Cosmos Nike Nwedu, Lecturer at Kampala International University and participant at Nottingham Doctoral Symposium
Voluntary carbon offsetting (VCO) is a practice through which a business entity or an individual can indirectly offset or reduce their own greenhouse gas emissions by paying for emissions reduction actions or projects undertaken by others. Today, VCO is increasingly gaining popularity as part of both public and private international climate governance.
However, serious reputational and accuracy concerns are beginning to emerge concerning VCO projects. For example, the current transnational governance structures and accountability mechanisms for such projects are not only complex and unclear but also raise doubts about adequate regulation and credibility. Additionally, VCO projects are not as efficient as comparable offsetting activities within institutionalised emissions trading systems, where a regulator defines an upper limit on greenhouse gas emissions that can be emitted during a particular period by a particular sector of the economy. This inefficiency is partly due to the absence of third-party certification mechanisms for VCOs, which could ensure compliance with established limits and accountability. There are also concerns about compliance with potential mandatory environmental requirements, adherence to just transition principles, and the broader implications of such projects across multiple jurisdictions. These implications include issues related to human rights, property rights, land use, and ownership.
This blog post primarily argues that legal complexities and accountability gaps are critical challenges that undermine VCO. The blog analyses the global context of VCO and various specific dimensions and limitations of these challenges, asserting that addressing them is essential for the effective implementation of VCO.
The Global Context of VCO
The urgent need to mitigate global climate change in line with the Paris Agreement has resulted in various emissions reduction initiatives across the globe. For example, VCO has emerged as an important tool for addressing climate change, allowing individuals and businesses to indirectly compensate for or offset their greenhouse gas emissions by paying for it via another person’s emissions reduction activities or projects that reduce emissions elsewhere, such as renewable energy projects, reforestation, or carbon capture, utilisation, and storage. Essentially, VCO constitutes a special alternative to carbon credits used in greenhouse gas emissions cap and trade programmes under the Kyoto Protocol, which is an international treaty that expanded the 1992 United Nations Frameworks Convention on Climate Change. Nonetheless, VCO is created, verified, and traded independently of government regulations and agencies.
Many people believe that VCO has the potential to mitigate climate change and contribute to climate finance. Typically, climate finance includes international, regional, national, and local funding sourced from public, private, and alternative financial channels, all aimed at supporting actions for climate change mitigation and adaptation.[SG1] These assumptions may not be far from reality. This is because global voluntary carbon markets- decentralised markets where businesses and individuals voluntarily buy and sell carbon credits to offset or reduce their greenhouse gas emissions- are currently valued at $2 billion. Thus, with the increasing number of VCO projects and services, this sector is becoming one of the world’s fastest-growing areas within the blue economy - an economic sector that promotes the sustainable use of ocean resources for economic development while simultaneously ensuring the health of marine ecosystems. The voluntary carbon markets are, however, plagued by legal complexities and accountability gaps, as analysed below. These issues stem from a lack of standardised regulations, inconsistent verification processes, and inadequate disclosure requirements, which create uncertainty and foster an environment where projects may fail to deliver the promised emissions reduction and market participants not accountable for their actions.
Legal Complexities as Gaps in VCO Project Governance
The global landscape of VCO projects currently lacks a standardised legal framework and faces intricate and often confusing, fragmented transnational regulatory structures based on multiple multi-national laws, regulations, and standards. There are various reasons for these complexities and inconsistencies.
Firstly, the VCO market is an ecosystem comprising various participants, including traders, brokers, exchanges, project funders, project owners, project developers, carbon offset providers, validators, verifiers, standard organisations, and carbon offset buyers. These stakeholders create multifaceted and overlapping relationships via complex contractual and business arrangements. The structure, content, and requirements of these relationships vary significantly from one business agreement to another, making it challenging to comprehend their contractual implications, and to hold different VCO project participants legally accountable for errors, omissions, or misconduct.
The second reason is a jurisdictional issue; VCO projects often involve multiple countries or regions, each with its own legal system. This diversity in jurisdiction can lead to regulatory arbitrage and fragmentation, due to a lack of uniform or harmonised legal framework and accountability mechanisms.
Thirdly, there are various standards and certification schemes, for example, Verra, Gold Standard, Plan Vivo Foundation, and Climate Action Reserve, each with their own different requirements. These variations can serve as a hive for potential inconsistencies in project quality and credibility, making it difficult to ensure compliance and enforcement, particularly when voluntary projects rely on self-reporting.
Fourthly, unclear lines of liability and dispute resolution mechanisms in carbon credit transactions exist. Developers or verifiers of projects are likely to have conflicting interests, which influence project outcomes or credit issuance. This means addressing pre-project or post-project implementation issues can be difficult, leading to VCO project developers and investors facing greater uncertainty and risks.
The Accountability Gaps
There are no clear global accountability mechanisms for international governance of VCO projects, much less any sufficient processes for addressing project accuracy and integrity, complaints, disputes, and non-compliance. This challenge has various specific dimensions and limitations, including:
Limited public transparency, mainly due to insufficient public disclosure of project details, emissions reductions, and credit transactions. Where project information and documentation is not routinely publicly disclosed and accessible, it is cumbersome to assess project effectiveness, accuracy, and integrity.
