Model clause

Target Product Carbon Footprint (Schedule for Consumer Goods Contracts)

Ming's Clause

A Target Product Carbon Footprint budget (which reduces over time) for each product manufactured and supplied pursuant to the contract.

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Why use this?

Many companies are committing to making their supply chain carbon-neutral - this schedule provides one practical way of doing so.

Parties will be incentivised to meet or reduce carbon emissions targets through rebates, discounts and adjustments to payment terms set out in their supply contract.

How it promotes a net zero future

This clause will drive change from the bottom up. Holistic decision-making that takes into account and internalises the cost of carbon emissions will drive a change in the behaviour and decision-making of contracting parties as they understand the “true” cost of their activity.

Contracting parties will need to be proactive, forward-looking and collaborative regarding the carbon emissions their relationship and activities are creating.

Customers will expect suppliers to demonstrate that they are ‘cheaper’, in financial - and carbon-emission terms.

The global supply chain will, by reason of economics, be compelled to de-carbonise. The shift in the private sector would also make it easier for governments and international organisations to legislate and regulate in accordance with these economic drivers.

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The clause

Additional Definitions

In this agreement:

Actual Product Carbon Footprint means the Scope 1, Scope 2 and Scope 3 Emissions of Greenhouse Gases (measured in CO2e) per Unit related, directly or indirectly, to the Provision of the Goods over the whole life of the Goods until delivery to the Customer.

Adjustment Date has the meaning given in clause [3].

Carbon Footprint Report means the report described in clause [5].

CO2e” or “CO2-equivalent means the standard metric measure used [by the UN’s Intergovernmental Panel on Climate Change (IPCC)] to compare various GHGs on the basis of their global warming potential over a specified timescale in order to express a Carbon Footprint that consists of different GHGs as a single number.].

Due Date means [[30] days [after delivery of Goods][, varied in accordance with clause [7], Variation in Payment Terms [applies if Option B used]] [as defined in the agreement] 

GHG Reporting Standard means a standard for the measurement, reporting and management of Greenhouse Gases published by [the GHG Protocol / the International Standards Organization / the BSI Group / The Carbon Footprint Standard] [(from time to time)]. 

Goods means [the goods manufactured and supplied pursuant to this agreement and set out in the first column of the Product List] [as defined in the Agreement].

Greenhouse Gases or GHGs means the natural and anthropogenic gases which trap thermal radiation in the Earth’s atmosphere as 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]. [These GHGs are currently: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3).]

Greenhouse Gas Emissions or GHG Emissions means emissions of GHGs including Scope 1, 2, and 3 Emissions, in absolute value over a specified area and period of time, each expressed as a total in units of carbon dioxide equivalent (CO2e) and calculated in accordance with the GHG Reporting Standard.

Net Negative means the Supplier has achieved a Net Zero Target but has also created an environmental benefit by removing Greenhouse Gases from the atmosphere or reducing its Greenhouse Gas Emissions to the atmosphere such that the aggregated reductions and removals exceed the unabated emissions.

Net Zero Target means both a reduction of GHG Emissions from all operations including value and supply chains and a removal of GHG Emissions associated with carbon offsets acquired to address Residual Emissions of a party by 2050 or sooner in order to achieve a balance between the party’s sources and sinks of GHG Emissions in a calendar year and for each subsequent year thereafter and the goals of the Paris Agreement.

Net Zero Target Plan means a plan to deliver the Net Zero Target and remain Net Negative thereafter, including an Offset strategy, interim targets split into Scope 1, 2 and 3 (as defined by the GHG Protocol) emission reduction targets, continuous measured reduction and identifying a year on year percentage decarbonisation aligned with the Paris Agreement goal of pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels which shall be, at a minimum, a 7% year on year reduction of absolute emissions, a procedure that links executive remuneration to the achievement of the interim targets and an evaluation of how the Net Zero Target can be delivered in a way that promotes a just transition to a low carbon economy.

