The transition to a low carbon economy is estimated to require significant funding globally. The voluntary carbon market continues to play a critical role in that transition by helping to channel funding into projects that reduce carbon emissions or remove carbon from the atmosphere.
A robust voluntary carbon market must be grounded in a strong legal foundation. Much of the process of creating, verifying and transferring the benefit of project activities that reduce emissions already exists within robust legal frameworks. As the market grows in size and complexity, however, secondary markets in fungible voluntary carbon credits (VCCs) would be significantly enhanced by steps being taken both nationally and internationally to better understand the legal nature of VCCs.
As with any intangible asset, the legal nature determines how VCCs as a fungible instrument can be created, bought, sold and retired. It affects what type of security may be taken and enforced in relation to VCCs and how that can be achieved, as well as how VCCs would be treated following an insolvency (including with regard to netting). It may also have an impact on broader considerations, including the regulatory, tax and accounting treatment of VCCs. In short, understanding the legal treatment of VCCs is necessary to achieve deep and liquid secondary markets, which, in turn, will enable the development of a clear price signal for carbon and allow funds to be efficiently channeled to emissions-reducing projects.
Furthering that legal understanding in different jurisdictions will help optimize the enormous potential that a global voluntary carbon market can offer. This whitepaper investigates the legal treatment of VCCs and considers certain other aspects of VCC transactions (such as when they might be regulated as derivatives). The paper also sets out recommended steps that can be taken to further develop legal certainty in VCCs at both a global and jurisdictional level.