At NACW 2025, Kita hosted a panel on the ‘Legal Nature of Carbon Credits’ with Lisa DeMarco of Resilient LLP and Peter Mayer of Stairs Dillenbeck Finley Mayer. The purpose of the panel was to shed more light on a foundational issue that too often stays confined to legal circles – how voluntary carbon credits are treated under the law. The panel was met with strong interest and thoughtful discussion, confirming what we suspected: this is a conversation that needs to reach far beyond lawyers.

In this post, we address the basic questions many people have about the legal nature of carbon credits. The following interview format is edited for clarity and conciseness. Please note, this post is for general informational purposes only and does not constitute legal advice. Readers should seek appropriate legal counsel for advice on their specific circumstances.

NOTE: Both Lisa DeMarco and Kita are part of UNIDROIT. Lisa participates in the working group as an individual observer and Kita is involved as an institutional observer.

The legal nature of carbon credits determines how they are treated under private law - how they can be owned, transferred, used as collateral or handled in insolvency. In many jurisdictions, the legal status of verified carbon credits (VCCs) remains uncertain. While derivatives linked to VCCs may fall under existing regulatory frameworks in some markets, there is often far less clarity around the legal status of the underlying credits themselves.

This lack of legal definition creates risk and uncertainty for market participants, particularly in cross-border transactions where inconsistent rules can undermine enforceability and trust. It also limits the development of robust market infrastructure and hinders access to finance - for example, by making it more difficult to use VCCs as collateral or structure them into investment products.

Ultimately, this issue matters to a wide range of stakeholders, including project developers, investors, financial intermediaries and regulators. Without a clear, harmonised legal foundation for carbon credits, the carbon markets will continue to struggle to unlock mainstream capital flows.

One of the most significant developments is the work of the International Institute for the Unification of Private Law (UNIDROIT). The Working Group is developing legal principles to clarify how private law applies to VCC transactions, with the final guidance expected in 2026. As recognised in the Draft Principles, legal uncertainty remains a key barrier to scaling finance and market efficiency, and these principles aim to provide clearer rules for ownership, transfer and enforceability. By offering guidance to market participants, legal advisors, and courts, and by encouraging legislative alignment across jurisdictions, UNIDROIT’s work is expected to help reduce transaction costs, support cross-border consistency and strengthen the legal foundation of carbon markets. “UNIDROIT’s work is important and helpful because it offers guidance that respects the differences between civil law and common law jurisdictions, and its publications are a valuable resource for legal practitioners worldwide”, says Peter Mayer.

This work is timely, given the implementation of Article 6 of the Paris Agreement, which establishes the framework for international cooperation through carbon markets. As countries begin operationalising Article 6 mechanisms, including the use of internationally transferred mitigation outcomes (ITMOs), the line between voluntary and compliance markets is becoming more fluid. Legal clarity at the domestic and international levels will be essential to ensure VCCs can interact reliably with Article 6 markets, where issues such as ownership, transfer and the avoidance of double counting are subject to international rules and reporting requirements.

In parallel, several jurisdictions are making progress at the domestic level. Australia has legally defined its compliance credits (ACCUs) as personal property and Brazil has introduced a legal framework for tradable emissions instruments under its new regulated carbon market. The U.S. Commodity Futures and Trading Commission views VCCs as tradeable intangible instruments. In England and Wales, allowances and related instruments under the ETS are treated as financial instruments, but the legal nature of VCCs has yet to be definitively determined. Stakeholders believe that they are likely to be treated as intangible property under common law, and recent VAT guidance signals growing official recognition of their economic value. These are encouraging signs of momentum, but such final clarity remains to be seen. Most jurisdictions have yet to address the legal status of VCCs in a systematic way, underscoring the importance of ongoing international coordination and national regulatory engagement. This has also been the subject of recent international arbitrations, notes DeMarco, in reference to the ICSID arbitration in Koch v. Canada.

Within individual transactions, the legal nature of carbon credits and the uncertainties around aspects such as ownership, transfer and enforceability are generally handled within the contracts and deal structures specific to that transaction. “The voluntary carbon market is built on contracts which makes it essential for market participants to understand the implications and enforceability of contractual choice-of-law provisions”, says Peter Mayer. From the insurance perspective, this enables insurability because the policy can sit behind the terms and governing law of a specific legally-binding contract.

Greater challenges lie in the legal nature of carbon credits as it affects the development of market infrastructure and interoperability. Without legal certainty around what a VCC is, what rights it conveys and how it can be validly transferred or encumbered, even the most sophisticated registries or trading platforms cannot provide the trust and functionality required for a scalable market. For example, a technology platform might enable seamless transfers between Registry A and Registry B, but if it’s unclear whether a VCC transferred in the process constitutes a legal transfer of property, counterparties face significant legal and financial risk. This undermines the potential for innovations like centralised clearing or integration between compliance and voluntary markets and limits broader market participation – particularly from institutional investors and lenders who require legal clarity to manage risk and structure transactions.

Registries play a fundamental role in tracking issuance, ownership and retirement of carbon credits. In many ways, they function like ledgers, similar to those in other financial systems. However, unlike securities markets - which rely on central securities depositories regulated under clear legal frameworks - carbon registries are unregulated and operate without a unified regime. This creates some limitations. For example, registries may not resolve disputes over ownership or legal title. And registry entries, while evidencing a transaction, may not in themselves confer legal rights enforceable in court. As the market grows, there is increasing interest in aligning registry functions with broader legal standards used in other asset markets, to reduce legal risk and improve interoperability.

Insurance plays a critical role in building trust and resilience in the voluntary carbon market, providing a uniform market mechanism to allocate risk. Industry conversations increasingly point to the potential for mandatory insurance as a way to strengthen market integrity, for example in relation to CORSIA. However, insurance is a regulated, legally binding contract and functions best in markets where there is legal clarity around the underlying asset or contract being insured. In the carbon markets, greater legal clarity around what VCCs represent – particularly in terms of ownership, transfer and enforceability – will enable insurers to design even more precise, responsive products that support project developers, buyers and investors alike, helping the market scale with confidence.

One area where this becomes particularly visible is in the role of buffer pools. If VCCs are recognised as property, this has implications for how carbon registry buffer pools are structured and managed - particularly if proprietary rights and obligations begin to flow to and from these pools. This shift would require buffer pools to meet higher legal standards, making insurance an increasingly important tool to manage reversal and other project risks.

Just as financial markets rely on well-defined legal frameworks for intangible assets, the carbon markets require similar clarity to function effectively. Greater consensus on the legal treatment of verified carbon credits - whether through international initiatives like UNIDROIT or coordinated national efforts - is essential to support market integrity, reduce legal risk and enable scalable investment.