Offset means the purchase of the equivalent quantity of carbon credits from a project that has been verified in accordance with [insert name of voluntary standard] or from a United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism (CDM) [or [successor/ equivalent] UNFCCC mechanism] project, with a view to the offsets being additional, permanent and verifiable and shall, where possible, prioritise projects with long-lived storage methods which have low risk of reversal over centuries to millennia and that remove greenhouse gases from the atmosphere rather than avoid or reduce other parties’ emissions of greenhouse gases and that consider global equity and address wider social and ecological goals.

Price means [the price of Goods set out in the third column of the Product List[, adjusted in accordance with clause 5, Variation in Price] [applies if Option A used]] [as defined in the Agreement].

Product List means the list set out at Schedule [X] of this agreement.

Provision of the Goods means the processes required to produce and deliver the Goods to the Customer, including but not limited to the extraction of raw materials, the manufacture, transportation, use, final re-use, recycling and disposal of the Goods.

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 including value and supply chains.Reporting Period has the meaning given in clause [4].

Scope 1, 2 and 3 Emissions means the following classifications of Greenhouse Gas Emissions: 

Scope 1 Emissions means all direct GHG emissions from the activities of the Supplier or under its control, including but not limited to on site fuel combustion and emissions from chemical production in owned or controlled process equipment, refrigerant losses and company vehicles. [Company/ Organisation specific examples may be added]. 

Scope 2 Emissions means all indirect GHGemissions from electricity purchased and used by the Supplier where the emissions occur at sources owned or controlled by another company. [Company/Organisation examples may be added]. 

Scope 3 Emissions means all indirect GHGemissions other than Scope 2 Emissions, that are a consequence of the activities of the Supplier, but occur from sources not owned or controlled by the Supplier, including but not limited to business travel, procurement, waste and water. [Company/Organisation specific examples may be added].

Target Product Carbon Footprint means the agreed maximum of Scope 1, 2 and 3 Emissions of Greenhouse Gases (measured in CO2e) per Unit related, directly or indirectly, to the Provision of the Goods over the whole life of the Goods until delivery to the Customer (“whole life” shall mean), set out in the fourth column of the Product List, which may be zero, a positive or a negative number.

Unit means the number of Goods set out in the second column of the Product List.

 

Additional Recitals

(A) The parties acknowledge their common intentions in the fulfilment of their obligations under this agreement are to:

(i) further achievement of their respective Net Zero Targets;

(ii) align with the ultimate objectives of the Paris Agreement and related agreements, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels and achieving net zero or net negative emissions by 2050 or sooner; and

(iii) minimise their impact on climate change by minimising the Greenhouse Gas Emissions generated through the Provision of the Goods [by the Supplier and the purchase, receipt and use of those Goods by the Customer] pursuant to this agreement.

 

Additional Clauses

1. Price

On or before the Due Date, the Customer will pay the Supplier the Price for the Goods in accordance with clause [x] of the agreement. 

2. Automatic Target Product Carbon Footprint reduction

On [the [second], [fourth] and [sixth] anniversaries] OR each anniversary of the date] of this agreement during the Term (each a Carbon Adjustment Date), by the written consent of the Customer only the Target Product Carbon Footprint for each item of the Goods will automatically reduce* by [the percentage specified in Schedule [ ] OR [7]% or any higher percentage that the parties agree in writing will apply from the applicable Carbon Adjustment Date. Starting at least three months before the applicable Carbon Adjustment Date, the parties will attempt in good faith to negotiate the highest percentage reduction that is reasonably achievable by the parties.

* [Drafting Note: for negotiation. Consider if this is intended to be cumulative year on year or a simple achieve and maintain for the life of the contract requirement. In order to achieve the widely accepted goal of halving emissions every decade, a minimum 7% year on year emissions reduction is required. (See The ‘Carbon Law’; and  J. Rockström et al., ‘A roadmap for rapid decarbonisation’, Science 355.6331, 1269-1271 (2017); and this Summary of Race to Net Zero Criteria Consultations.]

3. Offsetting

[The Supplier shall/the parties shall agree to jointly] Offset any Residual Emissions relating to the Actual Product Carbon Footprint. 

