Revitalising The Voluntary Carbon Market: A Key Cop29 Achievement?

Despite criticism that it is a symbol of "greenwashing", the voluntary carbon credit market has also been praised as a vital instrument for funding worldwide decarbonisation. This mechanism has facilitated substantial foreign direct investments in developing nations, supporting both economic and environmental objectives through the offset of greenhouse gas (GHG) emissions via investment in projects designed to reduce or sequester carbon. However, despite its potential, the market has faced significant challenges, including inconsistent regulatory oversight, disparate standards, and a lack of transparency. 

The voluntary carbon credit market has long been subject to varying standards established by groups such as Verra and Gold Standard. This has resulted in the issuance of non-fungible credits and a decline in trust due to scandals involving projects that have fallen short of their environmental commitments. The market's performance declined significantly as a result, with the value of credits issued dropping from a peak of over $2 billion in 2021 to just $800 million in 2023.

What was adopted at COP29 and will it have a positive impact?

In response to such issues, the operational framework for Article 6.4 of the Paris Agreement was adopted at CO29. The objective of this project is to establish a unified, internationally regulated market that is standardised and monitored by the United Nations Agency. The suggested reforms include mandatory independent audits to enhance accountability and transparency, the creation of a centralised credit register to prevent double counting, and the implementation of uniform project evaluation standards to guarantee consistent quality. The objective is to rebuild investor confidence and encourage broader corporate and governmental acceptance of voluntary carbon credits.

These measures are designed to rebuild investor trust and stimulate wider adoption of voluntary carbon credits by both corporations and governments. Nevertheless, the implementation of such a framework on a global scale presents certain challenges, particularly in regions such as the European Union.

The EU's Corporate Sustainability Reporting Directive (CSRD) already enforces stringent reporting requirements, requiring businesses to reveal the type and extent of carbon credits they employ in their decarbonisation plans. Furthermore, in 2024 the EU introduced the Carbon Removal Certification Framework (CRCF), which sets out its own standards for carbon removal project certification. These standards emphasise verifiability, transparency and measurement.

While the objectives of Article 6.4 and the CRCF are aligned, concerns have been raised about potential overlap and regulatory conflicts when they are implemented concurrently. It is essential that international and regional stakeholders collaborate closely to align these frameworks to maintain consistency and prevent undue administrative costs being placed on businesses, particularly in highly competitive industries in the light of Letta and Draghi’s reports. It is essential to maintain market efficiency and trust through effective coordination. 

Following these changes, what are the key legal issues to be aware of?

The maintenance of market efficiency and the legitimacy of carbon credits as useful tools for reaching global climate goals depends on this kind of agreement. If these changes are successful, the voluntary carbon market may be redesigned as a robust, transparent, and effective tool for promoting decarbonisation and ensuring the fair participation of developing countries in sustainable targets.

The future voluntary carbon credit market, as it is set to be reformed under EU law and the proposed amendments to Article 6 of the Paris Agreement, will raise novel and complex legal issues.

• Firstly, harmonizing the legal status of voluntary carbon credits seems a priority at a global level to establish a truly fungible system. Practical experience in drafting voluntary carbon purchase agreements highlights that this lack of fungibility poses significant challenges, particularly in cases of where a counterparty defaults. Substitution clauses are inapplicable in this particular case.
• Secondly, companies operating in the voluntary carbon credit market shall exercise heightened vigilance with the implementation of the CRCF. They shall ensure that their carbon credit sourcing aligns with both the CRCF requirements and the preparation of their sustainability reports, as mandated by the CSRD directive. To achieve this, it is recommended that companies (i) conduct a thorough audit of their sourcing voluntary carbon credit contracts and (ii) analyze the intersections between the CSRD directive and the CRCF.

If you have any queries regarding the voluntary carbon credit market, or would like to better understand whether these issues could affect your company, please don’t hesitate to get in touch with the authors of this article.