Greater Scope for Carbon Markets Legal Action in Asia

Legal and market professionals cite lack of legal certainty for likely rise in disputes at Singapore Convention Week.

More than 27% of delegates who attended a panel discussion on dispute resolution for carbon markets at the Singapore Convention Week voted that the lack of a standardised regime, regulation or classification has emerged as a major challenge.

Meanwhile, another 34.5% believed that a lack of awareness of the potential and impact of carbon markets is the biggest challenge to growth of the nascent sector. Others considered a lack of uniform legal framework (13.6%) and lack of clarity about transferability between government and voluntary credits (8.6%) as challenges too.

“The results have been very surprising to me in the sense that this market is so new that there is a slight lack of awareness of what it is,” said Mikkel Larsen, panellist and CEO of Singapore-based carbon exchange and marketplace Climate Impact X.

He was joined on the panel by legal professionals Rajat Jariwal, partner at Trilegal, Jinhee Kim, head of global dispute resolution practice at Jipyong. The panel was moderated by Annette Magnusson, co-founder of think-tank Climate Change Counsel.

Commenting on the poll results, Kim said that the “predominant majority in the legal sector are not yet aware of the importance of carbon markets”.

However, she has observed an increasing trend of climate-related litigations, particularly involving greenwashing and misleading advertising. Corporations claiming to be net zero or reducing carbon emissions are increasingly being accused of deceptive marketing.

Whether this misleading information is intentional or due to a lack of understanding, Kim sees such litigations emerging as a significant issue, even in countries like South Korea.

India-based Jariwal noted that the legal sector globally is moving towards a future where carbon markets could witness an increase in arbitrations and possibly more mediations.

“There haven’t been many disputes in India concerning carbon markets, but as time progresses, due to the commercial element associated with the public, we may see these disputes entering mediation or other resolution methods,” he added.

According to Larsen, the characteristics of carbon markets collectively give rise to intriguing legal cases and mediation scenarios. These include their nascent nature, cross-border scope, and high degree of political involvement.

Kim added that for most legal practitioners, mediation is probably not a suitable alternative dispute resolution mechanism for carbon markets at first, but it may be the only one available at present, particularly for voluntary carbon markets.

“Until we have a good legal mechanism to resolve these disputes, we do have to defer to the parties themselves to make and empower them to make the right decisions. Mediation is the right mechanism to promote until we have new forms of legal regime,” she shared.

Singapore Convention Week is an annual event organised by the Singapore Ministry of Law for legal professionals to discuss dispute resolution, including arbitration, mediation and litigation.

Raising awareness

Magnusson meanwhile helped to raise awareness of carbon markets among legal professionals attending the panel session by introducing them to the three primary categories of carbon markets.

She explained that the first category encompasses compliance markets, which are carbon markets operating under regulatory frameworks within a single jurisdiction or across multiple jurisdictions. An example of this is Europe’s Emissions Trading System (ETS).

Meanwhile, the second category involves voluntary carbon markets (VCMs), where transactions occur between private buyers and sellers of carbon credits. These credits are generated through climate mitigation projects.

“I will be the first to admit that VCMs and the technicalities associated with them could be quite complex, and it can take some time to dig into and understand,” said Magnusson.

Next, she explained that the third category involves carbon markets established under Article Six of the Paris Agreement. These markets facilitate voluntary cooperation among states to implement and achieve their nationally determined contributions (NDCs) under the Paris Agreement.

Larsen said carbon markets were needed to offer viable mechanisms to firms which are committed to addressing climate change, but which may reach a juncture where it is not feasible, either technologically or economically, for them to make further meaningful reductions in their emissions.

Highly unregulated VCMs

The panel discussion’s focus was primarily on VCMs, the operation of which, Larsen acknowledged, are highly unregulated.

He cited an example of a project developer, located in the UK, which initiates a project in Kenya and earns carbon credits endorsed by a US NGO. Subsequently, the developer vends these credits to an entity in Singapore, which could further transfer them to a company in Hong Kong. Then, a company in Germany purchases these credits with the intention of retirement but then something goes wrong in the transaction.

“You can imagine that given the unregulated nature of these processes, multiple different types of legal situations can arise,” said Larsen.

Such situations could involve aspects such as the legal rights of the actual carbon traders themselves and whether they have registered with both the NGO and regulators, he added.

A multitude of issues emerge regarding the transaction between the two parties, encompassing credit ownership, governance adherence, and potential breaches. Additionally, there are concerns over the utilisation of credits.

Larsen pointed out that many companies, despite acquiring the appropriate credits, often misuse terms like offsetting, carbon neutrality, or net zero, leading to legal disputes and litigation from various parties.

Discussing carbon credits, Kim added that the concept is highly technical and challenging to measure. It lacks regulation and standardisation. Therefore, when dealing with carbon credits, there’s a question of whether you’re truly purchasing a reliable credit or ending up with questionable ones.

“The biggest problem is in considering if you reduce your carbon emissions on one end, would there be increased emissions in another sector in another country?” said Kim.

Moreover, she found that the pricing and monetisation of carbon credits raise complex questions.

“If there is a damages claim related to carbon credits, how would you seek damages from a third party or your counterparty, especially if you feel you were duped into buying carbon credits?,” she posited.

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