The 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) introduced the concept of carbon credit, with the objective of creating a mechanism by which the emission of greenhouse gases into the atmosphere could be reduced. The Paris Agreement included carbon trading as a crucial component in the initiative to reduce carbon emissions in international and domestic supply chains.
From a private international law (PIL) perspective, the variety of participants and actors involved in a single carbon market transaction, as well as the origins and nature of the relevant carbon projects, may challenge the application of traditional connecting factors, as there may be a number of connecting factors to a number of jurisdictions. For example, where a unit is created as the result of a carbon project in one jurisdiction, it must be certified by a carbon standard, according to their particular methodology and pursuant to the contractual arrangement between the standard and the project developer.
Throughout the life cycle of carbon credits, private international law questions may arise, for example, in the creation, verification, registration, intermediation, trading and retirement or cancelling of the unit. Further complexities in the carbon markets that may give rise to private international law concerns include the digital or online certification of units, the tokenisation of units (incl. the interplay with decentralised or distributed storage mechanisms such as those based on distributed ledger technology), the revocation of the units, including the matter of authorisation under Article 6 of the Paris Agreement, and the extent to which the credits are potentially subject to insolvency proceedings.
In March 2024, the Council on General Affairs and Policy of the HCCH (CGAP) adopted Conclusion and Decisions (C&D) No 18 and No 19:
18. CGAP mandated the PB, in partnership with relevant subject-matter experts, and subject to available resources, to monitor developments of the PIL aspects of voluntary carbon markets. The PB will report to CGAP 2025, including proposals for next steps.
19. CGAP mandated the PB to cooperate and coordinate with the Secretariats of UNCITRAL, UNIDROIT, the United Nations Framework Convention on Climate Change (UNFCCC) and other relevant international organisations on their projects in relation to voluntary carbon credits, subject to available resources. CGAP welcomed the cooperation and coordination between the PB, and the Secretariats of UNCITRAL, UNFCCC, and UNIDROIT on this topic [...].
Following on these mandates, the PB currently participates as an institutional Observer on the UNIDROIT Working Group on the Legal Nature of Verified Carbon Credits. The PB also provided input to the section on “Issues of Applicable Law” of the draft report of the UNCITRAL/UNIDROIT Study on the Legal Nature of Verified Carbon Credits Issued by Independent Carbon Standard Setters.
- Prel. Doc. No 7 REV REV of January 2024 - Proposal for Exploratory Work: Private International Law Issues related to Carbon Markets