In Europe, on several occasions thieves have obtained the password to an emissions unit account, stolen units out of the account then sold the units to an unsuspecting buyer. Depending on the applicable law, the buyer may not have obtained good title to the units, so if it on-sells the units it may (unwittingly) not pass good title to the subsequent buyer.
The standard position in the International Swaps and Derivatives Association (ISDA) emissions annex is that the seller warrants good title to units it delivers. This is the same in other standard emissions trading contracts in use in the New Zealand market. However, in light of thefts of units in the EU, ISDA is working on provisions which will replace the good title warranty. ISDA's proposed provisions provide two alternatives:
- Buyer risk: The seller only has to replace units if the buyer notifies the seller within 1 or 2 business days (depending on the parties' election) after delivery that the units are previously stolen units.
- Seller risk: If at any time before expiry of the civil claims limitation period the buyer notifies the seller that the credits are previously stolen units, the seller must indemnify the buyer for all its losses and costs as a result of the units being previously stolen units.
ISDA is consulting members on this proposal. We will keep you posted on where this gets to and any implications for New Zealand emissions trading agreements.