Incentivise Emissions Reductions through Gain-Share
This clause incentivizes 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
Receiving a gain-share payment in exchange for reducing greenhouse gas (also called GHG) emissions during the term of a contract is a powerful incentive for a contracting party to decarbonize – especially in sectors that operate on narrow margins (like construction) or commercial environments undergoing aggressive cost savings.
Clauses
[Drafting note: Capitalized terms relate to either 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 in writing its GHG Emissions for the term of the contract and do so in accordance with the provisions of this clause.
1.2 Party B shall formally adopt the Carbon Footprint Standards in its GHG Report.
1.3 Party B’s board shall nominate one of its directors or officers 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] OR [By March 1st of each year] or [other date], 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 followed 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];
2.2.6 Party B’s existing and future initiatives to reduce Scope 1, 2, and 3 Emissions and the expected impact of those initiatives;
2.2.7 any laws and regulations that may help or hinder Party B’s ability to reduce Scope 1, 2, and 3 Emissions; and
2.2.8 any barriers to reduction of Scope 1, 2, and 3 Emissions.
2.2.9 [Other 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 contract year), Party B shall appoint a duly qualified external auditor or other verification authority to certify the contents and accuracy of its GHG Report.
3.3 Party B shall bear all costs associated with the external auditing and verification of the GHG Reports.
[Drafting note: To go further, Party A may request that the external auditor or verification authority be acceptable to Party A, with consent not to be unreasonably withheld or delayed. Party B could also request a cap on the costs of the audit.]
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 contract 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 tons of CO2e)
YX+1 = Services Carbon Footprint in Year X+1 (measured in tons of CO2e)
[●] percent x YX = the agreed Reduction in Services Carbon Footprint set out in clause 4 (Agreed RSCF) (measured in tons of CO2e)
YX – YX+1 = the absolute reduction in Service Carbon Footprint between Year X and Year X+1 (measured in tons of CO2e) (Total RSCF)
Total RSCF – Agreed RSCF = absolute reduction in Services Carbon Footprint above the agreed [●] percent required by clause 4 (Additional RSCF)
Additional RSCF x market rate to offset 1 ton of CO2e x 50 percent = payment made to Party B under the Gain-Share Mechanism (Gain-Share Payment).
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.
[Drafting note: For section 5.5 above, in case of dispute, parties may choose to include dispute resolution language to address those disputes. In addition, parties should specify when payment is due.]
5.6 Party A may require 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 written evidence that it is complying with this requirement.
[Drafting note: The gain-share clause could also be structured to create an incentive to meet the original goal, as opposed to only applying to situations in which a Party exceeds the goal, which may be more realistic for certain parties.]
Definitions
RSCF means Reduction in Services Carbon Footprint.
Carbon Footprint Standards means:
(a) for Supply Chain Carbon Footprints – the GHG Protocol or ISO 14064, its equivalents and/or successors [Drafting note: Choose relevant standard]; and
(b) for Services Carbon Footprints – the GHG Protocol Services Life Cycle Accounting and Reporting Standard, or ISO 14064, its equivalents and/or successors [Drafting note: Choose relevant standard].
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].
Greenhouse Gasses ('GHGs') means either:
- The gasses 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; or
- An alternative definition for GHG in the U.S. could be 'the gasses trapping heat in the atmosphere and regulated by the Environmental Protection Agency, such as carbon dioxide, methane, nitrous oxide, and fluorinated gasses.'
GHG Protocol means The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated periodically.
GHG Report means a written report prepared by or on behalf of 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 up to and through to its use and final re-use, recycling, or disposal, and including any Scope 1, 2, and 3 Emissions.
Supply Chain Carbon Footprint means total annual GHG Emissions (Scope 1, 2, and 3 Emissions) associated with the raw materials and services purchased and used by Party B to deliver the services and deliverables.
Total RSCF has the meaning given to it in clause [5.2].
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