Glossary entry

Carbon Budget

Definitions

Contracts definition

Carbon Budget means the aggregate of [value] tonnes of Carbon Dioxide Equivalent of Greenhouse Gas emissions permitted within the period of [YEAR to YEAR].

Model laws definition for the UK

Carbon Budget means the cumulative volume of carbon dioxide emissions permitted within a defined five-year period, as determined by the Secretary of State in accordance with the duties under Articles 4(1)(a) and 8(1) of the Climate Change Act 2008 in order to keep global warming below the Net Zero Target, and set at:

(i) 2,544,000,000 tonnes of Carbon Dioxide Equivalent for the period of 2018 to 2022 under section 2(c) of the Carbon Budgets Order 2009 (SI 2009/1259);

(ii) 1,950,000,000 tonnes of Carbon Dioxide Equivalent for the period of 2023 to 2027 under section 2(c) of the Carbon Budget Order 2011 (SI 2011/1603); and

(iii) 1,725,000,000 tonnes of Carbon Dioxide Equivalent for the period of 2028 to 2032 under section 2(c) of the Carbon Budget Order 2016 (SI 2016/785).

Model laws definition for other jurisdictions

Carbon Budget means the cumulative volume of Greenhouse Gas emissions permitted at the national level for the period of [YEAR to YEAR], expressed as a net quantity of Carbon Dioxide Equivalent and determined by decree of [NATIONAL LEGISLATION].

Drafting notes

Contracts definition

A system of carbon budgets can be a useful tool for organisations to manage and reduce their carbon footprints. It also seems inevitable that a carbon tax will be introduced at some point to meet the UK’s 2050 Net Zero Target.

Model laws for the UK

The Climate Change Act 2008 creates a system of “carbon budgets”, which will set limits on the net UK carbon account, to be divided into five-year periods beginning with the period 2008-2012. To date, five budgets have been set for the periods 2008-12, 2013-2017, 2018-22, 2023-2027 and 2028-2032. The carbon budget for the prescribed period of time must not be exceeded by the net UK carbon account, as defined in Article 27 of the Climate Change Act 2008 and set at 55,000,000 carbon units for the 2018-2022 budgetary period under Article 3 of the Climate Change Act 2008 (Credit Limit) Order 2016 (SI 2016/786).

Model laws for other jurisdictions:

·      Carbon budget periods appear typically to be five-year periods.

Consider whether certain emissions should be excluded from the carbon budget. E.g. emissions from international air/sea travel or from land use and forestry.

Application

Any contract where the parties wish to set carbon limits or create incentives and obligations linked to carbon including: manufacturing agreements, supply agreements, joint venture/ shareholder agreements. It may also be useful for directors’ annual reports, section 172 strategic reports and national climate laws.

A party could even enshrine positive climate behaviour in their Articles of Association (or equivalent documents), by including a Carbon Budget definition.

Used in Zack’s Clause [SPA/Investment Agreement Warranties], Gordon’s Clause [Capital Markets Due Diligence Questionnaire] and Tristan’s Clause [Construction Materials: Procurement].