What it means
A project, such as a wind farm, a methane capture plant or a forest protection scheme, can earn carbon credits if it proves that it reduced emissions compared with what would have happened otherwise. The ERPA sets out how many credits the buyer will purchase, at what price and when they will be delivered.
Because the credits are created over time, payment often follows delivery. For the project developer, the contract is valuable because it supports financing.
A lender is more willing to fund a project when part of its future income is covered by a signed purchase agreement. The agreement can be a basis for a loan, even before any credits exist.
Buyers include companies seeking to offset emissions, governments and funds that trade credits. They care about the quality of the credits, meaning whether the emission cuts are real, measured accurately and permanent.
Contracts therefore include clauses on verification by independent auditors, registration with a recognised standard and what happens if the project delivers less than promised. The pricing can be fixed per credit, linked to a market index or set with a floor and ceiling.
Risks include delivery risk (the project produces fewer credits than planned), regulatory risk (rules change) and price risk. Careful drafting of remedies, such as replacement credits or refunds, is therefore important.
The term became familiar through the Kyoto Protocol's Clean Development Mechanism, but similar contracts are used in voluntary carbon markets today. The same structure applies, although the standards, registries and pricing practices differ.
Anyone dealing with an ERPA should involve legal and technical advisers early.
In practice
Real-world examples.
Example
A cement company agrees to buy 50,000 credits a year from a methane capture project at a landfill. The credits help it meet its voluntary climate commitments. The agreement is signed before construction starts, which helps the developer raise a loan. The company reports the purchases in its sustainability disclosures.
Example
A forestry developer in a tropical country signs an ERPA with an airline. The airline pays $10 per credit for credits generated by protecting a forest area. Independent auditors verify the credits each year before payment. Payment is made only for credits that pass this check.
Example
A small wind farm sells its first three years of credits under an ERPA to a trading fund. The fund resells the credits to corporate buyers at a higher price. The wind farm owner keeps a steady income and avoids price swings. The fund takes on the risk that the market price may fall before it resells.
Formula
Calculation
Contract value = Number of credits delivered x Price per credit
Worked example: A buyer signs an ERPA for a biogas project to take 100,000 credits a year at $12 per credit for 5 years.
Annual payment = 100,000 x $12 = $1,200,000
Total contract value = $1,200,000 x 5 = $6,000,000
If the project delivers only 90,000 credits in a year, the payment for that year falls to 90,000 x $12 = $1,080,000, unless the contract provides for shortfall remedies.Case study
Seen in the real world.
Greenhaven Biogas is an illustrative, fictional developer planning a $4,000,000 plant to turn farm waste into energy. Banks were cautious because electricity prices were uncertain and the plant had no track record.
The company signed an ERPA with a fictional buyer for 30,000 credits a year at $15 each, or $450,000 a year in expected income. The lender counted this contract when judging whether the plant could repay its loan, and it approved the financing. Lenders also asked for evidence that the buyer was financially strong enough to pay.
In this illustrative story, the plant delivered 27,000 credits in its first year because of a technical delay. The contract allowed a shortfall to be made up the following year, so the buyer accepted the delay. The developer learned the importance of testing delivery forecasts conservatively before signing.
Watch out
Common mistakes.
- Assuming all carbon credits are equal, when quality, verification standards and permanence differ widely.
- Ignoring delivery risk, when a project that falls short may owe replacement credits or a refund.
- Treating the contract value as guaranteed income, when payment normally depends on credits actually being verified and delivered.
Questions
People also ask.
What is a carbon credit?
It is a tradable certificate representing one tonne of carbon dioxide equivalent that has been avoided or removed from the atmosphere. Buyers use credits to offset emissions they cannot yet avoid.
Who verifies the emission reductions?
Independent auditors approved under a recognised standard check the project's data before credits are issued. The checks are repeated at regular intervals while the project operates.
Can an ERPA help a project get a loan?
Yes, a signed agreement provides expected future income, which lenders often consider when assessing a project.
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