Hague Conference to Discuss Private International Law Aspects of Voluntary Carbon Markets
The next meeting of the Council on General Affairs and Policy (CGAP) of the Hague Conference on Private International Law (HCCH) is scheduled to take place on 4-7 March 2025. According to the meeting’s draft agenda, the CGAP will deal, among other things, with the project on Voluntary Carbon Markets (VCMs), following last year’s meeting, when the CGAP, based on a proposal for exploratory work prepared by the Permanent Bureau (PB), invited the PB to monitor the ongoing developments in this area, notably in light of the work that UNIDROIT is carrying out since 2022 (see the meeting’s Conclusions and Decisions, para. 18). The CGAP also mandated on that occasion the CGAP 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 VCMs.
The Voluntary Carbon Markets Project in a Nutshell
The 1997 Kyoto Protocol to the 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 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 (including 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.
Recent Developments Concerning the Project
A document has been prepared by the PB in November 2024 to report on the status of the work in cooperation with UNIDROIT and the other organisations mentioned above, outline the main private international law issues arising from the operation of VCMs, and make proposals about the next steps.
Input provided to the UNIDROIT Working Group dealing with carbon credits
Consultations between the PB and the UNDROIT Secretariat led to an invitation from the latter to the PB to form a joint informal subgroup of experts to provide input to an applicable law provision in the draft UNIDROIT Principles on the Legal Nature of Verified Carbon Credits (the UNIDROIT draft refers to “verified”, rather than “voluntary” carbon credits on the understanding that it is the purchase that is voluntary rather than the credit itself, and that reference to “verified” would potentially encompass credits verified by States as well as credits verified by independent carbon crediting programmes).
The UNIDROIT Working Group charged with dealing with the carbon credits project postponed consideration of matters regarding private international law at the full Working Group level, deferring these matters to the said informal subgroup.
The PB identified five volunteer subject-matter experts, sitting in their individual capacities, to support the PB in this informal subgroup: Amy Held, Mary Keyes, Alex Mills, Fabrício Bertini Pasquot Polido and the author of this post. The experts submitted to the UNIDROIT Secretariat a Preliminary Report concerning the Inclusion of an Applicable Law Provision in the draft UNIDROIT Principles on the Legal Nature of Verified Carbon Credits (the Preliminary Report: Annex I to the document of November 2024 mentioned above).
The experts expressed the view that, to ensure the effectiveness in practice of any applicable law rule, including in the draft UNIDROIT Principles, it is necessary to undertake a comprehensive analysis of the interconnected issues of jurisdiction, and recognition and enforcement; and to consider and multilaterally consult on the underlying policy that the rule is intended to further.
Specifically, as the carbon markets engage a range of diverse and complex interests, both public and private, solutions to private international law challenges should involve a broad multilateral consultation on the various policy issues engaged. This would better allow the different interests and potentially different perspectives to be ventilated, with the support of technical experts who can then find the best way to draft any solutions that are agreed upon.
According to the Preliminary Report,
[w]ithout multilateral consultation, there is a clear risk of adopting a rule which may not only fail to adequately consider and balance relevant policy considerations and different private interests, but which may indeed have harmful consequences for the functioning and impact of carbon markets, or for the likely adoption of the draft Principles as a means to facilitate their growth and the positive contribution they may make to climate change mitigation.
This led the experts to conclude that they were not in the position to endorse the approach in which an applicable law provision is drafted without multilateral consultation, in abstracto and in isolation from more holistic considerations of other private international law issues.
The recommendation made to UNIDROIT in the Preliminary Report was therefore that the UNIDROIT Working Group may wish to consider including a provision that the draft UNIDROIT Principles do not impact on private international law relating to carbon credits, and referring to the work being undertaken at the HCCH.
In the case that the UNIDROIT Working Group and the Members of UNIDROIT consider that the draft Principles would be incomplete without the inclusion of an applicable law provision, the recommendation made is that the provision be included after multilateral consultations, on a holistic approach to the issues of private international law, encompassing jurisdiction, applicable law, recognition and enforcement, and international cooperation mechanisms, are undertaken and completed at the HCCH, given the mandate of the HCCH.
Report and proposals in the Preliminary Document to CGAP
In its preliminary document of November 2024, the PB observes that each step of the carbon credit lifecycle raise private international law issues. Specifically, the variety of participants or actors potentially 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, all of which may differ at each of the different stages of the lifecycle of a carbon credit.
Quoting the Preliminary Report, the document notes that private international law issues
arise, for instance, from the origins of the relevant carbon project, the issuance of the credit, the matter of revocations, retirement, and the different commercial transactions that may take place involving carbon credits (e.g., trading, granting of security rights, insolvency matters).
Given the complex and interconnected nature of the above questions, one particular private international law question arising on a specific moment / stage of the lifecycle cannot be examined in isolation. As stated in the Preliminary Report,
[i]f applicable law rules were to be developed with a focus on a particular moment or lifecycle stage, it would be necessary to consider not only the suitability of the rule for that moment / stage, but also how or whether that rule would affect the applicable law both before and after that moment / stage, and the implications of possible changes in applicable law during the lifecycle.
The PB further notes in its preliminary document that, while compliance carbon markets may be subject to greater direct public governance, voluntary markets also engage similar public interests, adding that there is widespread recognition of the increasing convergence between the two.
According to the PB, it is necessary to look into the private international law issues in the carbon markets in general (i.e., not only the VCMs) in order for the HCCH to support UNIDROIT’s work, considering that the work of the UNIDROIT Working Group could potentially include within its scope verified credits that are issued by governments. The document also states that it is not helpful, for private international law purposes, to classify the types of credits (i.e., verified or not verified) originating in the VCMs.
The different types of projects that originate the credits and their nature (e.g., forestry and land use, or REDD+, or renewable energy), for their part, may also result in different private international law challenges.
The preliminary document of the PB stresses that the nature of carbon markets raises specific public policy considerations, which may have a bearing on private international law considerations. Although VCMs are mostly based on contractual and other relationships which are regulated by private law, these markets are also understood as serving a broader public purpose, and potentially engage important national interests such as local environmental concerns, or in some cases competing claims over land rights.
The PB also underscores the important role of national or private registries to ensure transparency and accountability in carbon markets, adding that, given the inherent cross-border nature of carbon credits, cooperation between registries and / or between national authorities has been considered one of the possible ways to provide further integration and more reliability in the carbon market.
Possible Next Steps
In light of the above considerations, the CGAP will be invited to consider establishing an Expert Group to study the private international law issues relating to carbon markets.
According to the proposal put to CGAP, the Expert Group should be tasked with studying: (a) the private international law aspects of the carbon markets and the legal relationships within these markets, excluding aspects of substantive law; (b) the private international law questions that arise in the different phases of the carbon credits lifecycle holistically, as each phase is interconnected to the other; (c) the possible inclusion of an applicable law provision in the draft UNIDROIT Principles on carbon credits; (d) the feasibility and desirability of international cooperation mechanisms in this area.