The Center’s expert took part in the second session of the UNIDROIT Working Group on the Legal Nature of Voluntary Carbon Credits

On 22-24 April 2024, the second session of the International Institute for the Unification of Private Law (UNIDROIT) Working Group on the Legal Nature of Voluntary Carbon Credits was held in Rome. The work focused on the Thematic Study LXXXVI– W.G.2 – Doc. 2, devoted to the consideration and possible harmonization at the international level of approaches to the legal nature of verified carbon credits (also known as VCCs). The Center’s expert Sergey Sitnikov was invited by UNIDROIT and took an active part in the session.

The consideration of the legal nature of VCCs by UNIDROIT began in January 2022, when the International Swaps and Derivatives Association (ISDA) sent a proposal to UNIDROIT to consider implementing a project to analyze the legal nature of voluntary carbon credits (the term was later changed to “verified carbon credits”). By decision of the UNIDROIT Governing Council, the project was included in the 2023-2025 Work Programme with a high priority. In March 2023, the UNIDROIT Secretariat organized and conducted a consultation seminar to identify relevant private law issues and to determine the possible scope of the Project. In May 2023, the UNIDROIT Governing Council authorized the establishment of the Working Group and also supported collaboration with other international organizations (including UNCITRAL) on these issues. Consultative work (including in the form of working tables, UNCITRAL meetings, etc.) continued in the summer of 2023. In October 2023, the first session of the Working Group was held, and in January 2024, UNIDROIT and UNCITRAL drafted a joint study on the legal nature of VCCs in order to assist states in assessing their options for approaches to relevant legal issues. This draft was reviewed at the UNCITRAL Expert Group and the Working Group Joint Meeting held in Vienna on 31 January and 1 February, 2024.  The UNCITRAL/UNIDROIT Joint Study was finalized in March 2024 and will be presented to the UNCITRAL in June-July 2024.

On 2 February 2024, at an intersessional meeting of the UNIDROIT Working Group, it was decided to prepare a soft law instrument in the form of Principles (with commentary) that would include approaches to addressing the legal nature of VCCs. Thus, the primary objective of both the Project and the related instrument is to create a private law guide to promote confidence in VCC transactions and the development of a voluntary VCC market. It is envisioned that a developed voluntary market can play an important role in combating climate change, help achieve the goals of the Paris Agreement and contribute to the UN Sustainable Development Goals, as well as help increase capital flows to emerging markets and provide financing for projects aimed at mitigating climate change.

During the second session of the Working Group, experts discussed the Thematic Study and draft UNIDROIT Principles on the legal nature of verified carbon credits, as well as some key issues of VCCs and the functioning of voluntary markets. These questions included among other things:

-        the scope of application of the Principles and a set of definitions;

-        possibility of recognition VCC as an object of property rights;

-        applicable law;

-        release of VCCs;

-        transfer of VCCs and rights thereto;

-        redemption, “refund” and annulment of VCCs;

-        intermediation, including registries and nominee custody;

-        use of VCCs as support means;

-        insolvency (bankruptcy) of participants of relations with VCCs.

During the session, the Center's expert drew the attention of colleagues to the need for the tool to cover the maximum possible range of relations arising in the framework of VCC circulation (in order to avoid loss of regulation of relations, in which certain types of VCCs are the objects), as well as the threats that accompany giving an excessive role to operators of independent standards and programs (such as Verra, Gold Standard, etc.) within the Thematic Study and the Principles. In addition, he noted the need to harmonize terminology and approaches adopted under international treaties (including the Paris Agreement) with those to be used under the Thematic Study and the Principles. The need to consider the role of the mitigation outcomes achieved and their relationship to the VCCs issued on their basis was also noted particularly. Among other things, Sergey Sitnikov drew the attention of the Working Group to certain aspects of a person's right to VCCs (and related benefits), as well as the specifics of the “good faith purchaser” status and the consequences for him in case of acquisition of VCCs from another person who did not have the necessary rights to these VCCs.

The Working Group decided to take into account the comments and suggestions of the experts received during the work and apply them in the updated versions of the Thematic Study and the draft Principles. The next session of the Working Group to discuss and work on updated versions of the documents should be held in September 2024.