Hello everybody and welcome to the latest edition of C&F Talks. Today, it's my pleasure to have with me Simon Puleston Jones, who's the Founder and MD of Emral Carbon. Simon's going to be joining us at the International Carbon Market Summit, which is being held in London on the 14th of October. Simon, welcome.

Thanks for having me.

Very good to have you with us.

Let's turn to the first question. The debate about the improving the integrity of the voluntary carbon markets continues. The VCMI and the ICVCM have published their claims code of practice and their core carbon principles, respectively.

Do you think we're getting there in terms of rehabilitating carbon credits?

We are getting there. There is a continuing journey to go on. What the standards do is they help market participants understand what does good look like.

So, in the case of the ICVCM, it's very much what are the hallmarks of a high integrity carbon credit. And on the VCMI side, it's largely what claims are you making and in relation to what percentage of your unabated emissions. But there's more to do beyond just those industry-led initiatives.

One thing that is receiving increasing focus is the lack of clarity as to the legal nature of voluntary carbon credits. And we've seen the Law Commission of England and Wales and UNIDROIT and UNCITRAL all take a look at this in recent months and years. But we do need to ensure we've got the legal underpinnings of the market right. Because that too is part of the integrity of the market.

Yeah, in fact, you anticipated a question I was going to ask you, Simon.

I mean, just delving a little bit deeper into that issue. But what's the main problems or potential problems you think that exist in the contracts then around carbon credits? Are the rights and responsibilities of the parties clearly delineated? And do you think that buyers are properly protected?

Great questions. So partly that's a contract question and partly that's a law question in terms of the legal nature of carbon credits. So perhaps if I start with the contract side, there are various templates that are available in the market.

So ISDA have created a set of definitions to supplement the ISDA Master Agreement, that traders and other market participants can use if they're documenting a secondary market transaction. And then in the primary market, another trade association, IETA, very much focused on the environmental markets, has published another template for primary market sale and purchase transactions. And the distinction between the two is simply that a primary market transaction relates to the first sale of the credit.

So typically, it's the project developer that is selling them, often before they've even been issued, because it's a financing tool as much as it is about spot sales. The challenge, IETA also have a template for the secondary market. The challenge is that those templates go some of the way to addressing the risks.

But in practice, when I'm acting as a consultant to Philip Lee, the law firm, on transactional matters, we mark these templates up very, very heavily. The IETA template is well used and familiar for the market. ISDA is still gaining traction, but given the participants in the secondary market, lots of attractions there, not least around margining.

And then on the legal nature of carbon credits, just moving on from the contractual side, there's a lot of work to do, frankly, and work is being done. It's not that there is no law governing the voluntary carbon market. It's that that law, as distinct to the regulation, that the law of what is a voluntary carbon credit as a matter of law is unclear or at least untested in the courts in most jurisdictions.

And that really matters for two or three really important reasons. One is if I sell you a carbon credit and you give me 10 million dollars, you want to make sure that you own what you've just paid 10 million dollars for. And it really complicates things if that transaction happens in the architecture of the Paris Agreement and corresponding adjustments are made. And then suddenly there's a problem with the trade.

It matters in the context of granting security. If I'm providing finance to a project, I would want to take as much collateral as I can. Ideally, including those very carbon credits. Well, can I do that?

And then that ability to grant security then, of course, achieves the holy grail of being able to access wholesale financial markets for including through securitisations, rather than having to forward sell your credits as a means of financing.

Yeah. So many of these issues, you say, remain unresolved. And the legal aspects haven't been tested in a court to date. I'm quite surprised to hear that, that they haven't, you know, the carbon markets been around the voluntary carbon markets for a little while now.

But yes, the nearest analogy, Maurice, is Bitcoin and digital assets. Bitcoin has been around for 15 years. And interestingly, under English law, when the Law Commission of England and Wales has been looking at this, they've looked at digital assets and voluntary carbon credits together and have come to the same conclusion that both of them, based on recent case law, probably are a third type of personal property that the Law Commission recommends Parliament officially recognised by way of statute as existing.

The problem with the Law Commission's approach is they propose to just say the words, there is a third type of property, full stop, and then leave it to the courts to decide whether verified carbon credits sit within that bucket. And if so, so what? What rights attached to that?

Which means we're not actually going to know the English law treatment of verified carbon credits in the voluntary carbon market for decades, if that's the approach they take, because we're going to need decades of litigation to find out the answers to what rights attached to this new third type of property.

Maurice

So is this going to impede the development of the voluntary carbon markets, do you think? Is this lack of precision about the legal aspects?

It's a great question. Logically it should, and in the ordinary course it might, but one only has to look at Bitcoin and the size of that market and digital assets more generally. One only has to look actually at the EU ETS, and it took years for courts to determine what is the nature of an EU emissions allowance under English law, but we got there in the end, and the market developed in spite of that uncertainty and in knowledge of that uncertainty. So it's important to resolve because we want deep liquid markets like we do in equities and debt and commodities and derivatives, and it's an important part of the journey.

But these things exist, notwithstanding the lack of that legal framework, and indeed that's part of the legal analysis for why they sit in a third new type of property bucket rather than in the first two.

Maurice

Yeah, so looking to the future, Simon, looking perhaps quite a bit into the future, how do you see the potential convergence between the compliance markets and the voluntary carbon markets? Will there eventually be some degree of interoperability between them, do you think?

Yes, and there already is. So there are a small number of markets, compliance markets, for which let's call it project-based carbon credits are permitted.

We have a consultation that's still live here in the United Kingdom that was launched by the previous government, but not yet shut down by the new one, and may be carried on by them, looking at whether direct air capture, BECCS, and perhaps the Woodland Carbon Code credits generated through those means, should they be allowed into the UK ETS.

In the European Union, they have the new proposals around the Carbon Removal Certification Framework, or CRCF for short, and in 2026, they will be consulting on whether to allow certified units from the CRCF to be incorporated into the EU ETS. And for me, most interestingly on your question, is really where does Article 6 sit, Article 6 of the Paris Agreement, in relation to these verified carbon credits in the voluntary carbon market? And where might that go over coming years?

And we'll have to see by the time the summit starts in October, whether I'm quite confident enough in a theory that I have as to why Europe maybe hasn't been playing ball in the Article 6 negotiations, and what it might mean in terms of the European Union potentially pulling out of CORSIA, which is another one of those compliance schemes yet, what might lead to that? And what might they fall back on instead? And the same thing, why aren't European Union countries allowed at the moment to participate in Article 6? And what might EU member states do instead?

Yeah, interesting time, Simon, interesting times. For our viewers, if you'd like to hear more about these issues and other related issues, please do come along to the International Carbon Market Summit on the 14th of October in London, further information available on the City & Financial Global website.

It just remains for me to say, Simon, thank you so much for sharing those thoughts with us today. Looking forward to seeing you on the 14th.

Thanks again. I look forward to it.