Levi McAllister is a partner at law firm Morgan Lewis. He leads the firm’s Electric and Zero-Emissions Vehicles Working Group, Energy Decarbonization Working Group and Energy Commodity Trading and Compliance Working Group. Views are the author’s own.
The global carbon market is entering a critical stage. Governments are expanding carbon-pricing programs, companies are pursuing ambitious emissions-reduction strategies, and the Paris Agreement is supporting cross-border transfers of carbon assets.
A deeper international market could direct private capital toward emissions-reduction projects, lower the cost of meeting climate targets and help companies address residual emissions. But the supporting legal infrastructure remains fragmented.
Carbon credits increasingly cross borders, while laws governing their creation, ownership, transfer and use remain national. Regulators also are scrutinizing environmental claims involving credits. Companies should focus on three issues: the legal status and ownership of credits; environmental integrity, accounting and claims risk; and the allocation of regulatory and performance risk in carbon contracts.
These challenges do not mean companies should avoid the market. They mean participation requires the legal, commercial and risk-management discipline typically applied to other corporate assets.
1. Threshold challenges
a. Carbon credits still lack a consistent legal identity
The fundamental legal question is simple: What does a company own when it purchases a carbon credit?
The answer varies by jurisdiction. Depending on where you are, a credit may be treated as property, an intangible asset, a contractual right, a commodity, a financial instrument or some combination of these concepts. In some jurisdictions, its status remains uncertain. A purchaser needs confidence that the seller owns the credit, can transfer it and has not previously transferred or retired the same environmental attribute. Participants also need predictable rules for competing claims and developer insolvency.
Cross-border transactions compound the problem. A project may be domiciled in one country, developed in another, financed internationally and supply multinational buyers. Applicable legal systems may impose different rules concerning ownership, security interests, insolvency, taxation and transfer. Host governments also may assert authority over domestic emissions reductions.
This tension is important under Article 6 of the Paris Agreement. Article 6.2 permits international transfers of mitigation outcomes, subject to accounting requirements intended to prevent double counting. Host-country authorization can therefore be an important attribute. A developer may have contractual rights to sell credits while the government controls whether the reductions may be transferred internationally or used for a particular purpose.
For example, a developer may agree to deliver credits authorized by the host country for an Article 6 use before the government has acted. If authorization is later delayed or unavailable, the developer may still have valid credits but not credits that satisfy the buyer’s intended use. The agreement should therefore address whether substitute credits, a price adjustment or termination is required.
Companies should assess both a project’s environmental merits and its credits’ chain of title. Agreements should include representations concerning ownership, prior transfers, retirement and authority to sell. When host-country authorization matters, contracts should allocate responsibility for it and address policy changes.
b. Environmental integrity is becoming a legal issue
Carbon markets depend on each credit representing a credible climate benefit. Would the reduction have occurred without the project? Is it permanent? Could emissions shift elsewhere? What happens if a forest supporting a removal project is destroyed?
Additionality, permanence, leakage, baselines and verification were once treated principally as technical matters. Increasingly, they are legal issues. A credit that fails to deliver can create contractual, disclosure, regulatory and reputational consequences and undermine corporate climate claims.
The potential for double counting adds risk. A single reduction could appear in a registry, in the host country’s accounting and in a buyer’s claims. Article 6 addresses certain forms of double counting through mechanisms including corresponding adjustments, but the relationship between national accounting and voluntary corporate claims is evolving.
Regulators are examining environmental marketing more closely. Claims such as “carbon neutral,” “net-zero,” or “climate positive” may attract scrutiny when the credits or accounting methods do not support them. Companies therefore must ask not only whether a credit satisfies a recognized standard, but also what they can legally and credibly say after retiring it.
Carbon procurement should be integrated with disclosure and marketing controls. Sustainability, legal, procurement and communications teams should coordinate before material climate claims are made.
Due diligence should examine methodology, additionality, permanence, leakage, verification, project governance and host-country treatment — not merely confirm a registry entry. The goal is to understand what a credit can credibly accomplish within the company’s climate strategy.
c. Carbon contracts must address regulatory change
The third challenge concerns the contracts through which credits are bought, sold and financed. As companies move from spot purchases toward long-term procurement, buyers may sign forward purchase or offtake agreements years before credits are issued. Developers may rely on those agreements to secure financing.
During that period, the regulatory environment may change substantially. Methodologies may be revised, registries may alter their requirements, governments may impose new authorization rules, projects may produce fewer credits than expected and regulations may restrict the use of certain credits or associated claims.
The central question is who bears the risk when a credit no longer has the characteristics that the parties expected. Agreements may need to address title, delivery, verification, registry requirements, host-country authorization, corresponding adjustments, invalidation, reversals, replacement credits, methodology changes and changes in law.
Replacement provisions are especially important. Buyers may demand substitutes if expected credits are not issued, credits are later invalidated or reductions are reversed (for example, if a forestry project loses stored carbon to a wildfire). Not every replacement credit is commercially equivalent, so agreements should define the attributes an acceptable substitute must have, such as project type, vintage, methodology or registry. Sellers may resist unlimited replacement obligations for government action or other events outside their control.
A long-term agreement tied only to present-day standards can quickly become outdated, so eligibility provisions should adapt to evolving legal requirements and recognized integrity standards.
The parties also should define the intended use. A credit purchased for a compliance obligation or corporate claim may have little value if it remains valid but becomes ineligible for that purpose. Agreements should distinguish between delivery of a carbon asset and delivery of one satisfying agreed eligibility criteria.
2. What companies should be doing now
Companies should treat carbon procurement as an enterprise risk-management issue, not solely as a sustainability initiative. Legal, sustainability, finance, procurement and communications teams all have roles to play.
Businesses should establish internal standards addressing project type, methodology, verification, permanence and host-country requirements. Companies anticipating significant demand may consider long-term offtake agreements or direct project investments, while recognizing the added development, political and regulatory risks.
Internal carbon pricing can help management compare operational reductions, credit purchases and other decarbonization investments. Companies should also maintain flexibility. Dependence on one project type, jurisdiction, registry or credit category can create unnecessary exposure; diversification and adaptable contracts can help as rules change.
3. The next phase of the carbon market will be a legal one
Carbon markets have made substantial progress. Article 6 is laying a foundation for international cooperation, governments are developing market frameworks, voluntary-market initiatives are strengthening integrity standards, and companies are becoming more sophisticated purchasers. Further growth, however, will depend increasingly on legal certainty.
Successful markets require confidence that buyers understand what they are acquiring, sellers possess authority to transfer it and contractual rights can be enforced. Carbon markets require an additional assurance: that the environmental benefit is real and the purchaser’s use of it is legally and environmentally credible.
Complete international harmonization is unlikely soon. Companies should not assume uncertainty will disappear before they must act. They can respond through stronger diligence, contractual protections, coordinated disclosure controls and strategies designed to adapt to legal change.
Ultimately, a global carbon market depends on three forms of confidence: confidence in the environmental integrity of the asset, in the rules governing its ownership and transfer and in the enforceability of the contractual and environmental promises associated with it. Establishing that confidence may be the most important step toward transforming today’s fragmented carbon markets into the global market envisioned by the Paris Agreement.
