Due Process Rights in the Carbon Markets

Author:Lisa Hodes Rosen - Adrienne Bossi
Position:General Counsel, The Gold Standard Foundation - Boston University School of Law, J.D. 2010
Pages:9-14
 
CONTENT
9SUSTAINABLE DEVELOPMENT LAW & POLICY
INTRODUCTION
The compliance and voluntary carbon markets are fac-
ing an identity crisis. Despite minor victories following
the 16th Conference of the Parties of the United Nations
Framework Convention on Climate Change in Cancun, Mexico,
the voluntary carbon markets are attempting to grow in an uncer-
tain regulatory world where the fate of the Kyoto Protocol and
its market mechanisms hang in the balance. At the same time,
the voluntary carbon markets have been able to survive through
flexibility and strong self-governance.
Critics initially attacked the fledgling voluntary market for
its lack of conformity to rules and attentiveness to real environ-
mental action. Now, as the voluntary markets mature, stricter
codes of conduct are emerging. Many of the almost two-dozen
carbon offset certification standards that exist in the voluntary
carbon markets today seek to establish credibility and account-
ability for voluntary environmental commitments. They seek to
enforce their rules through transparency and reputation to ensure
that these commitments are fulfilled in a real and verifiable way.
Indeed, social and environmental product certification systems
that include third-party auditing “are remarkable for their simi-
larity to state-based regulatory and legal systems.”1 But are the
legal systems similar? Certainly, the successful certification
standards have “establish[ed] their own governing systems,
largely independent of state governments, with the regulatory
capacity to back up those obligations with enforceable rules.”2
But what happens when the certification standard makes a mis-
take in enforcement?
Several voluntary certification standards include dispute
resolution mechanisms for private parties harmed by an adverse
decision from an auditor or the standard itself during the certi-
fication process. However, these dispute resolution mechanisms
vary widely and encompass diverse degrees and notions of due
process rights. The available dispute resolution mechanisms in
the voluntary carbon markets are important because they can
serve as models for how dispute resolution will be addressed by
the compliance markets, and, in particular, the Clean Develop-
ment Mechanism (“CDM”) under the Kyoto Protocol,3 which is
currently framing its own appeals procedure for private parties.4
This article explores due process rights in the carbon mar-
kets and discusses how innovation in the voluntary markets can
set an important example for the compliance markets. This arti-
cle provides an overview of the carbon markets and then exam-
ines whether the four leading offset certification standards in
the voluntary carbon markets have achieved enough credibility
and status to influence the CDM’s governance structure for the
resolution of conflicts. Finally, it outlines the appeals procedures
currently available in the voluntary market and advocates for
their continued development in both the voluntary market and
the CDM.
AN OVERVIEW OF THE CARBON MARKETS
THE COMPLIANCE CARBON MARKETS
There are two types of carbon markets: compliance and
voluntary. Compliance markets are government-mandated cap-
and-trade programs. The cap-and-trade programs established by
the Kyoto Protocol,5 the European Union Emissions Trading
System (“EU ETS”),6 and the Regional Greenhouse Gas Initia-
tive (“RGGI”) in the northeastern United States7 are examples of
compliance carbon markets. To date, the success of these mar-
kets has been mixed. Although these programs have proven that
carbon is a viable commodity that can attract significant capital,
several problems have repeatedly plagued these markets, includ-
ing the ability to set appropriate caps to enable real emissions
reductions over time.8
Carbon offsets, which must be certified by a third-party cer-
tification standard, are integral to any cap-and-trade program.
“Certification standards” are independent organizations that
provide the guarantee that a carbon offset project has achieved
the promised emissions reductions.9 When a project’s emissions
reductions have been verified against a standard’s rules and
requirements, the standard will issue the project carbon credits
equivalent to the emission reductions achieved.10 The credits are
then considered “certified” and the credits can either be sold or
“retired.”11
CDM Process of Certification
The most prominent carbon offset certification standard in
the compliance markets is the CDM. The Kyoto Protocol per-
mits Annex I Parties (developed countries) to satisfy part of their
emissions reduction targets by using Certified Emissions Reduc-
tions (“CERs”) created by registered CDM project activities.12
The CDM is a global market-based mechanism overseen by the
CDM Executive Board (“EB”), which facilitates the creation and
issuance of CERs from eligible CDM project activities.13 Before
a CDM project can begin to generate CERs, it must proceed
through the CDM project cycle. As a preliminary matter, the
nation hosting the CDM project must belong to the Kyoto Pro-
tocol as a non-Annex I (developing) country.14 After the project
is designed using an approved methodology that quantifies the
DUE PROCESS RIGHTS IN THE CARBON MARKETS
by Lisa Hodes Rosen, Esq. & Adrienne Bossi, Esq.*
* Lisa Hodes Rosen, General Counsel, The Gold Standard Foundation; The
American University Washington College of Law, J.D. 2004; Tufts University,
B.A., International Relations 2001.
