Foreword
The voluntary carbon market (VCM) is increasingly recognised as a crucial mechanism to crowd in financing to address climate change. Carbon markets are now a core instrument for global climate action.
Across jurisdictions, we see a mosaic of arrangements: compliance systems underpinned by domestic and regional regulation.
Against this backdrop, the traditional boundary between voluntary and compliance markets is blurring as Article 6 mechanisms evolve and selective compliance uses, such as CORSIA, expand across jurisdictions. There is an increasing convergence in standards, methodologies, integrity frameworks, and claims rules.
Clear systemic frameworks are fundamental to VCM scale
Based on interviews with banks, developers, exchanges, investors, insurers, traders, and SSFA, this paper identifies key industry-wide scaling pain points and their financing implications.
Although retirement levels are holding steady, demand for verified carbon credits (VCCs) has slowed due to several key barriers to market scale: (1) the complexity of legal regimes, (2) stagnant buyer appetite, (3) a lack of sophisticated secondary market, (4) integrity controversies that heighten greenwashing risks. When coupled with the evolving guidance from organisations such as the Science Based Targets initiative (SBTi), the Claims Code of Practice by the Voluntary Carbon Market Integrity Initiative (VCMI), and the developing operational framework under Article 6 of the Paris Agreement, these factors create a fragmented environment that underscores the need for greater harmonisation.
In this paper, we explore how having a clear legal and financial accounting characterisation of VCCs can contribute to the scale of the VCM ecosystem and catalyse carbon financing.
Our key conclusions and recommendations for policymakers and regulators are that:
- A proprietary classification of VCCs as intangible property has the potential to strengthen market confidence, facilitating the use of VCCs in trading, collateralisation and financing transactions. Specifically:
- Transfer as property: We suggest that VCCs are sufficiently determinate (i.e. specific and identifiable) to be treated as property. This gives clarity to how market participants think about and manage risks around the sale of VCCs. To unlock market scale in the VCM, we suggest that VCC registries can, similar to registers for immoveable property or company shares, implement a notice system that permits title and priority of security interests in VCCs to be checked by third parties.
- Security interests: Where it is clear that VCCs have proprietary character, security interests over VCCs can be enforced by secured creditors. VCCs can thereby serve as a useful form of collateral for the financing of carbon projects.
- Custodial arrangements: Where VCCs are held under a custodial arrangement, the proprietary character of a VCC ensures it can be properly held on trust and segregated from the custodian’s own assets, particularly in the event of insolvency.
- Insurance: Clarity over the characterisation of VCCs as property may also further unlock insurance solutions available to carbon ecosystem participants.
This position is supported by general principles from existing case law, particularly in Singapore and the United Kingdom.
Our suggestion that VCCs should be treated as property is also broadly consistent with the work of the International Institute for the Unification of Private Law (UNIDROIT) Working Group on the Legal Nature of VCCs.
- Clear and harmonised private international law rules can further support market scale. The multi-party and multi-jurisdictional nature of the VCM leads to potential conflicts around: (1) which State’s law should apply, and (2) which court should have jurisdiction to hear a dispute. This conflict of laws can be significant especially if, for instance, one State’s laws recognise VCCs as property, but another State does not.
A coherent approach to this issue is equally important for the VCM to scale.
The issue is a vexed one, given the international character of the VCM and the challenging nature of this area of law. We see multi-lateral consensus among States as the viable long- term solution for market scale.
- In addition, while existing accounting standards play a crucial role in the recognition, measurement and disclosure of VCCs in financial statements, we believe there is room for disclosures beyond accounting standards to provide decision-useful information to stakeholders and VCM participants.
Call to action
Legal and accounting clarity can have knock-on effects, fostering greater transparency, more liquid secondary trading, hedging opportunities, and enhanced investor and financier confidence. In this regard, effective policy and regulatory leadership can unlock and accelerate private investment and innovation. The VCM stands to benefit from Singapore taking a clear, articulated approach to the legal treatment of VCCs. This will send a strong signal and strengthen market confidence, providing a firm legal foundation as other barriers such as supply integrity, stronger demand, market maturity and secondary liquidity are being addressed.
Reducing fragmentation would be key to the next phase of growth for the VCM. As registries and standards look at different ways to integrate and align, there is a place for States and policy makers to converge as far as possible on the legal treatment of VCCs within their respective systems.
Acknowledgements
This publication is a collaboration between GenZero, Eng and Co. LLC, PwC Singapore, and the Singapore Sustainable Finance Association (SSFA).
This publication was authored by GenZero, Eng and Co. LLC and PwC Singapore following Carbon Project Financing Focus Group Discussions within SSFA’s Carbon Markets thematic area, as well as interviews across banks, project developers, investors, insurers, and carbon exchange to identify pain points faced by the market in enabling carbon financing and scale of the market.
This document does not necessarily represent the views of any of the parties or their representatives.
The representatives from GenZero, Eng and Co. LLC and PwC Singapore are:
| Organisation | Name | Designation |
|---|---|---|
| GenZero | Ting Sim | Managing Director; Head, Corporate Services Group and General Counsel |
| Randall Perera | Director | |
| Louisa Quek | Vice President | |
| Eng and Co. LLC | Rachel Eng | Managing Director |
| PwC Singapore | Eu-Lin Fang | Partner, Sustainability & Climate Change Practice Leader |
| Wai Kit Lee | Manager |
GenZero and Eng and Co. LLC provided the legal perspectives for this paper, while PwC Singapore contributed to the accounting, tax and bank regulatory perspectives.
GenZero, Eng and Co. LLC, PwC Singapore and SSFA jointly extend our sincere appreciation to all those who have provided their views and insights and contributed their input to the development of this publication, including –
Interviewees:
| Anew Climate | Climate Impact X | DBS | Global Carbon Market Utility (GCMU) | Kita | Rubicon Carbon |
SSFA members and external stakeholders:
| Organisation | Name | Designation |
|---|---|---|
| BeZero Carbon | Finn O’Muircheartaigh | General Manager, APAC |
| Climate Impact X | Oi-Yee Choo | Chief Executive Officer, and SSFA Carbon Markets Thematic Lead |
| Benjamin Kwok | Head of Legal | |
| DBS | Rajiv Vishwanathan | Executive Director, Project Finance |
| Environmental Defense Fund (EDF) | Holly Pearen | Lead Counsel |
| International Swaps and Derivatives Association (ISDA) | Dr Peter M. Werner | Senior Counsel |
| Ellingtonresolution.co.uk | Belinda Ellington | Legal Advisor |
| Norton Rose Fulbright | Elisa de Wit | Partner |
| Ben Carrozzi | Partner | |
| Charlie Bevis | Associate | |
| Rajah & Tann | Gregory Vijayendran SC | Partner |
| Resilient LLP | Lisa DeMarco | Senior Partner and CEO |
| Singapore Management University (SMU) | Adeline Chong | Associate Professor of Law; Associate Dean (Faculty Matters) |
| Standard Chartered | Chris Leeds | Head, Carbon Markets Development, and SSFA Carbon Markets Thematic Lead |
| Lucy Palairet | Director, Carbon Markets Development | |
| United Overseas Bank (UOB) | Christopher Ang | Group Head, Infrastructure & Project Finance |
| WongPartnership LLP | Fi Ling Quak | Partner |
| Teck Wee Tiong | Partner |
GenZero, Eng and Co. LLC, PwC Singapore and SSFA would also like to thank all those who have contributed to the development of this publication including SSFA’s Carbon Markets thematic leads and the SSFA Executive Committee for their review of this publication.
General Disclaimer
The information and opinions expressed in this report are presented for informational purposes only and should not be considered as professional, financial, legal, or investment advice. Readers should exercise their own independent judgement and seek independent advice before making any decisions based on the content set out in this report.
While every effort has been made to ensure the accuracy and reliability of the information presented, no representation or warranty, express or implied, is made regarding its completeness, accuracy, or suitability for any particular purpose. GenZero, Eng and Co. LLC, PwC Singapore, SSFA, the authors and contributors do not accept any responsibility or liability for any errors, omissions, or any consequences arising from reliance on this report.
This report may contain forward-looking statements based on available information and assumptions at the time of publication. These statements are subject to change without notice, and actual outcomes may differ. GenZero, Eng and Co. LLC, PwC Singapore, SSFA, the authors and contributors disclaim any obligation to update or revise any statements in the light of new information or future developments.
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