A joint report released by Herzog Fox & Neeman’s Environment and Climate Change practice and BeZero Carbon identifies legal uncertainty as one of the most significant obstacles to scaling the voluntary carbon market (VCM), underscoring the urgent need for clarity in the private law treatment of verified carbon credits (VCCs).
As investor interest grows—fueled by equity and debt financing and advance market commitments—the fragmented legal landscape surrounding VCCs is creating commercial and operational risks. The report warns that the absence of harmonised rules on ownership, transferability, insolvency, and enforceability is hindering market expansion and investor confidence.
“Legal clarity is fundamental for enabling secure, large-scale transactions in carbon markets,” the authors note. Without it, market participants face exposure to post-issuance legal risks such as credit revocation, project reversals, or defective title—despite the legal recognition of VCCs upon issuance.
The report points to international initiatives like the UNIDROIT Project as crucial steps toward harmonising legal frameworks, with the project aiming to issue international legal principles by 2026. However, it cautions that even with UNIDROIT’s guidance, jurisdictional discrepancies will persist, requiring investors, off-takers, and financiers to closely examine domestic legal protections before committing to VCC deals.
To mitigate these challenges, the report calls for greater adoption of pre-issuance risk management tools, such as carbon credit ratings and insurance products. These instruments help stakeholders assess the likelihood of credit delivery and offer financial safeguards against risks like invalidation, non-delivery, and government intervention.
“Carbon ratings and insurance cannot eliminate legal uncertainty,” the report acknowledges, “but they can provide a structured framework for managing project-specific risks and building market credibility.”
Looking ahead, the authors stress the importance of greater international legal alignment and integration of risk-based tools to support the integrity and scalability of voluntary and compliance carbon markets alike.
