Climate clause

Net Zero Obligations in FIDIC Engineering, Procurement and Construction (EPC) Contracts

Olivia's Clause

Clauses to include in the International Federation of Consulting Engineers (FIDIC) form of EPC contracts, obliging the contractor (and any subcontractors) to act sustainably in carrying out the works.

This is a climate clause

This clause brings climate considerations to your drafting. It is not yet net zero aligned. To align this clause with net zero, use our toolkit or join one of our events.

Skip to clause

Why use this?

The clause sets targets for contractors and subcontractors to reduce greenhouse gas emissions. Scope 3 emissions often account for the biggest chunk of an organisation’s total inventory.

Disclaimer - please read

The clauses on this website (and published in our Climate Contract Playbook) have been prepared in good faith on a pro bono basis and are free to download and use. The clauses have been drafted and edited by a variety of lawyers and, as such, the approaches to drafting may not conform to any particular drafting norms. We acknowledge this as a consequence of the collaborative drafting process.

The clauses on this website (and published in our Climate Contract Playbook) are provided on an ‘as is’ basis and without any representation or warranty as to accuracy or that the clauses will achieve the relevant climate goal or any other outcome.

This website (and the Climate Contract Playbook) does not comprise, constitute or provide personal, specific or individual recommendations or advice of any kind, and does not contain legal or financial advice. The clauses are precedents for legal professionals to use, amend and negotiate using their professional skill and judgement and at their own risk.

While care has been taken in the drafting of these clauses, neither The Chancery Lane Project nor any of its contributors owe a duty of care to any party in relation to their preparation and do not accept any liability for any errors or omissions, nor for any loss incurred by any person relying on or using these clauses or any other person. Users should use their own professional judgement in the application of these clauses to any particular circumstance or jurisdiction or seek independent legal advice.

At present, all the clauses are based on the laws of England and Wales. We encourage the conversion of these precedent clauses for use in other jurisdictions.

The clause

Additional Definitions

Actual Total Emissions means the Total Emissions actually emitted over the relevant Emissions Reporting Period, as verified by a Climate Consultant.

Annual Emissions Report means the Initial Emissions Report and each Subsequent Emissions Report.

Carbon Footprint means the amount in tonnes of GHG Emissions that will be released into the atmosphere as a result of the Project determined in accordance with the Project Sponsor’s carbon footprint methodology and carbon footprint tool and based on a Carbon Footprint Standard.

Carbon Footprint Standard means an internationally recognised standard for quantifying, monitoring, reporting and validating or verifying of GHG Emissions.

Contract Target means: 

(a) for the Contractor, the proportion of the Contractor’s Interim Net Zero Targets which will be achieved under this Agreement, being GHG Emissions reductions of [insert relevant target(s) as figure or percentage*]; and

(b) for the Subcontractor, the proportion of the Contractor’s Contract Target which will be achieved under the Subcontract, as specified in that Subcontract. 

* [Drafting note: Where there are different interim targets for scope or other sub-targets, more than one target could be specified here for each scope or subcategory of emissions reductions. Alternatively, consider pre-agreed emissions benchmarks for each reporting period that are not linked directly to the Net Zero Target.]

Contract Target Date means the date set for the Contractor or Subcontractor (as applicable) to achieve the Contract Target, which date should not be more than [24] months from the date of this Agreement.

Contract Target Plan means the Contractor’s or Subcontractor’s (as applicable) plan to reduce its Total Emissions for each Emissions Reporting Period and achieve and maintain the Contract Target by the Contract Target Date and thereafter, including:

(a) interim targets towards achieving and maintaining the Contract Target, subdivided into targets for Scope 1, 2 and 3 Emissions; and

(b) details of how Offsetting will be used to balance any Residual Emissions relating to performance of this Agreement after achieving the Contract Target and how such Offsetting aligns with the Oxford Principles for Net Zero Aligned Carbon Offsetting.

Emissions Reporting Period means: 

(a) first, a period of twelve months commencing on the start date of this Agreement and ending on the date immediately preceding the first anniversary of that date; and

(b) thereafter, a period of twelve consecutive months commencing on each anniversary of the start date of this Agreement and ending on the day immediately before the next anniversary of that date provided that the final Emissions Reporting Period shall end on the expiry or termination of this Agreement.

Greenhouse Gases (GHGs) means the natural and anthropogenic gases which 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. [Drafting note: See also TCLP Glossary: Greenhouse Gases.]

GHG Emissions means a party’s emissions of GHGs from all sources, being its Scope 1, 2 and 3 Emissions, each expressed as a total in units of carbon dioxide equivalent* and calculated in accordance with the GHG Protocol.

* [Drafting note: For sample definitions of carbon dioxide equivalent (CO2e), see TCLP Glossary: Carbon Dioxide Equivalent (CO2e or CO2eq).]

GHG Protocol means [The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015], as updated periodically.

Initial Emissions Report means the written report prepared following the date of this Agreement setting out the Projected Total Emissions for the first Emissions Reporting Period.

Interim Net Zero Targets means short term [(being [2 – 5 year])] targets set by a party towards achieving its Net Zero Target [that are in line with the scale of reductions required to limit global temperature increase to 1.5°C above pre-industrial temperatures, as advised by the latest climate science].

Net Zero Target means a target to reduce and remove GHG Emissions, including by Offsetting Residual Emissions, to achieve a balance between the [Party’s] sources and sinks of GHGs. This must be achieved by [2050/ Insert earlier date according to the parties’ published plans] and align with [the goals of the Paris Agreement].

