Title: The Legal Nature of Carbon Credits

Language: English

Type: Blog/Article

Nature: Website

Published: March 15, 2023

Region: Global

Country: Global / Non-Specific

Topic: Emission Reduction Program

Keywords: Emission Reduction Program

Document Link(s):

Document Summary:

Notwithstanding the important role of offsetting as a tool to help deliver Paris Agreement alignment and the widely anticipated surge in demand for VCCs (noting the emergence of new VCC marketplaces, exchanges, trading platforms and distribution channels to accommodate this), the precise legal nature of VCCs remains surprisingly elusive. As things currently stand, a properly issued carbon credit is likely to be a documentary intangible (i.e. a personal property right) under English law, a personal property right under the laws of other common law jurisdictions such as Hong Kong, Singapore, and Australia; may or may not be a property right in the US, depending on the laws of the state in question, or possibly a commodity; and may or may not be a financial instrument in the EU.

Document Details:

We are of the view that consistent legal treatment of VCCs across jurisdictions could help deliver scale to the VCM but should not be regarded as a pre-condition to facilitating trading on standardized contract terms or to achieving scale. As a practical matter, we consider achieving convention on the legal treatment of VCCs across jurisdictions to be an unlikely outcome, especially in the near or medium-term, given the number of jurisdictions, legal systems and regulatory frameworks involved. In the absence of convention on the legal nature of VCCs, participants will need to understand the legal treatment of VCCs in each relevant jurisdiction and ensure that contract terms, whether standardized or bilateral, accurately reflect this and include carefully worded and enforceable choice of law and conflicts of law provisions.

Connected to the legal nature of VCCs but outside the scope of this article, VCM participants should be mindful of the different legal and contractual rights, and applicable laws relative to a VCC transaction. The legal nature of a VCC, title to the underlying environmental attributes, and the right to a VCC in the event of insolvency of a VCC owner may be subject to the laws of different jurisdictions. Understanding this will help participants resolve some of the complexity that can complicate trading on standardized contract terms.

Updated: January 11, 2024