Net Zero Completion Adjustment Clause
A net zero/ carbon budget adjustment clause included as part of a completion accounts mechanism to provide “Carbon Certainty”.
What this clause does
Ensures a purchaser's acquired company is supported to measure and reduce emissions where the purchaser rates greenhouse gas emissions equally significant to net assets. Sellers will be incentivised by an adjustment to the purchase price. Any amount paid as a result can be used to finance the net zero transition.
Recitals
(A) [Insert Eddie’s Recitals (Climate Recitals) here].
Clauses
[Drafting note: Capitalised 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. Purchase Price
1.1 The Purchase Price is the Cash Consideration:
1.1.1 [insert normal completion account adjustment provisions as required]; plus
1.1.2 the Carbon Negative Amount if any; minus
1.1.3 the Net Zero Overshoot Amount if any.
2. Carbon Statement and adjustment of the Purchase Price
2.1 The parties agree that the Carbon Statement shall be prepared in accordance with Schedule [1] (Carbon Statement) and within the period stipulated by paragraph 2 of the Schedule.
2.2 Following agreement or determination of the Carbon Statement, if the amount of the Completion Net Carbon:
2.2.1 exceeds [Net Zero OR the Target Net Carbon Budget] (the Amount), the Seller shall pay to the Buyer on or before the Net Zero Adjustment Date an amount equal to the excess in tonnes of Carbon Dioxide Equivalent multiplied by:
(a) the Carbon Price, if the Amount is exceeded by 5% or less;
(b) [1.5] x the Carbon Price, if the Amount is exceeded by [5-20%]; or
(c) [2] x the Carbon Price, if the Amount is exceeded by [21% or more]; or
2.2.2 is less than [Net Zero OR the Target Net Carbon Budget], the Buyer shall pay to the Seller on or before the Net Zero Adjustment Date an amount equal to the shortfall in tonnes of Carbon Dioxide Equivalent multiplied by the Carbon Price.
[Drafting note: Cross-refer to standard payment and set-off provisions for completion accounts.]
Schedule [1] - Carbon Statement
1. Definitions
The definitions in this paragraph 1 apply in this Schedule:
Specific Policies means the policies set out in paragraph 5 of this Schedule.
Offsetting Principles has the meaning given in paragraph 4.1.2 of this Schedule.
[Drafting note: Insert additional definitions as required.]
2. Preparation of the Carbon Statement
[Drafting notes:
(i) Generally, the Buyer is tasked with producing the completion statement based on the agreed principles / methodology and the Seller is given rights to review and challenge which ultimately ends in expert determination if differences cannot be resolved. The Seller should be required to cooperate with and provide access to the Buyer for the purposes of producing the completion statement.
(ii) Cross-refer to any existing Review and Dispute mechanism for Completion Accounts in the SPA so that they can apply as required to the creation of the Carbon Statement and related accounts.
(iii) Agree a deadline for the Carbon Statement.]
3. Expert determination of Completion Net Carbon
[Drafting note: Cross-refer to existing expert determination provisions in the SPA (including the mechanics for finalising the accounts / statement once agreement has been reached or determined) but update it for the Climate Professional to be recognised as the Expert in relation to the Completion Net Carbon.]
4. Basis for preparing the Carbon Statement
4.1 Subject to the Specific Policies, the Carbon Statement shall be prepared on the following basis, [and in the order of priority shown below:]
4.1.1 applying the specific carbon footprinting principles, specifications, bases, conventions, rules and estimation techniques set out in:
(a) [ISO 14064];
(b) [GHG Protocol Initiative Corporate Accounting and Reporting Standard];
(c) [The Carbon Trust Standards and Protocols];
(d) [Science Based Target calculations];
(e) [Carbon Footprint Standard];
(f) [BEIS Voluntary Reporting Guidelines];
(g) [other],
4.1.2 applying the specific carbon offsetting and carbon insetting principles, specifications, bases, conventions, rules and estimation techniques (the Offsetting Principles) set out in:
(a) [ISO 14064 offset protocol];
(b) [GHG Protocol for Project Accounting (offset accounting protocol)];
(c) [International Carbon Code of Best Practice];
(d) [Carbon Footprint - Certified Emissions Reduction standards];
(e) [Gold Standard Verified Emission Reductions];
(f) [other],
4.1.3 to the extent not provided for by paragraphs 4.1.1 and 4.1.2 above, applying the same Carbon Footprint and net zero calculation standards, principles, policies and practices (with consistent classifications, judgements, valuation and estimation techniques) that were used by the [Target] [and its Subsidiaries] to determine [its/ their] Net Zero status OR the Target Net Carbon Budget.]