Offset or 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

(iv) that takes account of a just transition and addresses wider social and ecological goals. 

* [Drafting note: The reference to “emissions of GHGs” here is to GHG emissions generally. The defined term GHG Emissions is deliberately not used because in this clause it is defined to mean the emissions of a party which are not the GHG emissions referred to here.]

Projected Total Emissions means an estimate of future Total Emissions for the relevant Emissions Reporting Period.

Residual Emissions means the GHG Emissions that are emitted after all reasonable efforts have been made by a party to reduce GHG Emissions from all operations.

Scope 1, 2 and 3 Emissions means the three classifications of emissions in the GHG Protocol. [Drafting note: See also TCLP Glossary: Scope 1, 2 and 3 Emissions.]

Subcontract means any contract, including but not limited to purchase orders, entered into between the Contractor and a Subcontractor or between Subcontractors (as applicable) in relation to the carrying out of any part of the Works.

Subcontractor means any person or company of any tier (including suppliers or vendors of Materials) having a contract with the Contractor in relation to the carrying out of any part of the Works.

Subsequent Emissions Report means a written report setting out the Actual Total Emissions for the most recently completed Emissions Reporting Period and the Projected Total Emissions for the next Emissions Reporting Period.

Total Emissions means the sum of the Contractor’s or Subcontractor’s (as applicable) GHG Emissions, in each case arising out of the performance of its obligations under this Agreement, in a given Emissions Reporting Period.

[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.]

 

Additional Recitals

(A) [Consider including Eddie’s Recitals (Climate Recitals) here.]

(B) The Parties, in carrying out any part of the Works, shall take into account the environmental effects of their activities and take steps to mitigate such effects. 

 

Additional Clauses

[4.25] Climate Obligations

[4.25.1] The Contractor shall:

(a) measure and calculate its Projected Total Emissions and Actual Total Emissions for each Emissions Reporting Period in accordance with the GHG Protocol;

(b) engage an independent consultant appropriately qualified to provide climate impact assessment and emissions reporting services to verify the calculations in [4.25.1](a);

(c) provide an Annual Emissions Report to the [Employer] no later than [30] Business Days after the end of each Emissions Reporting Period;

(d) Offset its Residual Emissions relating to performance of this Agreement [for each financial year/ Emissions Reporting Period] within [60] days of the end of such [financial year/ Emissions Reporting Period]; 

(e) develop the Contract Target Plan within [●] of signing this Agreement and implement the Contract Target Plan by the Contract Target Date; and

(f) take all reasonable steps to reach its Net Zero Target.

[4.25.2] Unless the [Employer] otherwise consents, the Contractor will only enter into a Subcontract:

(a) with a Subcontractor who has set a Net Zero Target and specified a Contract Target; and 

(b) that includes a copy of this clause [4.25] and its related definitions.

[Drafting note: This may need adjusting depending on the size and capability of subcontractors, as it may place an unfair burden on those lacking the resources to meet the reporting requirements. However, to appropriately set a Contract Target and for the Scope 3 Emissions of the entire chain to be properly assessed, this is necessary. This could be supported by providing funding to subcontractors (i.e. by extending the Employer Assistance clause) in order to decarbonise the supply chain.]

[4.25.3] If in any Emissions Reporting Period the Actual Total Emissions for that Emissions Reporting Period exceed the [Projected Total Emissions for that Emissions Reporting Period/ Actual Total Emissions of the previous Emissions Reporting Period]* by more than [●]%, the Contract Price payable to the Contractor or Subcontractor (as applicable) shall be reduced by [●]%** per [specify unit] of CO2e that the Actual Total Emissions exceed the Projected Total Emissions up to [insert cap equaling the premium portion of the contract]. 

* [Drafting note: The first bracketed drafting option may be a disincentive to setting ambitious targets by encouraging the Contractor to overestimate their projected emissions, unless the Employer also evaluates the Projected Total Emissions value and provides a benefit for an ambitious value. A disincentive for exceeding the previous period’s Actual Total Emissions may be preferable, since it encourages a reduction in emissions.]

** [Drafting note: The disincentive should be proportionate to the failure, otherwise once the Contractor knows that it will not meet its targets it has no incentive to minimise such failure. This disincentive could be adjustable depending on the proportion of exceeded emissions (as in Ming’s Clause) or a fixed figure payable to an environmental charity (as in Jessica’s Clause or Owen’s Clause). In relation to subcontracts, consider whether the reduction should be deducted per subcontractor or varied according to the value of the relevant Subcontract.]

[4.25.4 If the Contractor or Subcontractor (as applicable) fails to meet [any of its other obligations under this clause [4.25]]: 

[Insert specific obligations that should attract a penalty for breach

[Insert disincentive or a list of disincentives applicable to different obligations].]

[Drafting note: If including this bracketed clause [4.25.4], disincentives should only be applicable to breach of those clauses that create sufficiently clear obligations so that what constitutes a breach is clear. For example, the achievement of the obligation to “take all reasonable steps to reach the Net Zero Target” would not be easy to objectively determine and implementing the Contract Plan may be similarly difficult to measure.]

[●] Employer Assistance with Climate Obligations

The [Employer] shall take reasonable steps to procure that the Contractor or Subcontractor (as applicable) is provided with appropriate training and/or resources* to enable it to meet its obligations under Clause [4.25].

* [Drafting note: As explained above, this may need expanding to cover financial assistance to enable reporting by subcontractors.]

Join hundreds of lawyers fighting climate change

Help us and take part