Liabilities for Breach of Carbon-Credit Sale Contracts Under the EU Emission Trading Scheme: The Law and the Practice

HDR Candidate: Yu (Molly) Yao

Advisors: Assoc Prof Qiao Lui (Principal) and Prof Rick Bigwood (Associate)

Abstract: The topic of my thesis is “Liabilities for Breach of Carbon-Credit Sale Contracts under the EU Emission Trading Scheme: the Law and the Practice”. To improve certainties in contracting practice on the EU carbon market, it is necessary to find judicial approach to construction of contracts for carbon-credit sales.

Terms of “no encumbrance obligations” in the International Emission Trading Master Agreement, which is governed by the English law, are taken as examples of the contracting practice. Contractual construction, as a matter of law, decides liabilities for breaches of carbon-credit sale contracts due to breaches of “no encumbrance obligations” by the following steps. To decide occurrence of breaches of “no encumbrance obligations”, two issues need to be addressed by contractual construction. 1. Valid incorporation of “no encumbrance obligations” terms in a contract for carbon-credit sales. 2. Meaning of the terms of “no encumbrance obligations”. To decide breaches of “no encumbrance obligations” constitute breaches of contracts, another two issues need to be addressed by contractual construction.  3. Nature of the terms of “no encumbrance obligations”. 4. Nature of events that can cause breaches of “no encumbrance obligations” terms.  Finally, the courts need to construe consequences of breaches of “no encumbrance obligations”. In construction of the consequences of breaches of “no encumbrance obligations”, tests of “good faith”, “reasonable endeavours”, and “best endeavours” significantly affect determinations of liabilities of the breaching party and the injured party.

In the contracting practice on the EU carbon market, three matters are subject to the governance of regulations of the EU carbon market. 1. Definition, validity and tradability of carbon credits. 2. Delivery and acceptance of carbon credits. 3. Acceptable market behaviours.

In the contractual constructions, regulations of the EU carbon market are involved in two ways. One way is that the regulations can be directly incorporated as part of the contractual terms. Consequently, interpretation of the contractual terms is an interpretation of the regulations; and, changes in the regulations amend the contractual terms. The other way is that the regulations constitute a context in which carbon-credit sale contracts are made and performed. As such, the regulatory context cultivates commercial senses of  contracting parties on the EU carbon market. Also, a changing regulatory context can give rise to events in the nature of Force Majeure events, illegality events, or frustrating events.

On the EU carbon market, to improve certainties in making and performing contracts for carbon-credit sales, one of the keys is to find consistent judicial approach to construction of the contracts. And, the key to consistent judicial approach to construction of contracts for carbon-credit sales is to find consistent treatments of the regulations of the EU carbon market.