5. Specific Policies
[Scope of GHG Emissions
(a) GHG Emissions [of the Target [and its Subsidiaries]] shall be accounted for on an itemised basis.
(b) [The Product Carbon Footprint and Service Carbon Footprint of goods and services no longer provided by the [Target [or any of the Subsidiaries]] shall be fully provided for.]
(c) [Where an emission is a GHG other than carbon dioxide it shall be converted to a Carbon Dioxide Equivalent using the conversion units adopted by the IPCC from time to time.]
[Offsetting and Insetting
(a) Only offsetting that has been verified in accordance with the procedures and techniques set out in the Offsetting Principles shall be accounted for in the Carbon Statement.
[Drafting note: Depending on which Principles are included at clause 4.1.1(b) above and their content, drafters may also consider specifying that only credits from projects that (a) remove emissions, rather than avoid or reduce others’ emissions projects and/ or (b) include long lived storage methods which have low risk of reversal over centuries to millennia can be accounted for. However, this may be too onerous and the Buyer may simply choose to change the Target’s sourcing of offsetting projects after completion.]
(b) Offsetting and Insetting shall be accounted for on an itemised basis showing the source and geographic location of the offsetting project.
(c) [Offsetting and Insetting shall be depreciated by the:
(i) Embodied Carbon used to create and required to decommission the offset project at the end of its useful life; and
(ii) the efficiency of the technology used to offset decreasing over time.
(d) [Offsetting and Insetting shall be impaired by the negative impact of the offset project on biodiversity in the geographical location of the project.] [Drafting Note: for consideration if data is available to define the measurement of any impairment.]]]
[Carbon inventories
(a) Carbon Dioxide Equivalents shall be calculated to the nearest tonne for all [Target [and Subsidiaries]] GHG Emissions on an itemised basis.
(b) Carbon Footprint[, Product Carbon Footprint and Services Carbon Footprint] inventories that have been estimated with a range of measurements shall use the highest estimate in the range. [Drafting Note: an alternative approach is to require estimates to be multiplied by Carbon Footprint Confidence Multiplier of, for instance, 2 in case of a pure estimate (indicating low confidence), and 1.5 in case of a partial estimate (indicating average confidence).]
(c) Offsetting and Insetting inventories that have been estimated with a range of measurements shall use the lowest estimate in the range.]
[Post Net Zero events
(a) The Carbon Statement shall not take account of:
(i) [any event or transaction that occurs or arises[, or information that comes to the parties' attention,] more than [NUMBER] days after the Completion Date OR after the delivery of the Draft Documents in accordance with paragraph 2 of this Schedule [1] ( Carbon Statement)];
(ii) any event or activity that emits GHGs and occurs or arises after the Completion Date as a result of a voluntary act or omission of the Buyer, except where such act or omission was carried out or effected in the ordinary course of the Business pursuant to a binding obligation of the Target.]
Definitions
Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure to compare the global warming potential of various Greenhouse Gases (GHGs) over a specified timescale. [See also TCLP Glossary: Carbon Dioxide Equivalent.] [It allows a Carbon Footprint consisting of different GHGs to be expressed as a single number]. [Drafting note: If using the language in square brackets, you will need to add Carbon Footprint as a definition.]
Carbon Footprint means the total annual GHG Emissions caused by the [Target [and its Subsidiaries]]. [Drafting Note: All Scopes should be accounted for, but users of this clause should amend this to what is feasible in the context of the nature of the Target’s business, its capacity to measure all Scopes and Buyer priorities and requirements. It may only be feasible to include Scope 1 or Scope 1 and 2 emissions. Scope 3 emissions are more likely to be important to a Buyer where these make up a significant proportion of Buyer’s total emissions.]
Carbon Negative Amount means the amount to be paid by the Buyer where the Completion Net Carbon is less than [Net Zero OR the Target Net Carbon Budget], as calculated in accordance with clause 2.2.2.
Carbon Price means a price of [£] [AMOUNT] per tonne of Carbon Dioxide Equivalent.
Carbon Statement means the statement setting out the amount of GHG Emissions [in the year []] and the Completion Net Carbon prepared in accordance with the carbon footprinting principles, policies, standards, practices, evaluation rules and estimation techniques referred to in paragraph [2] of Schedule [1].
Cash Consideration means [the sum of [£][AMOUNT] OR [insert calculation OR cross-refer to relevant clause containing calculation of a sum in GBP or other relevant currency]].
