THE VOLUNTARY CARBON MARKET: A Law and Economics Analysis

According to the Intergovernmental Panel on Climate Change (IPCC), carbon dioxide removals are considered essential across all pathways to meet the 1.5°C Paris Agreement goal. Nevertheless, scaling up these removals to deliver tangible results requires significant financing. The voluntary carbon market (VCM), supported by private investments, has the potential to contribute to this goal. In recent years, the surge in climate commitments made by corporations has led to a substantial increase in the use of carbon offsets from the VCM to meet these climate goals. This trend has fueled the expansion and growth of the VCM. Despite the increasing relevance of carbon offsets in corporate sustainability plans, legal scholars have often overlooked the VCM and the corporate use of VCM carbon offsets. This thesis aims to fill this gap by exploring the challenges associated with the corporate use of VCM carbon offsets in fulfilling climate pledges, with a particular focus on the risks of greenwashing stemming from over-crediting and misleading advertising. It also evaluates legislative and judicial responses to these challenges, assessing the effectiveness of existing regulations governing climate claims that rely on carbon offsets. Against this backdrop, this thesis proposes a dual-claim framework designed to mitigate greenwashing risks and strengthen the reputational constraints on VCM market players. Specifically, it advocates for the use of nature-based projects in contribution claims and technological carbon removals in compensation claims. On the one hand, corporations willing to invest in nature-based carbon offsets should be permitted to do so by establishing contribution claims based on a “money-for-money” approach. This solution can promote private investment in projects aimed at preserving natural resources while mitigating the risk of over-crediting. On the other hand, the thesis advocates for the use of technological removals in compensatory claims. Although these solutions are more expensive, they provide a more verifiable and reliable pathway for meeting climate targets, effectively addressing the shortcomings of nature-based approaches. This proposed framework seeks to enhance confidence in the VCM by reducing the risk of greenwashing and promoting greater transparency and accountability in corporate climate initiatives. Simultaneously, it refrains from imposing undue restrictions on companies, enabling them to adopt credible and effective strategies to meet their climate commitments.