The Legal Nature of Carbon Credits

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This is the second in our series of thought pieces on carbon markets and is a continuation of our first article: Everyone Wants to Buy Carbon Credits – Here’s What You Should Know.

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.

It matters because the legal nature of a thing is relevant to determining how it can be bought and traded, the type of security that may be granted in respect of it and how that security may be enforced, and how it will be treated in an insolvency. It will also affect regulatory, tax and accounting treatment. In the case of VCCs specifically, the legal nature of a VCC (including digital VCCs and VCC tokens that purport to grant title interests to owners) may also impact the owner’s right to retire and rights in the event of the cancellation of VCCs by the registry provider for any reason including following fraud or scandal.

Source: Ben McQuhae & Co

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