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1.– Definition and complexity of the carbon market

The expression “carbon market” owes its success to its apparent simplicity: the market where the rights to emit carbon dioxide are traded. But this simplicity is deceptive. The very idea of ​​a carbon market is fundamentally complex and hides disparate realities and real semantic pitfalls. First of all, there is not one but two markets: the regulated market and the voluntary market which, however, communicate with each other up to a certain point. Then, who says “market” refers a priori to companies; However, the regulated market stems from commitments made by States but transferred to their companies, which involves multiple regulators who create rights trading systems that communicate imperfectly with each other. This multiplicity no doubt also explains why the legal nature of the rights to issue still poses a problem. Moreover, the carbon market does not only concern carbon dioxide but five other gases also endowed with a power of warming the atmosphere, a power calculated, it is true, in relation to the first, which serves as a benchmark for the market eponym. Finally, there is, for the general public, a somewhat « cognitive » difficulty which opposes the understanding of the very concept of the carbon market which is, in fact, based on a paradox. This market is commonly presented as a means to reduce GHG emissions. However, although emission rights are intended to regulate GHG emissions, they nevertheless appear, in the eyes of many, to be “rights to pollute”. It is all these difficulties of understanding and interpretation that this study must resolve.

2. – Plan

It is also the aforementioned difficulties that outline the plan of the present study. It is appropriate, first of all, to briefly outline the economic theory of trading in emission rights, which is essential for understanding the mechanisms of the carbon market. Secondly, with regard to the actual study of carbon market law, it seemed fundamental to reserve as much importance, if not more, for the creation of carbon market values ​​as for their transactions. It is in the creation of values ​​that lies the originality and the difficulty of analyzing the carbon market for the reasons that we have just explained and which are mainly due to the complexity and diversity of the role of regulators. Transactions, for their part, are similar to national or international sales of transferable securities even if they include particularities which will be developed later, in particular with regard to the registers materializing these securities and which are the essential instrument for their transfer. of property. We will devote part of this study to the voluntary market whose economic importance is, for the moment, much lower than the regulated market and whose main features can be defined in relation to the latter.

What are the market mechanisms that contribute to price formation on these two markets ?

The compliant carbon market and the voluntary market

In the classical theory of price formation, these result directly from the confrontation of global supply and demand. Their confrontation must cause the price adjustments necessary to obtain an equilibrium.

But the existence of a market presupposes that two conditions are met: the goods or services in question must be fungible, that is to say things which can be replaced by things of the same nature, of the same quality and of the same amount ; the other condition is that there is a place of exchange.

The regulated carbon market fits these definitions and categories well.

– The quotas or authorizations to be emitted all have the same value: one ton of CO2 equivalent.

– Centralized platforms allow daily exchanges from all parts of the world

This is not the case with the voluntary carbon market: there is a lack of centralized exchange organizations and the carbon credits generated by reduction or absorption projects have the same value in terms of unit volume but differ about the accompanying sustainable development measures.

How to give a price to carbon on the voluntary market ?

In fact, a carbon credit represents both a reduction or absorption of GHG but also the realization of various actions in favor of sustainable development: “beyond carbon” according to the accepted expression and which can be illustrated by the icons, created by the United Nations, and symbolizing goals or “Global Goals for Sustainable Development” (SDG).

As a result, each carbon project is profoundly different and difficult to assess on an objective basis. It is buyers’ preferences for these goals that influence the price.

The “Just price « 

The fair price is a notion developed by Saint Thomas Aquinas which assigns a good a value based on fundamentals which must be distinguished from the market price which corresponds to the « current value » of this good. The fair price may correspond to the potential price estimated from elements considered objective (cost, utility, rarity, etc.); a substitute for the market price when there is no organized market providing a reliable reference; or finally, at the desirable price based on ethical assessments.

Gold Standard’s approach seems to be getting closer

One of the leading validating organizations, the NGO Gold Standard, asked the question of the « value » of a carbon credit. Why do carbon credits that represent the same volume of avoided GHGs have different prices? To answer it, Gold Standard analyzes three concepts:

1) The voluntary market cannot simply rely on the law of supply and demand.

Its goal is climate security and access to basic human rights such as food, water, education and good health. Failure to fully consider the real value they bring in terms of development benefits beyond carbon can accelerate a race to the bottom, meaning that the highest quality projects could be the first to fail.

2) A cost-based model takes into account the costs of implementing a project and should be used to help ensure the continued viability of projects.

To support this analysis Gold Standard uses the “Fair Trade” minimum price model. This calculates a minimum price that ensures average project costs will be covered, plus an additional “Fair Trade Premium” that goes directly to the local community to fund activities and help them adapt and become more resilient. to an already changing climate. The NGO thus establishes the minimum Fair Trade price for certain types of eligible projects (energy efficiency, renewable energy and afforestation/reforestation):

– Energy efficiency: €8.20 / tCO2e + €1 Fair Trade premium

– Renewable energy: €8.10 / tCO2e + €1 Fair Trade premium

– Forest management: €13 / tCO2e + €1 Fair Trade premium

3) Prices based on the delivered value.

