Any given market needs certainty regarding the characterization under private law of the thing that is being traded. Indeed, such legal characterization is key to answering a range of legal questions that are crucial for market participants, such as how this thing may be acquired and sold, what rights its owner may assert over it, how it will be treated upon insolvency of any market participant, whether it may be used as securities, or what tax and accounting rules will apply to it.

If private actors are unable to know with certainty how a thing will be treated under private law, it then becomes difficult for them to assess and quantify their risk exposure. This, in turn, may refrain them from purchasing this thing, or investing in it, because of the perceived uncertainties and legal risks surrounding the trading environment. 

With regard to VCMs, the issue at the moment is that the precise legal nature of verified carbon credits (VCCs) under private law often remains “elusive”. This is where the UNIDROIT Working Group on the Legal Nature of Voluntary Carbon Credits and its Draft Principles on Verified Carbon Credits can offer guidance.

What is UNIDROIT?

The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization based in Rome. Its purpose is to study needs and methods for modernizing, harmonizing and co-ordinating private and, in particular, commercial law as between States and groups of States and to formulate uniform law instruments, principles and rules to achieve those objectives.

The Roots of Chaos: A Jurisdictional Patchwork

Carbon credits currently face incompatible legal treatments across key markets. For instance:

One possible approach is to characterize VCCs as a bundle of contractual rights. Under this view, VCCs are the product of contractual obligations performed by one or more identified parties—much like a service. This characterization arises from the fact that VCCs exist solely through, and because of, the performance of a series of contractual commitments. To issue and trade VCCs, multiple contracts must be executed. These include, among others: (i) a contract between the project proponent and the independent carbon standard setter; (ii) a contract between the project proponent and the verification and validation body; (iii) a contract between the project proponent and the registry; and (iv) a contract between the registry and the person requesting the issuance of VCCs into a new account in their name.

A second approach is to treat VCCs as a form of "intangible property." The precise legal implications of this characterization vary across jurisdictions, but functionally, it means that VCCs could be the subject of rights enforceable against third parties, despite their intangible nature. This approach may apply both to VCCs that do not comprise any contractual rights and to those that do. Under this view, a VCC is seen as a finite resource capable of being the object of such rights. The finite resource, in this analysis, is the certification that one ton of CO₂ equivalent has either been removed from the atmosphere or not emitted, as a result of a specific and identifiable climate mitigation project.

A further issue worth considering is that VCCs, being primarily stored in electronic form and identified by a unique serial number, may be viewed as a type of “digital asset.” The term digital asset is broad and can encompass a wide range of meanings, but only a subset of digital assets are likely to qualify as the subject of proprietary rights. As digital assets play an increasingly significant role in modern society—and given their distinctive characteristics from a property law perspective—a question that has attracted growing interest in the legal community is whether digital assets should be recognized as a new legal category under domestic law.

Given these varying approaches, the main objective of the UNIDROIT Project on the Legal Nature of Verified Carbon Credits is to provide guidance on private law issues to enhance confidence in VCC transactions. While it does not establish a universally binding set of rules, the project offers valuable guidance for national legislators and legal practitioners involved in drafting VCC-related agreements.

Summary of the proposed UNIDROIT Principles (as of March 2025):

1. General Principles: VCCs are "individuated intangible assets" that can be transferred between accounts.
2. Creation of a VCC: A VCC comes into existence when a VCC registry records that it has been credited to an account.
3. Transfer of a VCC: A VCC can be transferred and the transferee can acquire all proprietary rights that the transferor had over the VCC. In addition, the acquisition of an innocent acquisition rule is suggested.
4. Cancellation/Reversal/Revocation/Retirement of a VCC: In the event of cancellation as a result of reversal, revocation or retirement a VCC ceases to be the subject of proprietary rights.
5. Custody: The Principles establish the relationship between a custodian, its client, the VCC it maintains for its client, and, in appropriate cases, a sub-custodian. The VCC does not form part of the custodian's assets in case of insolvency.
6. Secured Transactions: The Principles do not define security rights but state that a VCC can be subject of security rights. Matters relating to the creation, perfection, priority and enforcement of a security right in a VCC are governed by national law and differ greatly.
7. Insolvency: The principle concerning the effect of insolvency on proprietary rights in VCCs has been adopted from the UNIDROIT Principles on Digital Assets and Private Law but has yet to be adapted into a form specifically suited to VCCs. It is intended to address various insolvency scenarios beyond that of a custodian's insolvency—including cases where the person holding proprietary rights in a VCC becomes insolvent, whether or not they have granted a security interest in the VCC to a creditor. The applicable treatment of these insolvency cases is closely tied to the legal characterization of VCCs.

Next Steps and Implementation Timeline

A common understanding of the legal nature of VCCs, while respecting national laws and regulations, can support the development of a well-functioning VCC market. Given that a significant share of the projects that generate VCCs are located in developing economies, a reliable carbon credit market also provides an opportunity to increase capital flow to emerging markets and provide funding to climate mitigation projects.

The next steps for the UNIDROIT working group are as follows: