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2007 EFET General Agreement
Version 2.1(a) (Power)
A Jolly Contrarian owner’s manual™
EEP and EEP Equivalent in a Nutshell™
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“ Excess Emissions Penalty” or “ EEP” means a financial payment required to be made to a Relevant Authority pursuant to and in accordance with Article 16(4) of the EU ETS Directive (which, for the avoidance of doubt, shall not include any costs relating to or arising from the obligation to purchase and/or surrender Allowances in the following Compliance Year), or its equivalent under any other Emissions Trading Scheme;
“Excess Emissions Penalty Equivalent” or “EEP Equivalent” means an amount which the Buyer must pay to a third party in respect of any amount payable by that third party which arose as a result of the Buyer’s failure to Transfer the required Allowances to that third party and which in turn was a consequence of the Seller’s failure to Transfer the Contract Quantity to the Buyer under this Agreement (which, for the avoidance of doubt, shall not include any costs relating to the obligation to purchase and/or surrender Allowances in the following Compliance Year);
§ 8.3 Excess Emissions Penalty (“EEP”) and EEP Equivalent:
- (a) Applicability. The Parties to any Allowance Transactions desiring to make EEP or EEP Equivalent inapplicable and inoperative to the calculation of the Buyer’s Cover Costs for any Allowance Transactions between them may do so either globally by specifying EEP or EEP Equivalent as not applying in Part II of this Allowances Appendix, or specifically, with respect to a particular Allowance Transaction, by so agreeing in the terms of that Allowance Transaction itself.
- (b) Excess Emissions Penalty. If EEP is applicable, the Buyer may invoice the Seller in the amount of an EEP it incurs as the result of the Seller’s failure to Transfer to it Allowances when required pursuant to the terms of an Allowance Transaction.
- (c) Excess Emissions Penalty Equivalent. If EEP Equivalent is applicable, the Buyer may invoice the Seller for an EEP Equivalent it incurs as the result of the Seller’s failure to Transfer to it Allowances when required pursuant to the terms of an Allowance Transaction.
- (d) Duty to Mitigate. The Seller’s obligation to pay the EEP or the EEP Equivalent is subject always to the Buyer’s overriding obligation to use commercially reasonable endeavours (including, without limitation, making use of any excess Allowances it may have available to it at the time, and/or procuring such Allowances as are available in the market) to satisfy its obligation to surrender the required number of Allowances necessary to avoid or otherwise mitigate its EEP or EEP Equivalent liability. For the avoidance of doubt, the Buyer’s duty to mitigate its EEP or EEP Equivalent exposure is limited to management of its Allowance portfolio and shall not impose upon it any further obligation regarding its operation of any installation with an obligation to surrender Allowances to a Relevant Authority.
- (e) Evidence of Commercially Reasonable Efforts. Upon request, the Buyer shall confirm to the Seller:
- (i) that it has incurred EEP or EEP Equivalent consequent upon the Seller’s failure to Transfer Allowances to it;
- (ii) the extent to which the requirement for the Buyer to pay the EEP or the EEP Equivalent results from the Seller’s failure to make such a Transfer;
- (iii) that it was unable to mitigate its EEP or EEP Equivalent exposure,
- and shall provide the Seller with evidence: (A) that the EEP or EEP Equivalent, as applicable, was incurred by it; (B) that such EEP or EEP Equivalent was incurred as a result of the Seller’s failure to perform its Transfer obligation; and (C) of its commercially reasonable endeavours to mitigate its exposure to such EEP or EEP Equivalent as it has invoiced to the Seller; provided, however, that should the Seller elect to challenge the Buyer in respect of any of the above matters, then the burden for demonstrating: (A) that such EEP or EEP Equivalent was not actually incurred by the Buyer; (B) that such EEP or EEP Equivalent was not incurred by the Buyer as a result of the Seller’s non-performance; and/or (C) the insufficiency, lack of thoroughness or unreasonableness of such endeavours shall be on the Seller and, if § 22.3 (Expert Determination) is specified as applying in Part II of this Allowances Appendix the process by which such challenge will be determined shall be in accordance with the procedures set forth in § 22.3 (Expert Determination).
