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 Party B shall measure, manage and report its GHG Emissions for the Term and do so in accordance with the provisions of this clause.
1.2 Party B shall formally adopt 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 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:
2.2.1 the industry best practices on managing and reducing GHG Emissions that Party B has applied in the previous contract year, 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 preceding GHG Reports and in accordance with this clause [2.2][; and
2.2.6 [insert additional requirements]].
3. Verification
3.1 Party B shall cooperate and collaborate with Party A 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 other obligations on Party B under this clause.
3.2 If Party A at any time reasonably requires it (and not more than once during each year of the Term), Party B shall appoint an external auditor or verification authority (such as the Carbon Trust) to certify its GHG Report.
3.3 Party B shall meet all costs associated with the external auditing and verification of the GHG Reports.
4. Reduction of GHG emissions
4.1 Party B shall reduce its GHG Emissions by no less than the percentage shown in clause 4.2 in each period to which a GHG Report relates.
4.2 Party B will reduce the Services Carbon Footprint by [●] percent each year (when compared to the previous year) of the Term for the duration of the Term.
5. Gain-share
5.1 Where Party B reduces the Services Carbon Footprint by more than the percentage stated in clause [4.2] in any one year then the following gain-share mechanism shall apply (Gain-Share Mechanism).
5.2 YX = Services Carbon Footprint in Year X (measured in tonnes of CO2e*)
YX+1 = Services Carbon Footprint in Year X+1 (measured in tonnes of CO2e)
[7 (seven)**] percent x YX = the agreed reduction in Services Carbon Footprint set out in clause 4 (Agreed RSCF) (measured in tonnes of CO2e)
YX – YX+1 = the absolute reduction in Service Carbon Footprint between Year X and Year X+1 (measured in tonnes of CO2e) (Total RSCF)
Total RSCF – Agreed RSCF = absolute reduction in Services Carbon Footprint above the agreed [7 (seven)] percent required by clause 4 (Additional RSCF)
Additional RSCF x market rate to offset 1 tonne of CO2e x 50 (fifty) percent = payment made to Party B under the Gain-Share Mechanism (Gain-Share Payment).
* [For a definition of CO2e, see TCLP GLossary: Carbon Dioxide Equivalent (CO2e or CO2eq).]
** [Drafting note: the recommended 7 percent figure is based on ‘The Carbon Law’ in Exponential Roadmap Initiative’s The 1.5°C Business Playbook, p.5; and J. Rockström et al., A roadmap for rapid decarbonisation, Science 355.6331, pp.1269-1271 (2017).]
5.3 The maximum cumulative value of any Gain-Share Payment(s) due to Party B in any year of the Contract shall be equal to [●] percent of the value of the Services provided by Party B to Party A in respect of that same year.
5.4 The Gain-Share Payment shall only become due for payment after any verification process pursuant to clause [3] is complete.
5.5 Party B shall invoice Party A for any Gain-Share Payment after it has become due for payment and in the absence of any dispute about the level of the Gain-Share Payment it shall be paid by Party A as if it were part of the payment for the Services.
5.6 Party A expects Party B to invest at least [●] percent of any Gain-Share Payment(s) received by Party B into green or sustainability initiatives. Party A reserves the right to ask Party B for evidence that it is complying with this requirement.
Definitions
Additional RSCF has the meaning given to it in clause [5.2].
Agreed RSCF has the meaning given to it in clause [5.2].
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].
Gain-Share Mechanism has the meaning given to it in clause [5.1].
Gain-Share Payment has the meaning given to it in clause [5.2].
GHG Emissions 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 and may be updated periodically.
GHG Protocol means The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated periodically.
GHG Report means a report prepared by Party B in accordance with the requirements of the clause.
Scope 1, 2 and 3 Emissions means the three classifications of 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 duration of this Agreement.
Total RSCF has the meaning given to it in clause [5.2].
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