4. Climate Governance

The Supplier shall:

(a) within [insert time period] of entering into this agreement publicly set an organisational Net Zero Target [validated by the Science Based Target Initiative][and sign up to Race to Zero]; 

(b) develop and take immediate initial actions from the Net Zero Target Plan;

(c) establish a sustainability committee as a committee of its board of directors which shall oversee the development, implementation and review of the Net Zero Plan, either chaired by a [non-executive] director with experience of improving sustainability and mitigating carbon footprints, or advised by an appropriately qualified climate, sustainability or environmental consultant who has the fundamental skills and experience to diligently, competently and professionally advise on improving sustainability and mitigating carbon footprint;

(d) report annually and publicly on:

i. its progress against the [Net Zero Plan and] Net Zero Target;

ii. the climate risks and opportunities to the Supplier and its business in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);

iii. an analysis of how the Supplier’s wider local and global stakeholders (including employees, clients, end customers and supply chain partners) are affected by both climate risk and the transition to a low carbon economy and how the Supplier can help to improve their resilience; and

iv. all climate policy engagement, climate leadership, lobbying activities, trade association memberships and public policy positions of the Supplier that may support or undermine the goals of the UNFCCC’s Paris Agreement; and

(e) provide an environmental and sustainability training programme on a regular basis (at least annually) for employees, personnel and contractors during their usual working hours (and online as required) which will cover, as a minimum:

i. the latest climate science;

ii. climate change policy and relevant legal context (including core terms of the Paris Agreement and any national implementation measures);

iii. the economic and social (e.g. health) benefits to the Manufacturer in reducing the workplace’s environmental impact;

iv. sustainable lifestyle changes and issues relating to the workplace; 

v. details of the Supplier’s public and contractual commitments, targets and governance in relation to climate change and sustainability; and

vi. other topical climate and sustainability issues.]

[Optional approaches:*

* [Drafting Note: These are more detailed approaches, which aren’t necessary as part of the above baseline and can always be agreed separately later on.]

A. [Fixed percentage] [fifteen] percent ([15]%);  

B. [Rolling agreed percentage] a percentage higher than [fifteen] percent ([15]%) as the parties may agree within [three] ([3]) months prior to each Adjustment Date; or

C. [Fixed cascading percentages] by no less than the percentages shown in Schedule [X].]}

5. Target Product Carbon Footprint change proposal

Either party may propose in writing at any time during the Term of this agreement that the Target Product Carbon Footprint is aligned to the Actual Product Carbon Footprint of the immediately preceding Reporting Period. The other party agrees to not unreasonably withhold its approval of the proposed alignment if the Actual Product Carbon Footprint during the immediately preceding Reporting Period is [20]% more or less than Target Product Carbon Footprint.

6. Bi-Annual Product Carbon Footprint Report

6.1. Within [30] days of the end of each consecutive [six] month period from the date of this agreement during the Term (each, a “Reporting Period))(each a “Reporting Date”), the Supplier will provide a written Carbon Footprint Report to the Customer. The Carbon Footprint Report shall,(ii) be audited by an independent accounting or audit firm. The Customer and Supplier will attempt to agree the appointment of that firm, but, if the parties cannot agree the appointment within 30 days or a request by either party, the Customer will (acting reasonably) choose the firm and the Supplier will cooperate with the appointed firm. The Customer and Supplier agree to share equally the costs of any independent accounting or audit firm engaged with respect to the Carbon Footprint Report. 

6.2. The Carbon Footprint Report must, at a minimum, set out:

A. the Actual Product Carbon Footprint of Goods manufactured and supplied to the Customer pursuant to this agreement in the relevant Reporting Period;

B. the specific GHG Reporting Standard used to calculate the Actual Product Carbon Footprint;

C. the industry best practices on managing and reducing Greenhouse Gases that have been applied by the Supplier during and prior to the Reporting Period; 

D. the reduction in Greenhouse Gases achieved measured against the Actual Product Carbon Footprints for each Good stated in previous Carbon Footprint Reports; 

E. the difference between Actual Product Carbon Footprint and Target Product Carbon Footprint of the Goods for that period; and

[F. insert any additional requirements].

[Option A: Customer receives a discount where carbon emissions exceed the Target Product Carbon Footprint and the Supplier receives a rebate where carbon emissions are less than the Target Product Carbon Footprint.]