Adrienne Bossi, Boston University School of Law, J.D. 2010; University of Mas-
sachusetts, Amherst B.A., Journalism 2005.
10WINTER 2011
emissions reductions, a designated operational entity (“DOE”)
is appointed to act as an independent auditor to validate and
subsequently request registration of the proposed CDM project
activity.15 The DOE then submits a validation report to the EB,
thereby confirming that certain preset requirements are met.16
The EB then decides whether to formally accept the DOE’s rec-
ommendation and if so, it “must register CDM projects within
eight weeks of the [DOE’s] request unless three members of the
CDM Executive Board, or a CDM participant, require a review
of the proposed activity.”17
Once registered, the project participants implement the
CDM project. A second and different DOE is appointed to moni-
tor the project during implementation and to ultimately confirm
that the project’s resulting greenhouse gas (“GHG”) reductions
are real, measurable, and verifiable below an approved base-
line.18 This second DOE requests the EB to issue CERs after it
is satisfied that the GHG reductions are “appropriate”.19 There
is then a fifteen-day window during which time a three-member
panel of the EB or a CDM participant can request a review of the
DOE’s findings.20 However, “[b]ecause the scope of the review
is limited to issues of fraud, malfeasance, or incompetence of the
[second DOE], issuance of CER[s] by the Executive Board . . .
is almost . . . automatic.”21 If no review is requested, the CER
“issuance is considered final.”22
THE VOLUNTARY CARBON MARKETS
In contrast to the compliance markets, voluntary carbon
markets do not impose a mandatory cap on greenhouse gas emis-
sions. Instead, they rely on participants’ voluntary commitments
to reduce emissions. A unique dynamic has developed between
these two types of markets in which the voluntary markets often
appear to act as a test-drive for companies facing the prospect
of the enactment of complex, and sometimes confusing, com-
pliance markets.23 Indeed, the voluntary markets buoyed the
credibility of the overall carbon markets when the compliance
markets were most vulnerable. This was particularly evident
following the failures at the 15th Conference of the Parties
(“COP15”) where regulators hesitantly noted the Copenhagen
Accord.24 The robust growth of the voluntary markets is thus a
logical response to the Kyoto Protocol’s complex rules, dispa-
rate enforcement and inefficiencies that have resulted in CDM
capacity bottlenecks and slowed credit issuances.25
In the past, the voluntary markets were accessed through
the Chicago Climate Exchange (“CCX”), a voluntary but legally
binding cap-and-trade program, or through an over-the-counter
(“OTC”) purchase or sale. However, CCX’s emissions trading
program shut its doors at the end of 2010.26 Consequently, OTC
transactions will now dominate the market.
Most of the transactions in the OTC market involve offset
credits from third-party certification standards.27 In 2008 and
2009, more than ninety percent of the credits transacted in the
voluntary markets were certified by a third-party standard.28
Over the last few years, the following certification standards
have emerged as leaders in the voluntary market: the Veri-
fied Carbon Standard (“VCS”), the Climate Action Reserve
(“CAR”), the American Carbon Registry (“ACR”), and the Gold
Standard (“GS”).29
The VCS was launched in 2007.30 It was founded by The
Climate Group, the International Emissions Trading Associa-
tion, and the World Business Council for Sustainable Develop-
ment.31 The World Economic Forum and approximately one
thousand carbon market stakeholders also assisted in developing
the standard.32 VCS issues credits called Verified Carbon Units
(“VCUs”) for carbon offset projects throughout the world that
can demonstrate emissions reductions that are real, measurable,
permanent, additional, independently verified, unique, transpar-
ent, and conservative.33
CAR, formerly the California Climate Action Registry
(“CCAR”), was established in 2001 after a group of CEOs lob-
bied the state of California to create a mechanism by which they
could track their firms’ early emissions reductions in anticipa-
tion of the future state and potential federal regulation.34 CCAR
was thus born from a state mandate.35 The program eventually
separated from the state to be incorporated as a nonprofit orga-
nization and, in 2009, the organization began transitioning its
tracking and inventory operations to The Climate Registry, a
national nonprofit body established in 2007 that was actually
modeled after CCAR.36 In turn, CAR flip-flopped its role as part
of CCAR to become the new parent organization focusing on
developing an offset credit, Climate Reserve Tonnes (“CRT”)
that apply to GHG reduction projects within North America.37
ACR was established in 1996 by the Environmental Defense
Fund and Environmental Resources Trust.38 It was the first of its
kind in the United States and over the last fifteen years, it has
issued over thirty million offset credits.39 These credits, called
Emission Reduction Tons (“ERTs”), are issued in accordance
