Recently, climate change has been one of the most talked about issues in Bangladesh. Bangladesh has been described by the Asian Development Bank (ADB) as the world’s most vulnerable country to climate change related risk factors.[i] The Bangladesh government has taken some steps and is in the process of taking more steps to tackle this serious issue. One of the steps undertaken by the government is setting up the Designated National Authority (DNA) under the Kyoto Protocol. The establishment of the DNA under the Department of Environment has augmented the certification and approval process involved in any Clean Development Mechanism (CDM) project under the Kyoto Protocol. With the increase in CDM projects, there is huge potential for Bangladesh to have a carbon finance market.
Carbon finance is described as financial resources provided to projects generating (or expected to generate) greenhouse gas (GHG) emission reductions in the form of the purchase of such emission reduction.[ii] By way of a hypothetical example, let us assume that Company X is a regulated entity in Country A (an Annex I country that is required to reduce GHG emission under the Kyoto Protocol). Company X is subject to GHG emission caps under Country A’s Kyoto Protocol implementing statute. Company X identifies renewable energy projects in Bangladesh (a non-Annex I country). Company X determines that the renewable energy Company X determines that the renewable energy projects in Bangladesh would reduce GHG emission. Company X finances the renewable energy projects in Bangladesh and in return receives the right to the carbon credit generated by the renewable energy projects. These carbon credits, upon issuance and certification, would be allocated in Company X’s account in its national CDM registry.
Like any project finance, Company X’s financing involves taking security and collateral for its investments in the renewable energy projects. The important question here is can Company X put a charge on the carbon credits that would be generated by the renewable energy projects as collateral for its investments so that it has a legal claim on the carbon credits against and superior to others?
The entitlement to carbon credits (also known as Certified Emission Reductions (CERs)) has been clearly dispelled by the Marrakesh Accords.[iii] But what about the national laws of Bangladesh? The answer to this question is crucial from any carbon credit project financier’s perspective because for any debtor or seller to collateralize or sell any property (in this case, CERs or carbon credits), he must have right, title and interest on such property to be sold or collateralized.
The term ‘property’ has been defined in the Bangladesh Constitution as property of every description, movable or immovable, corporeal or incorporeal … and any right or interest in any such property.[iv] Judged by this definition, it seems that entitlement to carbon credits or CERs would be allowed under the laws of Bangladesh. But this conclusion undermines the policy objective that led Kyoto Protocol and Marrakesh Accords to disallow any entitlement to carbon credits or CERs – that is – the moral hazard in granting the right to pollute where Kyoto Protocol’s policy goal is to reduce GHG emissions.
There is another cogent argument for not allowing property rights in CERs or carbon credits. Article 42 of Bangladesh Constitution allows right to property to every citizen and states that in case of acquisition of such property, compensation shall be payable. If CERs or carbon credits are regarded as property, then any reduction or elimination of the CERs by the government would potentially involve compensation to be paid by the government under Article 42 of Bangladesh Constitution.
One way to address this uncertainty is to enact specific legislation dealing with structured finance in carbon credits projects under the Kyoto Protocol. A legislation specifically dealing with creation and perfection of security interest in CERs (carbon credits) would provide certainty and reliability to both the sponsors and investors of carbon credits projects. Keeping the spirit of the Kyoto Protocol and the Marrakesh Accords in mind, the legislation may give limited property rights in CERs or carbon credits while generally disallowing property rights therein (like the Kyoto Protocol and the Marrakesh Accords).
Because the carbon credits market in Bangladesh is at a nascent stage, it is perhaps now important to clearly spell out the status of property rights in CERs or carbon credits. Until this issue is conclusively settled, there will remain problems in structuring carbon finance transactions.
Written by Junayed Chowdhury, Managing Partner
† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.
 See http://www.unmillenniumproject.org/documents /Environment-chapter3.pdf
 Overview of Global Carbon Market, Iftekhar Enayetullah, Director, Waste Concern, April 2008
 “the Kyoto Protocol has not created or bestowed any right, title or entitlement to emissions of any kind on Parties included in Annex I …”
 Article 152 of the Constitution of Bangladesh