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Jipyong News|KOREA LEGAL INSIGHT

Voluntary Carbon Market – A New Genre of Cross Border Disputes?

2023.09.04

Voluntary carbon market (“VCM”) is a truly unique marketplace where private actors buy and sell carbon credits to remove or reduce greenhouse gases (GHG) in the atmosphere.  The VCM’s purpose is aligned with the Paris Agreement adopted at the 2015 United Nations Climate Change Conference (COP21) in Paris, France – a binding agreement among 196 member states to curb global warming by cutting greenhouse gas emission roughly by 50% by 2030. 
 
Compliance carbon markets (“CCM”) were created for companies and entities (typically oil and gas refineries, mining and steel production companies, transportation industry, etc.) to meet mandatory national or regional emission targets set by their respective governments.  Compliance carbon markets are regulated by national compliance programs called cap-and-trade schemes, or Emission Trading Systems (“ETS”).  South Korea was the first among East Asian countries to implement such nationwide emissions trading scheme (KETS), covering 74% of its national GHG emissions and 684 emitters in the power, industrial, buildings, waste, transport, and domestic aviation sectors.1 
 
Voluntary carbon markets are, by nature, voluntary.  They exist alongside compliance markets to allow companies to purchase carbon credits – 1 unit being one ton of carbon dioxide or equivalent GHG removed from the atmosphere – on a voluntary basis to offset or reduce their carbon footprints.  VCM grew from just USD 300 million in 2018 to USD 1 billion as of March 2022.2  According to an October 2021 report by McKinsey & Company, the market value is projected to reach USD 180 billion by 2030.3 
 
This rapid increase in VCM trading is expected to be accompanied with an increase in cross border disputes involving carbon contracts and carbon credits.  Just last week, thought-provoking discussions took place at the UNCITRAL Academy Conference on 29 August 2023 during the Singapore Convention Week, where a panel of experts explored the dynamic landscape of carbon markets and carbon market disputes that may arise from them.4 
 
 
South Korea’s Draft Law on Misleading Environmental Advertisements 
 
One form of disputes related to carbon markets is the so-called greenwashing litigation – consumer legal action against false or misleading information concerning a company’s environment-friendly impact.  There has been an increasing number of greenwashing claims over the last few years in Korea. 
 
For instance, in October 2022, Solutions for Our Climate (SFOC), a consumer organization group in Korea advocating for stronger climate policies and power regulation reforms, filed a complaint with the Korea Fair Trade Commission against SK Enmove (formerly SK Lubricants) for false advertisement concerning a questionable carbon offsetting impact.  It concerned SK’s purchase of carbon credits verified by Verra from the Guanare reforestation project in Uruguay.  One of the issues raised by SFOC in connection with the legal action was that there was “lack of regulations or standards surrounding the voluntary carbon market in South Korea” which in turn allowed corporations “to increasingly throw[] around carbon neutral claims without directly reducing their use of fossil fuels”.5 
 
Shortly thereafter in February 2023, South Korean Ministry of Environment (MOE) announced a plan to introduce a fine up to KRW 3,000,000 (approximately USD 2,300) for greenwashing, trailing a global crackdown on misleading fossil fuel advertisements.  While the contemplated amount of fine may not be significant, carbon market stakeholders view this as a move in the right direction as companies purchasing carbon credits will be held accountable for advertising any “carbon neutral” or “net zero” impact of their products or activities.  This would place considerable burden on voluntary purchasers of carbon credits, as they are difficulty to measure with technological certainty and their types and quality vary, all in the absence of uniform or global standards. 
 
 
Potential Commercial Disputes on the Horizon 
 
Increasing greenwashing litigation means that there may be a surge of cross border disputes involving voluntary carbon contracts among carbon credit issuers, sellers, buyers, and verifiers.  To mitigate such risks, stakeholders may invite additional stakeholders into the voluntary carbon market, such as carbon credit insurers, third-party guarantors, and verification specialists. 
 
The difficulty of valuating a carbon credit, double-counting, and lack of uniform standards are not the only foreseeable problems in the VCM.  Voluntary carbon trading is vastly international – i.e., a dispute over a carbon credit contract will likely involve parties of different nationalities who are subject to different national regulations and legal regimes. Contracting parties must consider carefully which jurisdiction they choose to adjudicate or settle their dispute and which governing law to apply, given that laws and regulations concerning climate change vary drastically. 
 
Many issues that often arise in cross border transactions are also expected to arise in voluntary carbon markets, but the product traded, carbon credit, is not akin to the traditional goods and services the private sector has been trading for centuries.  Carbon credits have unique and unprecedented features that require special treatment as an essential commodity in the global climate change regime.  In this vein, advising corporations engaged in the VCM presents new challenges for both transactional and compliance attorneys as well as disputes lawyers. 
 
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