As seen on Reuters

BEIJING/LONDON, Apr 11 (Reuters) – Chinese owners of clean energy projects say European firms have since 2011 defaulted on potentially hundreds of contracts to buy millions of United Nations carbon credits for fixed prices of up to $10 or $20 per unit.

Those European firms now risk being sued for hundreds of millions of dollars in China and elsewhere for breaching contracts to buy carbon credits.

The prices are exponentially more than the credits’ current value of 23 cents, leaving buyers including banks, trading houses, utilities and credit aggregators facing big losses.

Attempts by the buyers to renegotiate many of the contracts have been rejected, leading many firms to breach the agreements and a growing number of Chinese sellers to subsequently launch arbitration proceedings or lawsuits, several lawyers said.

“More than 95 percent of contracts have been breached because buyers are reluctant to comply with their obligations,” said Wang Huihong, a chief partner of Beijing’s Jin Rui.

The exact number of ongoing disputes is unknown, but legal experts estimate it to be in the hundreds.

Tom Luckock, a Beijing-based associate with law firm Norton Rose Fulbright, said the profitability of most fixed-price contracts will be affected by current market conditions.

That will include more than 3,700 Chinese U.N.-approved projects because their owners are barred by the government from signing floating-price deals for under 7 euros ($9.72) per unit.

The credits, known as Certified Emissions Reductions (CERs) and issued under the U.N.’s Clean Development Mechanism, offer some 12,000 large greenhouse gas-emitting plants across Europe a cheaper option to comply with the EU Emissions Trading System.

But CER prices have collapsed due to Europe’s financial crisis and nonexistent demand from other rich countries that have been reluctant to use the credits to help meet more ambitious emissions reduction targets.

CER buyers, already hurt by falling prices, are now faced with costly lawsuits, arbitration proceedings or pre-court settlements.

Graham Stuart, a partner at law firm Baker & McKenzie’s London office, said that while many of these cases have settled out of court, in other instances it has not been possible.

“Large well-resourced firms may have less value at stake under these contracts compared to their overall revenues so they have more flexibility to settle, whereas for smaller ones, relatively speaking there’s a lot more hinging on them.”

Banks including Deutsche Bank and JP Morgan have sold their CDM portfolios, while other firms such as London-listed Trading Emissions plc have incurred losses over the contracts, known as Emissions Reduction Purchase Agreements (ERPAs).

MUCH AT STAKE

“We have seen a number of ERPA-related disputes in multiple jurisdictions over the last few years. In many cases, there have been ambiguities in drafting which have opened up opportunities for litigation,” said Tim Baines, a London-based senior associate at Norton Rose Fulbright.

Estimating how much is at stake in the disputes is difficult because the arbitration procedures are confidential, but U.N. data suggests hundreds of millions of dollars in annual transactions have been affected.

“It’s hard to say how many ERPAs have been breached or have led to a dispute, but there are usually strong arguments that can be raised by both buyers and sellers,” Baines said.

“Often the outcome of discussions boils down more to the commercial relationships between the parties rather than the nuances of an agreement.”

A common way for buyers to avoid having to pay for the credits is to delay the CER issuance requests that they are responsible for overseeing and sending to the U.N.

But many Chinese firms may never be paid as a growing number of European credit aggregators are under threat of bankruptcy due to the contracts.

“Even if successful in arbitration, it may be impossible (for Chinese firms) to take the award and ‘turn it into money’,” said Norton Rose Fulbright’s Luckock.

Original Article – Chinese firms turn to courts in cer rows with european buyers