Carbon Contracting Cheat Sheet: Part 1

• Offtake Agreement: A long-term legal document between a seller, typically a carbon project developer or carbon credit retailer, and a buyer. Within the offtake agreement, the buyer commits to purchase a specified amount of the seller’s future carbon credits at a defined price. For example, a carbon project developer and buyer may sign a long-term offtake agreement for credits to be delivered in 2030 through 2035. This differs from a spot agreement, which is for carbon credits that are bought by the buyer and delivered by the seller immediately.  

• Price: The dollar amount the buyer agrees to pay the seller per carbon credit. However, there are several approaches to defining price within a carbon offtake agreement. Here are a few of the common ones: 

• • Fixed: The price per carbon credit remains constant throughout the contract term. For example, the buyer would agree to pay $35 per carbon credit throughout the contract term. 

• • Fixed Escalating: The price per carbon credit is fixed, but there is an agreed-upon escalator at a defined interval within the contract. For example, a buyer could agree to pay $35 per carbon credit with a 2.5% escalator in price each year. In this scenario, the year one price in the contract would be $35 per credit, year two of the contract would be $35 per credit + 2.5%, and so on. The price changes, but the degree to which it changes is clearly defined. 

• • Floating: This pricing approach usually uses a price index to determine future pricing within the agreement or can float with inflation. For example, a buyer and seller could agree to use a defined price index at the time of delivery to establish the pricing. The price index should be aligned with the carbon credits being bought and sold. For example, if the offtake agreement were for Improved Forest Management (IFM) carbon credits from the United States, a price index for North American IFM would be appropriate vs. a price index for global cookstove projects.  

• Payment: When the buyer pays the seller, and how much. The total payment is typically defined by the volume of carbon credits being delivered or paid for multiplied by the price per carbon credit. There are two common approaches to when the payments occur: 

• • Pay on delivery: When the payment for carbon credits occurs when they are delivered to the buyer. 

• • Pre-payment: When the buyer pays for the carbon credits prior to delivery, usually at a discounted price. 

• Volume: The amount of carbon credits being purchased. Similar to price, there are several ways to define volume within offtake agreements. Here are a few common ones: 

• • Fixed: The volume of contracted carbon credits that the buyer agrees to purchase and the seller agrees to deliver in the offtake agreement does not adjust. For example, the buyer and seller may contract for 10,000 carbon credits. No less, no more. If there is an under delivery, it would usually trigger a shortfall event and associated remedy within the contract (more on that below).  

• • Unit Contingent: there is a target volume defined in the contract, but the actual delivery volume is dependent on what is produced by the carbon project. For example, a buyer and seller may contract for 10,000 carbon credits but if only 8,000 carbon credits are produced, then only 8,000 credits are delivered to the buyer and no shortfall, or remedies are triggered.  

• • Min/Max:  There is an acceptable volume range agreed to by the buyer and seller. For example, the offtake agreement may define a minimum delivery volume of 8,000 carbon credits and a maximum volume of 10,000 carbon credits. If less than 8,000 carbon credits are delivered, it would likely trigger a shortfall event and associated remedy in the contract. 

While partnering with a good contracts lawyer, particularly one with experience in environmental commodities, is always a sound approach to structuring a carbon offtake agreement, these terms should help you navigate the world of contracting with slightly more confidence and familiarity. For our readers representing either carbon credit buyers or sellers, I hope this primer helps you feel a bit more comfortable as you work towards your next carbon contract! Stay tuned for part two, where we will dive into terms used to determine project milestones and credit delivery requirements.