reduction less the Agreed Reduction (as set out in clause 4.2)
Gain-Share Payment = Additional Reduction x [insert agreed rate*] to offset 1 (one) tonne of Carbon Dioxide Equivalent x 50 (fifty) percent.
[*Drafting note: the rate should be in line with those for a high quality, verified project in accordance with the Oxford Principles for Net Zero Aligned Carbon Offsetting (as amended)]
6. The Gain-Share Payment
6.1 The gain-share payment(s) shall be calculated in accordance with the Gain Share Mechanism described under clause [5] (the Gain-Share Payment).
6.2 Subject to clauses [6.3 and 6.4] the Gain Share Payment shall be paid by Party A to Party B in accordance with clause [6.5].
6.3 The total Gain-Share Payment(s) due from Party A to Party B in a GHG Reporting Period shall not exceed [●] percent of the annual value of the Services provided by Party B to Party A during the same Contract Year to which the GHG Reporting Period relates.
6.4 If Party A requests certification of the relevant GHG Report by an external auditor or verification authority in accordance with clause [3.2], the Gain-Share Payment shall only become due for payment after any verification process pursuant to clause [3.2] is complete.
6.5 Party B shall invoice Party A for any Gain-Share Payment after it has become due for payment in accordance with this clause [6] and it shall be paid by Party A as if it were part of the payment for the Services [in accordance with the terms of the [Agreement OR insert reference to relevant payment terms].
6.6 Party B shall invest at least [●] percent of any Gain-Share Payment(s) received by Party A into green or sustainability initiatives (such initiatives to be agreed between the parties). Party A reserves the right to ask Party B for evidence that it is complying with this requirement and Party B shall provide such documentary evidence upon reasonable request without delay.
6.7 Any dispute arising out of or in connection with the Gain-Share Payment (including without limitation disputes relating to its calculation, payment, and application) shall be resolved in accordance with the [Agreement OR insert reference to Alternative Dispute Resolution Clause].
Definitions
Carbon Dioxide Equivalent means a unit of measurement that is used to standardise the climate effects of various Greenhouse Gases.
Carbon Footprint means the total annual [GHG Emissions] OR [Scope 1, 2 and 3 Emissions] relating to the [product] [Company] [party].]
Carbon Footprint Standards means:
(a) for Supply Chain Carbon Footprints – the GHG Protocol, [or ISO 14064]; and
(b) for Services Carbon Footprints – the GHG Protocol Services Life Cycle Accounting and Reporting Standard, or [ISO 14064].
Contract Year means any consecutive 12 (twelve) month period commencing on the date of this Agreement or an anniversary thereof (with the last Contract Year ending on the date of termination or expiry of this Agreement).
Gain-Share Mechanism has the meaning given to it in clause [5.1].
Gain-Share Payment means the gain share payment as described in clause [6.1] calculated in accordance with the Gain-Share Mechanism
GHG Emissions means emissions of Greenhouse Gases.
GHG Protocol means The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard as updated.
GHG Report means a report prepared by Party B in accordance with the requirements of clause [2].
GHG Reporting Period means the 12-month period immediately preceding the Contract Year in which GHG Report is due to be submitted under clause [1.4].
Greenhouse Gases (GHGs) means the gases that trap thermal radiation in the Earth’s atmosphere. They are specified by the United Nations Framework Convention on Climate Change in Annex A to the Kyoto Protocol as updated.
Representative means:
(a) in respect of Party A, [the Contract Manager OR Representative ] appointed by Party A; and
(b) in respect of Party B, [the Contract Manager OR Representative] appointed by Party B,
or such other person as the relevant Party may notify the other Party from time to time.
Scope 1, 2 and 3 Emissions means the three classifications of GHG Emissions in the GHG Protocol.
Services Carbon Footprint means total GHG Emissions over the whole life of the Services and Deliverables, from the extraction of raw materials and manufacturing through to its use and final re-use, recycling or disposal, including Scope 1, 2 and 3 Emissions.
Supply Chain Carbon Footprint means total annual GHG Emissions associated with the raw materials and services purchased by Party B to deliver the Services and Deliverables.
Term means the period for which this Agreement is in force pursuant to clause [insert clause of the agreement that sets out commencement and duration].
Updates
February 2025
This clause has been updated following a routine QA review. Some wording was amended and some definitions were added to improve clarity. A drafting note was added about offset rates.
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