The following comments were submitted to the Article 6.4 Supervisory Body (SB) in response to a call for Input on the “Provision of a functionality for security interest arrangements in the mechanism registry through a pledge system" on Mar. 22, 2025.
The Institute for Agriculture and Trade Policy (IATP), an accredited observer organization, appreciates the opportunity to respond to the Supervisory Body’s (SB) Call for Input on the “Provision of a functionality for security interest arrangements in the mechanism registry through a pledge system.” Our most recent communication to the SB is a September 30, 2024 letter concerning the draft Sustainable Development Tool. The SB, having begun to improve the quality of Emission Reduction (ER) credits in the Paris Agreement Crediting Mechanism (PACM), now proposes how the SB may provide financial security safeguards for ER credit account holders in the PACM registry.
Making the security interest of investors in A6.4 ER credits enforceable: our overview
The Information Note presents the concept of security interest in financial markets: “A security interest is a method of securing an investment in a predictable manner. This would normally be a contractual instrument which gives the investor the ability to realize, enforce and recover their investment, such as a mortgage, pledge or lien.” (paragraph 8) How are security interests protected when the investment to be realized, recovered and enforced involves ER credits?
Applying the concept of “security interest” to a PACM registry in which the account holder controls A6.4 ER credits without owning them, “security interest arrangements would be made between the financer and recipient [of funds to originate and maintain ER activities].” The model for these security interest arrangements, the structured finance for long-term infrastructure projects, is presented by the International Emissions Trading Association (IETA) in response to the SB’s Call for Input in 2024.
To mitigate the financiers’ potential losses upon the default of a borrower (typically the project sponsor), it is a common and long-established practice in both domestic and international project finance transactions outside of carbon markets, [underlined in the original] and in structured finance transactions of all types and purposes, for financiers to take security over assets of the borrower.
As the SB further develops its security interest proposal, it should exemplify possible causes of default that would trigger the financier’s taking of the borrower’s assets to enforce its security interest. For example, if an ER activity participant were unable to provide buffer account ER credits of comparable quantity and quality to credits that were negated by emissions reversals, would uncompensated or partly compensated reversals trigger a default? Such exemplification would broaden the understanding among Parties and non-Parties about the causes of default and how the financier’s security interest would be enforced within the PACM registry.
To continue reading, download a PDF of our full submission here.