Derisory monitoring, verification, validation, and reporting. There is inadequate and inconsistent tracking, verification, validation, and reporting of project performance, integrity, accuracy, and environmental impacts. This problem is reflected in growing unreliable emissions reduction claims, which has resulted in eroded trust in and credibility of the carbon offsetting market. The existing transnational regulatory frameworks governing transparency, accountability, accuracy, and third-party implications of VCO projects remain unclear when compared to the offsetting activities within institutionalised emissions trading systems.
Limited stakeholder engagement, where local communities, indigenous peoples, and other stakeholders are not currently effectively engaged in project decision-making. This creates power imbalances, limits access to information and benefits, and undermines consultation and open dialogue, leading to inadequate assessment of social and environmental impacts of VCO projects. VCO projects can have wider implications for justice as carbon capture, utilisation, and storage technologies can pose some risks to economically marginalised communities or under-developed regions if carbon leakages occur, triggering serious environmental hazards, human rights concerns, and property rights or land use or ownership controversies.
Non-compliance with regulatory frameworks and standards. The current global governance frameworks and arrangements for VCO can lead to potential non-compliance with established regulations, laws, carbon credit standards, or protocols in various countries. The extent to which VCO projects can be independently evaluated against recognised legal standards- assuming such standards are unmet or that the projects have implications for broader communities, remains vague.
Fraud and misrepresentation: There is room for exaggerated or false claims about project benefits, credits, or environmental impacts in current VCO projects. For example, on 5 May 2024, it was widely reported that the giant international oil company, Shell sold millions of ‘phantom’ credits to many clients. In addition, Verra was allegedly involved in the issuance of falsified offset credits, despite being one of the most prominent voluntary registries operating under the Verified Carbon Standard- formally known as the Voluntary Carbon Standard, which serves as a framework for verifying carbon credits intended to offset emissions. These reputational cases generally make for a deep illustration of how the design of voluntary carbon markets can fail to realise intended goals.
Most alternatives that organisations deploy to create net emissions reduction of greenhouse gases purchased elsewhere under VCO have accountability imperfections. For example, carbon capture, utilisation, and storage technologies can cause carbon dioxide (CO2) leakages at storage sites, triggering a reversal of planned emissions savings. In addition, policy and market-driven mechanisms for greenhouse gas emissions reduction can create so-called ‘hot air’, meaning emission certificates may not reflect candid emissions reduction. Furthermore, while forests constitute a great component of VCO projects, they are vulnerable to risk reversal due to deforestation. These instances can lead to green-washing, whereby VCO products may be vulnerable to exaggerated or misleading claims about their environmental benefits.
Conclusion
The governance of VCO projects faces legal complexities and accountability gaps. These deficiencies foster an ecosystem of increasing uncertainty and mistrust, creating opportunities for potential abuses that undermine the integrity of the carbon offset market. To address these challenges, it is essential to establish clearer legal frameworks, enhance transparency and disclosure requirements, and strengthen accountability mechanisms through government action and the involvement of the International Organisation for Standardisation. By implementing these measures, we can ensure that VCO projects deliver genuine emissions reductions and contribute to a more sustainable future and effective climate change mitigation.
Further reading
Bryan K and Murray C, ‘Shell sold millions of ‘phantom’ carbon credits’ (Financial Times, 5 May 2024), available at https://www.ft.com/content/93938a1b-dc36-4ea6-9308-170189be0cb0.
Dawes A, McGeady Cy, and Majkut J, ‘Voluntary Carbon Markets: A Review of Global Initiatives and Evolving Models’ (Centre for Strategic and International Studies, 31 May 2023), available at https://www.csis.org/analysis/voluntary-carbon-markets-review-global-initiatives-and-evolving-models.
Chen S et al., ‘Voluntary Carbon Offsets: An Empirical Market Study’ (2021), available at http://dx.doi.org/10.2139/ssrn.3981914.
Ecosystem Marketplace, ‘Paying for Quality: State of the Voluntary Carbon Markets 2023’ (2023), available at https://www.ecosystemmarketplace.com/publications/state-of-the-voluntary-carbon-market-report-2023/.
Fischer VT and Knuth H, ‘CO2 Certificates: Phantom Offsets and Carbon Deceit’ (Zeit Online, 19 January 2023), available at https://www.zeit.de/wirtschaft/2023-01/co2-certificates-fraud-emissions-trading-climate-protection-english.
Gros M, ‘Net zero forces the voluntary carbon market to grow up fast’ (EuroMoney, 17 October 2022), https://www.euromoney.com/article/2ar33sf7j40nlgcp4nhfk/esg/net-zero-forces-voluntary-carbon-market-to-grow-up-fast.
LSE, ‘What is carbon capture, usage and storage (CCUS) and what role can it play in tackling climate change’ (2023), available at https://www.lse.ac.uk/granthaminstitute/explainers/what-is-carbon-capture-and-storage-and-what-role-can-it-play-in-tackling-climate-change/ [last updated March 2023).
May PJ, ‘Regulatory Regimes and Accountability’ (2007) 1(1) Regulation and Governance, 8-26.
Milieudefensive v. Royal Dutch Shell (2021) ECLI:NL:RBDHA:5337.
White C, ‘Voluntary carbon offsets: The evolution of a business expense’ (The Tax Advisor, 1 January 2022)<https://www.thetaxadviser.com/issues/2022/jan/voluntary-carbon-offsets-business-expense.html>, accessed 28 March 2024.
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