European Union: Voluntary Carbon Markets In Portugal And The European Union

1. Background

The Government has published for public consultation the draft decree-law establishing the Voluntary Carbon Market ("VCM"). The importance of this proposal is justified by the objectives of avoiding "greenwashing" in the acquisition of carbon credits and increasing the confidence of investors and purchasers of this type of product.

The consultation is open until 10 April to gather input from citizens, businesses and other stakeholders. The creation of a VCM in Portugal was announced at the end of 2020, when the Minister for the Environment and Climate Action issued Order 12401/2020 of 21 December, which aims to develop a proposal for a regulatory framework for voluntary carbon markets.

In parallel, a similar proposal is going through the legislative process at EU level. In particular, the European Commission has put forward a proposal for a Regulation to ensure the quality of carbon offset projects and systems in the European Union (COM(2022) 672 final / 2022/0394(COD), available here).

The aim of carbon markets is to value different types of projects that convert their greenhouse gas ("GHG") sequestration capacity into tradable titles ("carbon credits"). These markets broadly allow companies and other organisations to offset their GHG emissions and thereby leverage their internal ESG objectives by making a meaningful contribution to the overall goal of climate neutrality.

The purpose of this informative note is to summarise what is at stake in these two proposals and the main similarities and differences between them.

2. The legislative process

The legislative initiatives came to light about three months apart, with the European one being made public before the Portuguese one. However, as far as we can see, there is no obvious link between the two proposals. What is certain is that, under normal circumstances, the European proposal will take longer to be adopted because the European legislative process is longer and more bureaucratic than the Portuguese one.

The European proposal aims to establish a regulation which, if adopted, will be directly applicable in all Member States. Although there is a principle of supremacy of European law over national law, the specific design of the European proposal, based on a voluntary system, will lead to a simple coexistence of national and European proposals.

3. Purpose of the legislative initiatives and standards for eligible projects

The European and Portuguese proposals have different objectives:

• The European Commission's proposal defines the bases for the creation of voluntary carbon markets in the Member States, in particular the rules for the recognition of certification systems and the operation of certification bodies, as well as the eligibility criteria for projects, including the bases for determining how many carbon credits they can generate.
  
  
• The Portuguese proposal goes further and aims to create a VCM covering the whole country, managed by the Portuguese Environmental Agency ("APA"), which will regulate carbon sequestration/ reduction projects. It also regulates in some detail the means by which projects are converted into carbon credits and the rules for the market.

As we can see, what they have in common is the definition of eligibility criteria for the projects that have been established, that is, standards that a given carbon sequestration or reduction project must meet in order to be able to issue carbon credits.

The innovation proposed by the Commission does not lie in the criteria themselves, as they follow the main criteria already known since Kyoto: quantification, additionality, permanence and sustainability ¹, which the Commission has grouped together under the acronym QU.A.LI.TY ("QUantification", "Additionality", "Long-term storage" and "sustainabilITY").

The European Commission's proposal regulates the recognition of effective carbon sequestration/ reduction capacity.

The Portuguese government's proposal also regulates the eligibility criteria for projects under the Kyoto Protocol. However, as mentioned above, the Portuguese proposal also focuses on the establishment of a true VCM, which specifically regulates:

• The parties operating in this market.
• The products sold in it - carbon credits and their types.
• The way in which they are supplied - through projects considered eligible to issue credits.
• The conditions for their traceability after sale - platform and credit account.
• Etc.

The VCM to be created by the Portuguese proposal can therefore be integrated into the voluntary carbon markets disciplined by the future European regulation, provided that it ensures compliance with the requirements that may be included in the latter.

4. The structure of VCM and certification of eligible projects: the european and portuguese models

VCMs are markets for carbon credits issued with reference to projects that have the capacity to sequester carbon that would otherwise remain in the atmosphere, in particular, afforestation. The rules for certification of eligible projects are therefore an essential part of the regulation to be created.

The Commission's proposal bases the functioning of VCMs on two key players:

• The certification systems, platforms accessible to the public and managed by public and private bodies, to be recognised by the European Commission under certain conditions, whose role is to supervise the certification of projects to ensure that they meet the eligibility criteria.
• The certification bodies will be the bodies accredited to assess and certify the eligibility of projects and contractually linked to the certification schemes. These bodies must provide guarantees of impartiality and independence, in particular from project promoters. They must also be contractually bound to the certification schemes.

The Commission proposes a voluntary framework for the recognition of the eligibility of projects with the following outline:

• The promoter or a group of promoters - referred to in the proposal as the "operator or group of operators" - submits an application for certification of a specific project to a certification scheme.
• A certification body will carry out a certification audit to confirm the conformity of the declarations and documentation submitted by the promoter and, in particular, the net carbon removal benefit generated by the project. The body then issues a certificate at the end of the process.
• In order to ensure the permanence criterion, certification bodies are required to carry out periodic re-certification audits of the project, which must also be published in the public register of the certification scheme.

To view the full article click here

Footnote

1. On them, please see the previous PLMJ Informative Note (available here).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.