Climate Professional means an [appropriately qualified] [environmental, sustainability consultant / net zero consultant / analyst] [or climate] scholar / [or climate] scientist] who has the skills and experience to diligently, competently and professionally [perform the expert determination of Completion Net Carbon], in accordance with this Agreement.
Completion Net Carbon means the aggregate GHG Emissions less the aggregate Insetting and Offsetting of the Target and the Subsidiaries [in the calendar year [] to the Completion Date], as set out in the Carbon Statement.
Embodied Carbon means the total emissions of GHGs emitted in establishing, developing and constructing (if any) the offset project. This includes emissions of GHGs caused by the extraction, manufacture, transportation and assembly of every element in the offset project, as well as emissions of GHGs caused by deconstruction or decommissioning of the offset project at the end of its useful life (if applicable).
GHG Emissions means emissions of GHGs from all sources [related to Target [and its Subsidiaries], categorised as scope 1, 2 and 3 emissions by The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard as updated periodically. [See TCLP Glossary: Greenhouse Gas (GHG) Emissions.]
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 (UNFCCC) in Annex A to the Kyoto Protocol and may be updated periodically. [See also TCLP Glossary: Greenhouse Gases.]
Insetting means the investment into an offset project, verified by an offset standard, which occurs within the [Target’s] ([and/ or any of its Subsidiaries’)] own supply chain and supply chain communities.
IPCC means the United Nations' Intergovernmental Panel on Climate Change.
Net Zero means a balance between [a party’s] sources and sinks of GHGs by [2050/ insert earlier date]. This is achieved by reducing GHG Emissions and removing GHGs [to meet [the goals of the Paris Agreement/ Paris Agreement Goals]].
Net Zero Adjustment Date means the [tenth (10th)] Business Day following the date on which the Carbon Statement is agreed or determined in accordance with [Schedule [1].
Net Zero Overshoot Amount means the amount to be paid by the Seller where the Completion Net Carbon is greater than [Net Zero OR the Target Net Carbon Budget] calculated in accordance with clause 2.2.1.
Offset means buying carbon credits from a project:
(a) that has been verified by [insert name of voluntary standard] or the United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism [or successor UNFCCC mechanism]; [Drafting note: Article 6.4 of the Paris Agreement replaces the CDM by 2026. New rules implementing this were agreed at COP26. More detailed guidance will be released]
(b) where the emissions of GHG avoided, reduced or removed by the project are additional; [Drafting note: The reference to “emissions of GHGs” here is to GHG emissions generally. We don’t use the defined term GHG Emissions because in TCLP’s glossary that defined term has a specific meaning and relates to either (i) the emissions of a party under a particular agreement or transaction (see GHG Emissions - Option 1); or (ii) an organisation’s scope 1, 2 and 3 emissions of GHG (see GHG Emissions - Option 2)]
(c) [that prioritises removing GHGs from the atmosphere rather than avoiding or reducing third party emissions of GHG*;]
(d) that, for GHG removals, uses storage methods with a low risk of reversal over millennia; and
(e) that takes account of a just transition and addresses wider social and environmental goals.
* [Drafting note: The Oxford Principles for Net Zero Aligned Carbon Offsetting 2020 state that "an immediate transition to 100% carbon removals is not necessary, nor is it currently feasible, but organisations must commit to gradually increase the percentage of carbon removal offsets they procure with a view to exclusively sourcing carbon removals by mid-century. Most offsets available today are emission reductions, which are necessary but not sufficient to maintain net zero in the long run. Carbon removals scrub carbon directly from the atmosphere. This counteracts ongoing emissions after net zero is achieved and creates the possibility of net removal for actors choosing to remove more carbon than they emit.”]
Product Carbon Footprint means the total emissions of GHGs over the whole life of the product, from the extraction of raw materials and manufacturing through to its use and final re-use, recycling or disposal, including emissions of GHGs associated with the raw materials and services purchased by the [the Target [and its Subsidiaries]] to deliver the product.
Purchase Price has the meaning given to that term in clause [INSERT].
Residual Emissions means GHG Emissions that are emitted after all reasonable efforts have been made by the [the Target [and its Subsidiaries]] to reduce [its/ their] GHG Emissions.
Service Carbon Footprint means the total emissions of GHGs over the whole life of the service, from the extraction of raw materials and manufacturing of component parts through to the use and final re-use, recycling or disposal of such parts, including emissions of GHGs associated with the raw materials and services purchased by the [the Target [and its Subsidiaries]] to deliver the service.
Target Net Carbon Budget means [INSERT] tonnes of GHG Emissions [emitted by the Target [and its Subsidiaries]] in a [calendar year].
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