A net zero/ carbon budget adjustment clause included as part of a completion accounts mechanism to provide “Carbon Certainty”.
Why use this?
A purchaser that rates GHG emissions equally significant to net assets can ensure its acquired company is supported to measure and reduce emissions. 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.
How to use this clause
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(A) Insert Eddie’s Recitals (Climate Recitals) here.
Carbon Dioxide Equivalent (CO2e or CO2eq) means the standard metric measure used by [the UN’s Intergovernmental Panel on Climate Change (IPCC)] to compare the emissions from various Greenhouse Gases (GHGs) on the basis of their global warming potential over a specified timescale [to express a Carbon Footprint that consists of different GHGs as a single number].
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 (b).
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  of Schedule .
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 The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated from time to time.
Greenhouse Gases (GHGs) means the natural and anthropogenic gases which trap thermal radiation in the earth’s atmosphere and are specified in Annex A to the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) [or otherwise specified by the UNFCCC at the date of this Agreement], as may be amended from time to time[, which include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3),] each expressed as a total in units of Carbon Dioxide Equivalent (CO2e).
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 state of balance by [2050/ Insert other date] between sources and sinks of GHG Emissions [in each calendar year] achieved by both a reduction of GHG Emissions overall and a removal of GHG Emissions [to achieve the goals of the Paris Agreement].
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 .
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 (a).
Offsetting means the purchase of carbon credits from a project:
(i) that has been verified in accordance with [insert name of voluntary standard] or under the United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism];
(ii) where the emissions of GHG avoided, reduced or removed by the project are additional;
(iii) that, in relation to GHG removals, employs long-lived storage methods that have a low risk of reversal over millennia;
(iv) that prioritises the removal of GHG from the atmosphere rather than avoids or reduces third party emissions of GHG; and
(v) that takes account of a just transition and addresses wider social and ecological goals.
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].
1. Purchase Price
1.1 The Purchase Price is the Cash Consideration:
(a) [insert normal completion account adjustment provisions as required]; plus
(b) the Carbon Negative Amount if any; minus
(c) 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  (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:
(a) 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:
(i) the Carbon Price, if the Amount is exceeded by 5% or less;
(ii) [1.5] x the Carbon Price, if the Amount is exceeded by [5-20%]; or
(iii)  x the Carbon Price, if the Amount is exceeded by [21% or more]; or
(b) 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  – Carbon Statement
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(b) of this Schedule.
[Drafting Note: Insert additional definitions as required]
2. Preparation of the Carbon Statement
(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:]
(a) applying the specific carbon footprinting principles, specifications, bases, conventions, rules and estimation techniques set out in:
(i) [ISO 14064];
(ii) [GHG Protocol Initiative Corporate Accounting and Reporting Standard];
(iii) [The Carbon Trust Standards and Protocols];
(iv) [Science Based Target calculations];
(v) [Carbon Footprint Standard];
(vi) [BEIS Voluntary Reporting Guidelines];
(b) applying the specific carbon offsetting and carbon insetting principles, specifications, bases, conventions, rules and estimation techniques (the Offsetting Principles) set out in:
(i) [ISO 14064 offset protocol];
(ii) [GHG Protocol for Project Accounting (offset accounting protocol)];
(iii) [International Carbon Code of Best Practice];
(iv) [Carbon Footprint – Certified Emissions Reduction standards];
(v) [Gold Standard Verified Emission Reductions];
(c) to the extent not provided for by paragraphs 4.1(a) and 4.1(b) 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.*
(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.]]]
* [Drafting Note: Depending on which Principles are included at clause 4.1(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.]
(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 2.1 of this Schedule  ( 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.]