Carbon projects go far beyond mitigating GHG emissions. Using a value-based model to price carbon credits must truly account for all of the environmental, social and economic impacts of a specific project, i.e. both in terms of reduced emissions and additional development benefits that can transform lives.

The EPA approach: the social and environmental cost

The US Environmental Protection Agency (EPA), for its part, published a report, updated in 2015, to estimate the total cost of carbon to society. It establishes that for every ton of carbon dioxide we emit into the atmosphere, we sacrifice between $11 and $212 in environmental degradation and negative social impacts.

Defining the right price for carbon credits is a complex task as the determinants are numerous and varied. However, the EPA’s assessment can help us define a « floor price ». The carbon credit buyer should know that below its lower threshold of $11, the price of carbon is not commensurate with environmental issues.

This is an opportunity to recall the meaning of this expression and that of related formulas: « Net Zero » and « Negative Carbon« .

A. Carbon neutrality is the balance to be struck between human-made greenhouse gas (GHG) emissions and their removal from the atmosphere by humans. The difference between the amount of gas emitted and the amount of gas extracted from the atmosphere is then zero.

To this end, companies apply the carbon offset mechanism: compensating its own CO2 emissions by financing projects to reduce GHG emissions. Carbon offsetting consists, for example, in investing in tree planting, protection against deforestation or renewable energy projects. But carbon neutrality does not involve any commitment in terms of reducing GHG emissions.

B. Zero emissions, or Net Nero Emissions. Some more ambitious companies that have already achieved carbon neutrality are committed to achieving « net zero emissions« . They intervene upstream and trying to reduce the quantities of GHGs resulting from their activity. For example, Capgemini achieved in 2020 its goal of reducing its emissions per employee by 30%, by acting on the decarbonization of its high-impact operations: business travels and energy consumption in offices. Similarly, Google (which has been carbon neutral since 2007) has committed to no longer emitting CO2 at all by 2030, in particular by supplying all of its energy needs with clean energies.

C. The ultimate step is to become « carbon negative »: removing more carbon than is emitted, using Carbon Removal Technologies (CRT). The CRTs are the same as those used by the carbon offset mechanism: afforestation, reforestation, carbon sequestration in the soil, carbon storage, etc.

This is the commitment made by Microsoft: the company wants to offset by 2050 all the carbon emitted by its activity since its creation in 1975, offset its electricity consumption with renewable energies by 2025 and do without diesel for its vehicle fleet by 2030.

Under the Kyoto Protocol, developed countries committed to reducing their greenhouse gas (GHG) emissions by at least 5% below 1990 levels over a period from 2008 to 2012. This commitment is accompanied by so-called « flexible » mechanisms by which these States are authorized either to exchange GHG emission rights between themselves, or to develop between themselves industrial or energy projects that reduce GHGs (Joint Implementation procedure – JI ), or, finally, to carry out GHG reduction projects in developing countries according to the Clean Development Mechanism (CDM).
Of all these mechanisms, the CDM is of particular importance both by its nature and by its economic and financial potential. Politically, it presents itself as the only mechanism through which developing countries voluntarily contribute to the reduction of GHG emissions while welcoming technologies contributing to their development. On the financial level, the « carbon credits » that the CDM should generate over the period from 2008 to 2012, would reach more than 3.7 billion metric tons of CO2 equivalent, or approximately 75 billion dollars.
A formidable ecological and financial challenge, the CDM is based on totally innovative procedures which find their origin in public international law but combine, in their application, sui generis legal and financial techniques that only a new perspective can embrace in their entirety. . Such is the purpose of this book, which describes all the legislation of the United Nations from its broad outlines to its most detailed texts, both in its general and procedural aspects, with great emphasis being given to the method and the conditions of presentation of the projects for the approval of the United Nations. Finally, transactions relating to carbon credits, in particular sales contracts and the related financial transactions, are covered in the form of a commented study of the different standard contract models.
Businesses and lawyers have been waiting for such a book since none exists. The former will find practical information enabling them to study and implement their projects. The latter will also discover elements serving as a basis for reflection on a new branch of law.

Jean-Charles BANCAL, carbon market specialist at the law firm Fasken Martineau in Paris, holds a doctorate from the University of Lille and an LL.M from Harvard University.

Julia KALFON, member of the Paris Bar since January 2006 and holder of a DESS in Litigation, Arbitration and Alternative Methods of Conflict Resolution from the University of Paris II and a DEA in Public Law of Economic Activities from the University of Paris XII, is a lawyer with the law firm Fasken Martineau.

Yang LIU, CDM and carbon market expert, graduated from HEC Paris and Beijing Foreign Studies University. He is currently Senior Consultant at Cap Gemini Paris.