7. Variation in Price

A. There will be no variation to the Price under this [clause OR schedule OR agreement] where the Actual Product Carbon Footprint of Goods is lower than, equal to or is within [1]% of the Target Product Carbon Footprint for those Goods.

[Optional approaches:

[Option A1: Simple discount.  In this example, the Price is reduced by [5]% where the Target Product Carbon Footprint has been exceeded.]  [Where the Actual Product Carbon Footprint of Goods is higher than the applicable Target Product Carbon Footprint, the Price for those Goods will be adjusted by multiplying that Price by [0.95].] 

[Option A2: Matching discount.  The Price varies depending on the Actual Product Carbon Footprint of the Goods.]  [In relation to each Reporting Period, where the Actual Product Carbon Footprint of Goods exceeds their Target Product Carbon Footprint [by more than 1%], the Price for the affected Goods will be reduced with effect from the first day of the following Reporting Period by the same percentage amount by which the Actual Product Carbon Footprint for the Goods exceeds the Target Product Carbon Footprint for the Goods.  For example, if the Actual Product Carbon Footprint of Goods exceeds their Target Product Carbon Footprint by three percent (3%) of the Target Product Carbon Footprint, the Price will be reduced by three percent (3%).]

[Option A3: Simple rebate. The Price will be increased  by 2% where the Actual Product Carbon Footprint is less than the Target Product Carbon Footprint.] [Where the Actual Product Carbon Footprint of Goods is less than their Target Product Carbon Footprint, the Price will be adjusted by multiplying the Price by [1.02]. This adjustment will take effect on [DATE].] 

[Option A4: Matching rebate.The Price varies depending on the difference between Actual Product Carbon Footprint and Target Product Carbon Footprint of the Goods.] [Where the Actual Product Carbon Footprint of Goods is less than their Target Product Carbon Footprint [by at least 1%], the Price will be increased by the same percentage amount that the Actual Product Carbon Footprint for the Goods is less than the Target Product Carbon Footprint for the Goods. For example, if the Actual Product Carbon Footprint of Goods is less than their Target Product Carbon Footprint by three percent (3%) of the Target Product Carbon Footprint, the Price will be increased by three percent (3%).] This adjustment will take effect on [DATE].

B. Unless the relevant discount has been applied in the Price, any discounts, price adjustments or credits to which the Customer is entitled under clause [6A] are payable by the Supplier to the Customer in the manner determined by the Customer as follows:

[Optional approaches:] 

(a) [on demand by the Customer;

(b) as a credit on the account of the Customer; or 

(c) may be withheld from any payment due from the Customer to the Supplier.] 

C. The Supplier is entitled to include any rebates to which the Supplier is entitled under clause [6A] as an additional charge in its next invoice issued by the Supplier to the Customer.

[Option B: Payment terms vary depending on the Actual Product Carbon Footprint of the Goods.]

8. Variation in Payment Terms

Starting from the [second] Reporting Period, the Due Date for payment of any Goods ordered in a Reporting Period will be adjusted with effect from the first day of each Reporting Period in accordance with the following table:

Actual Product Carbon Footprint of Goods as shown in the Carbon Footprint Report for the preceding Reporting Period Due Date
Less than [0.7] times the Target Product Carbon Footprint for the Goods  On delivery of the Goods.
Equal or more than [0.7] times the Target Product Carbon Footprint for the Goods but less then [1] times the Target Product Carbon Footprint for the Goods [15] days after delivery of the Goods.
Equal or more than [1] times the Target Product Carbon Footprint for the Goods but equal or less than the Target Product Carbon Footprint for the Goods. [30] days after delivery of the Goods.
More than the Target Product Carbon Footprint for the Goods but less than [1.2] times the Target Product Carbon Footprint for the Goods. [45] days after delivery of the Goods.
Equal or more than [1.2] times the Target Product Carbon Footprint for the Goods. [60] days after delivery of the Goods.

 

SCHEDULE

Product List

First Column: Item / SKU Second Column: Units Third Column: Price ($) Fourth Column: Target Product Carbon Footprint (CO2e) 

 

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