- (f) Later Mitigation of Recovered EEP or EEP Equivalent. To the extent an initially assessed and recovered EEP is later reduced and/or fully or partly returned or credited to the Buyer by a Relevant Authority for any reason whatsoever, only such reduced and finally assessed EEP shall apply. EEP recovered by the Buyer in the form of damages under this § 8 which are later reduced or returned to such Buyer shall be returned upon demand to the Seller who paid such damages, and the Buyer shall provide the Seller with prompt notification of any such reduction or return. Similarly, in the event the Seller has made the Buyer whole for an EEP Equivalent, and all or any portion of the underlying EEP or EEP Equivalent upon which the Seller’s EEP Equivalent payment was based is later returned to the Buyer by its resale customer, the Buyer shall return an equivalent amount of its own EEP Equivalent payment to the Seller.
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Comparison
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Overview
The definition of Excess Emissions Penalty is more or less the same in all three emissions trading documentation regimes. Compare:
ISDA: Excess Emissions Penalty
IETA: Excess Emissions Penalty
EFET: Excess Emissions Penalty
Seeing as it is quite a fundamental part of the economic risk of Allowance trading, we should not be surprised to find that all three versions have a concept of EEP or Excess Emissions Penalty, nor that, per their Myers-Briggs personality types, ISDA has gone for quite unnecessary optionality, IETA has sort of followed suit, and EFET has gone for none, but laborious drafting of alternatives anyway. Hey ho.
Summary
ISDA defines itself up the wazoo, with EEP, EEP Equivalent, EEP Amount, EEP Non-delivery, EEP Payment, EEP Risk Period and Indemnifiable EEP — of course they did, didn’t they — whereas IETA is a relatively spartan Excess Emissions Penalty (and no EEP Equivalent — it just defines it in EEA Amount as “if this sub-paragraph (b) is specified in Schedule 2 (Elections) as applying”) and EEP Status, while EFET just has EEP and EEP Equivalent, but nothing else.
EEP Amount is pretty much the same between ISDA and IETA. EFET goes off on one.
What is is all about
Well, the basic point of an Emissions Trading Scheme is to require emitters to surrender Allowance credits to atone for their pollution, on main of being whacked with financial penalties for failing to do so on time. These are the Excess Emissions Penalties, so this is what it is all about, compadres.
Relevant for operators and those settling contracts with them, who have to worry about Reconciliation Deadlines and such messy practicalities.
An “Excess Emissions Penalty” is a penalty payment levied under the EU ETS on a end-user who is a Seller under an Allowance Transaction, and who missed the deadline for surrendering Allowances as a direct result of a failure by a Buyer to transfer Allowances when due under that Allowances Transaction. Only likely to be relevant if (i) your counterparty is some kind of power station or carbon monster and (ii) the Transaction is due to settle just before April 30th in any year, when Allowances must be submitted.
An EEP Equivalent is an amount for which a Seller becomes liable to a third party end user under a different Allowance Transaction — along the contractual chain, as it were — which is nonetheless occasioned by Buyer failing to settle a transfer of Allowances under this one.
Obe case is an actual penalty, the other one a delta-one derivative of a penalty, and both amount to the same thing. IETA and ISDA recognise this by wrapping “EEP Equivalent” into the concept of EEP Amount (optionally, at any rate, although it is hard to imagine when you wouldn’t apply the equivalent).
You would like to think EFET’s Carbon Squad would have done likewise, or at least come up with a better term than “EEP or EEP Equivalent” — which appears a mouthwatering 48 times in the document — to define it, especially since there doesn’t seem to be any optionality under the EFET.
At least, we suppose, they didn’t say, “EEP or EEP Equivalent as the case may, for the time being and from time to time, without limitation, be”.
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References