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First, the words “contract” and “agreement” can be, and often are, used interchangeably. The parties to the contract are the buyers and sellers, the people or organizations that agree to do something, to transfer something, or to pay something according to the terms in the contract. A contract outlines the rights and obligations of the parties. Right are things that a party may do under the contract – typically something that the party would not be allowed to do without the contract, while obligations are things that a party is required to do under the contract. Default is a violation of the terms of the contract. A contract generally defines what will be considered to be a default or breach of its terms in order to make sure that trivialities are not considered to be a contractual default.
Before a PES contract can be entered into, there are a number of preconditions that must be satisfied. This topic is dealt with more fully in the presentation on Policy Issues for PES, but outlined here for clarity. First, there must be one or more parties with clear authority to enter into the contract on the buyer side. In other words, there must be someone who is able, legally and otherwise, to perform ecosystem-enhancing services or to generate and sell credits for ecosystem services. The question of who is entitled to act as a seller depends on things like ownership and use rights over land and natural resources, as well as technical requirements in terms of titling and registration. It is a complex topic that is beyond the scope of this presentation, but an important issue that should be flagged. As with any commercial transaction, for successful PES, there must be a minimum degree of social, political, and regulatory stability, generally over long time frames of 20 years or more to ensure continued ecosystem service provision. Similarly, mechanisms for dispute resolution and enforcement must be accessible to the parties.
Moving on to the PES contract itself, the first question is whether the contract will be structured as a contract for the purchase of credits, for example for proven carbon sequestration or reduced carbon emissions, or as a purchase of specific services from the seller(s). If it is to purchase credits, the contract requires certain results, like carbon sequestration and storage or increased water flows. If it is to purchase services, the contract requires certain inputs, in terms of actions that are intended to generate ecosystem restoration, protection, or enhancement, but doesn’t guarantee these results.
A purchase contract is mostly about the final product, the ecosystem service benefit itself, rather than the methods used to generate ecosystem services benefits. Therefore, there must be some method for verifying that ecosystem services benefits have been (or will be) created as a result of a particular project, and for quantifying the benefits. Once the benefits are measured and quantified, they can be turned into tradeable credits, which can then be used to offset the buyer’s environmental impacts in a concrete, quantifiable way.
Another way to structure the contract is as a purchase of services to restore, protect, or enhance an ecosystem, for example by planting trees, revegetating with native plant species, or planting beside streams to prevent erosion and filter the runoff that goes into the waterway. Payment depends upon the provision of labor and/or raw materials (inputs), rather than concrete ecosystem services outputs. Structuring the contract in this way may be most suitable where the contracted services are certain or very likely to generate desired environmental benefits Services contract example: Ex. Buyer pays Seller to replant 10 ha of grassland with native forest at 50 trees per ha, to maintain seedlings, and patrol regularly to enforce logging and use restrictions. If Seller does all of these things, Buyer must pay, even if all of the trees are lost due to fire, flood, or other causes.
ECOTRUST: The Environmental Conservation Trust of Uganda Geographic location: 258 hectares of agricultural lands within the boundaries of the Bushenyi District in Southwestern Uganda per initial Rainforest Alliance audit/verification. Plans to extent to Northern and Eastern Uganda Project coordinator works with supporting organizations, manages reporting to validation/verification organizations and others, handles marketing and sales, and oversees distribution of benefits Output: each credit represents one ton of CO2 that has been removed from the atmosphere and stored in trees and biomass due to project activities Buyers: the project will create credits for the voluntary market, which is now largely driven by PR and philanthropic purchases.
PES agreements may be oral or written, binding (that is, enforceable in court) or non-binding, and may vary in complexity. While variation in these dimensions exists within as well as between different categories, an illustration of different levels of “formality” appear on the left of the slide. At the informal end of the spectrum is an oral handshake agreement. At the most formal end would be a lengthy, legally-binding, written agreement. In between these two extremes are everything from complex oral agreements to non-binding memoranda of understanding, to simple written contracts. As formalities and legal protections are added, the specificity and the clarity of the agreement increases, but so does the complexity and the cost to negotiate and draft the agreement. Despite the added cost, it is generally advisable for parties to have a written agreement. Putting it in writing helps the parties to have a clear understanding of rights and obligations at the outset, to minimize misunderstandings over the course of the project, and simply to have easy reference to what was agreed.
Key elements of a contract generally include: Clearly defined right and obligations telling the buyer and seller what they must do, may do, and may not do – this is the basis of why the parties are entering a contract Payment amounts and timing are central to the contract – this is the major reason the seller is entering the contract! Setting the price and timing depends on the cost to the seller of providing services or creating credits, market prices for such services or credits, the risks for each party, and other project costs that are allocated to one or the other party Also, the contract will define what it means to default under the contract, and what the consequences will be for the defaulting party.
Deciding on the contract terms that are acceptable to each party can be the subject of a lengthy negotiation process, or can be quite straightforward, as in many government-run programs where participants simply sign on to an existing form that is not customizeable. Otherwise, the parties must balance the desire to get the best deal possible against the practical need to come to an agreement with the other party. In most cases, PES agreements will be fairly negotiable, within set parameters and according to accepted contractual conventions. One common challenge for PES projects is unequal bargaining power between buyers, often large, multinational companies or brokers, and sellers in the developing world, often small-scale land users. Especially where this is the case, it is very important for sellers to have their own legal representation. The buyer’s lawyer has an obligation to get the best deal for the buyer and cannot fairly represent the interests of the seller as well.
Special considerations for PES contracts, as provided and any promised governance or safeguards aspects are present can be difficult and costly. Moreover, if PES credits are being generated, the actual provision of ecosystem benefits must be assessed and quantified. Also, PES projects generally are long-term undertakings – up to 20 years or more – because ecosystem benefits like carbon storage or critical habitat restoration can take many years to generate and yet can be lost very quickly.