As the drive to combat global warming gathers pace, voluntary carbon markets (VCMs) could see over a five-fold increase by 2030, with transacting carbon volumes on track to equal the annual emissions of the global aviation industry before the pandemic.
With an increasing number of private companies setting ambitious net-zero targets, demand for carbon offsets is expected to increase as these companies purchase the credits to cancel out their emissions elsewhere.
These credits represent emissions-reducing activities that can be generated through climate-action projects, such as tree planting or generating renewable energy.
The VCMs, which were worth some US$2 billion ($2.7 billion) in 2021, are likely to grow to between US$10 billion and US$40 billion by 2030, according to energy giant Shell in a joint report with Boston Consulting Group earlier this year.
This would be the equivalent of transacting between 0.5 billion and 1.5 billion tonnes of carbon dioxide, up from 0.5 billion tonnes currently.
But while many see VCMs playing an increasingly critical role in reducing global greenhouse gas emissions in a cost-effective manner, the emerging field faces an uphill battle to assuage critics’ concerns.
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Regulatory bodies have been pushing for standards and greater consistency among a heterogenous, unregulated market that has often been criticised for its lack of transparency and questionable environmental impact.
The criticisms levelled at carbon markets are likely to mean that the global legal sector will witness an increase in climate-based dispute resolution cases — itself a new and unstandardised legal regime.
Already, the number of court cases linked to climate change doubled between 2017 and 2022, according to the UN Environment Programme and Columbia University’s Sabin Center for Climate Change Law.
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As of mid-September, more than 2,500 cases have been lodged worldwide, a Sabin Center tracker shows.
At the Singapore Convention Week held in August, more than 27% of delegates who attended a panel discussion on dispute resolution for carbon markets voted that the lack of a standardised regime, regulation or classification is the primary challenge facing VCMs.
Another 35% believed that a lack of awareness around the potential and impact of carbon markets poses the biggest challenge to the sector’s growth, while other considerations include a lack of uniform legal framework and a lack of clarity about transferability between government and voluntary credits.
The Singapore Convention Week is an annual event organised by the Ministry of Law for legal professionals to discuss various topics in dispute resolution including arbitration, mediation and litigation.
Mediation refers to a non-binding process generally conducted with a single mediator who does not judge the case but facilitates discussion and eventual resolution of the dispute.
Meanwhile, arbitration typically refers to a binding process that replaces the full trial process with multiple chosen people to serve as judges.
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‘Fertile ground’ despite challenges
Despite these obstacles, panellists are optimistic that VCMs — with their dynamic landscape and initiatives implemented across various geographies — could still hold the key to private companies achieving their emissions reduction targets.
The discussion focused on best practices in employing arbitration and mediation as a medium to drive sustainable outcomes and provided insights on navigating carbon market disputes that could arise from growing environmental challenges.
According to Mikkel Larsen, CEO of Singapore-based carbon exchange and marketplace Climate Impact X, the complexities and legal challenges of carbon markets — characterised by its nascent stage, cross-border scope and highly political nature — will create intricate legal scenarios in the emerging field. “We’re diving into fertile ground here.”
Larsen was joined by fellow panellists Jinhee Kim, head of global dispute resolution practice at Jipyong LLC; and Rajat Jariwal, partner at Trilegal; as well as moderator Annette Magnusson, co-founder of think-tank Climate Change Counsel.
According to Larsen, the three areas of VCMs most prone to creating legal disputes are carbon rights, contract substitution and — most prominently — corporate claims.
Carbon rights define which parties have the right to the benefits generated from carbon emission reductions.
For instance, the benefits of preserving natural forests can be, but are not necessarily, tied to the ownership of forest land, creating disputes over ownership and to whom authorities should grant legal rights.
“It is one thing to own the plot of land and another to have the right to the carbon [reductions] that are an intangible that comes on top of that,” Larsen explains.
As for contract substitution, he points out that there is generally a significant delivery risk in forward contracts, with the possibility that these projects do not generate the amount of carbon credits originally promised.
An “acceptable alternative” will then have to be found to make up for this shortfall, a task which is made even more difficult by the variance in environmental quality of credits available on the market today.
Finally, corporate claims have risen to the fore as the most prominent issue related to VCMs, with companies being accused of making false or misleading environmental claims.
“You can imagine that given the unregulated nature of these processes, multiple different types of legal situations can arise,” says Larsen.
Mediation the ‘right mechanism’
One of the legal scenarios that is seeing an increased incidence is climate-related litigation, particularly involving greenwashing and misleading advertising, says Kim, who has observed this growing trend in South Korea, where she is based.
Whether this is intentional or due to a lack of understanding among corporations, Kim sees the emergence of commercial litigation in the voluntary carbon market as a significant issue.
Commercial litigation, the traditional mechanism of dispute resolution, is a legally binding process in which a judge from a particular legal jurisdiction presides over civil disputes.
“Litigation is probably not the best mechanism to resolve disputes in VCMs because it resorts to a single jurisdiction in which you may not want to be adjudicated on your claim concerning a global public good,” Kim explains, pointing out that there is no “real guarantee” that the purpose of a contract will be protected as it was intended in a country which is not a party to the Paris Agreement.
Considering the involvement of global public goods, Kim notes that even the typically favoured alternative mode of dispute resolution — or arbitration — is still a flawed mechanism for VCMs.
“Arbitration is the preferred mode of dispute resolution because parties can choose under which government and bodies of law they wish to arbitrate their claims, but it is not a perfect solution because an adversarial regime is still adversarial,” she says, explaining the typically binding process that replaces the full trial process of litigation with appointed persons who serve as arbitrators.
“We’ve heard about arbitration being too adversarial — it’s not conducive to restoring the relationship between voluntary parties who have entered into carbon credit contracts,” adds Kim.
The way she sees it, mediation is probably not only a suitable alternative dispute resolution mechanism for carbon markets in the long term — it could be the only available medium currently, especially for VCMs.
Mediation is a non-binding dispute resolution process that helps the involved parties resolve disputes. In contrast to arbitrators, a mediator is not a decision-maker and instead guides the parties to resolve the dispute between themselves — neither party can be forced to settle.
Says Kim: “Until we have a good legal mechanism to resolve these disputes, we do have to defer to the parties themselves to make the right decisions. Mediation is the right mechanism to promote until we have a uniform or standardised legal regime.”
Kim says that given the early stage, the efficacy of resolving carbon market disputes through litigation or arbitration would be “speculation”, but notes that the legally binding processes would have precedential value on other carbon credit purchasers and sellers.
“All the more reason why we want to promote mediation, through which the parties involved in the transaction can come up with a win-win solution because they are the experts in creating value out of carbon markets,” she says.
Photos: Ministry of Law, Singapore