with ACR’s requirement that reductions are “real, measurable,
permanent, in excess of regulatory requirements and common
practice, additional to business-as-usual, net of leakage, verified
by a competent independent third party, and used only once.”40
ACR’s reach is not limited to the United States and accepts
international projects.41 In 2007, ACR became an “enterprise”
of Winrock International, an American nonprofit organization
working globally to “empower the disadvantaged, increase eco-
nomic opportunity, and sustain natural resources.”42
The GS Foundation, which manages the GS carbon certifi-
cation scheme, was founded in 2003 by a network of large non-
governmental organizations (“NGO”), including the Worldwide
Fund for Nature, Helio International, and SouthSouthNorth, in
response to criticism that the Kyoto Protocol’s CDM did not ade-
quately address sustainable development.43 These NGOs devel-
oped the GS as a complement to renewable energy or energy
efficiency CDM projects through the addition of a sustainabil-
ity assessment.44 If a project proponent successfully applied the
GS’s sustainability assessment to its CDM project, then the GS
would provide the CDM project with an additional GS label.45
The project could then sell the GS-labeled CERs for an addi-
tional premium in the marketplace.46 Subsequently, in 2006, the
GS launched its voluntary standard whereby it issues GS Vol-
untary Emission Reductions (“VERs”) to renewable energy or
11 SUSTAINABLE DEVELOPMENT LAW & POLICY
energy efficiency projects that successfully meet the Standard’s
rigorous technical and sustainable development criteria.47
Unlike the CDM, which was born out of climate diplo-
macy and is therefore vulnerable to global politicking, VCS,
CAR, ACR, and GS operate in an unregulated market, free
from bureaucracy, political hostage-taking, and other possible
effects of governmental intervention. This gives VCS, CAR,
ACR, and GS freedom to respond to market demands through
innovation, limited only by their own creativity and available
resources. As such, these standards can experiment with a vari-
ety of governance, financial, and technical mechanisms. Indeed,
experiments in the voluntary carbon markets—the successes and
failures alike—can set examples for the compliance markets as
they develop over time.
These third party standards play another critical role in the
voluntary markets, acting as civil regulatory bodies to build con-
sumer trust by ensuring a consistent level of quality. Thus, vol-
untary certification standards become “distinctive . . . because
they transform the global marketplace by developing ‘delib-
erative and adaptive governance institutions designed to embed
social and environmental norms in the global marketplace that
derive authority directly from interested audiences, includ[ing]
those they seek to regulate, [but do not derive their authority]
from sovereign states.’”48 Such non-state global governance
institutions are known as non-state market driven (“NSMD”)
governance systems.49 The application of the NSMD analysis to
voluntary carbon certification standards is appropriate because
the framework was originally developed to explain forest certifi-
cation, which is similar to carbon certification.50
VCS, CAR, ACR, and GS must establish credibility, build
consumer trust, develop a strong reputation in the marketplace,
and operate with a certain degree of political integrity to be
considered as relevant and appropriate examples for the CDM.
The NSMD governance system, an academic analytical frame-
work, provides a framework from within which to measure these
characteristics.
THE NSMD FRAMEWORK
A MEASURE OF MARKET CREDIBILITY
It is generally accepted that a NSMD system displays five
features.51 First, a NSMD system’s authority is not derived
from the state.52 That is, “there is no use of state sovereignty to
enforce compliance.”53 This element is arguably the most impor-
tant because of the lack of a connection with the state, which dis-
tinguishes NSMD systems from public-private partnerships or,
in the case of carbon markets, the standard-setting CDM, which
derives its authority from an international agreement between
nations.54 Second, NSMD systems must have established gov-
ernance mechanisms,55 whereby “NSMD institutions constitute
governing arenas in which . . . adaptation, inclusion, and learn-
ing over time occur . . . across a wide range of stakeholders.”56
At its core, this element rests on democratic ideals of fairness,
accountability and transparency, and its intent is to promote
“good practice” and “practical reason.”57 Third, the NSMD’s
authority is market-based,58 deriving its power from the market
and civil society.59 Fourth, the NSMD is concerned with social
impacts.60 A NSMD governance system seeks to address global
issues that private firms are not incentivized to address, and
which governments may not have the capacity or, in the case
of climate change mitigation in the United States, the political
will to remedy.61 Finally, the NSMD system has enforcement
mechanisms and mandatory requirements.62 These are rules and
regulations where compliance can be verified and non-compli-
ance can be punished.63 “Once firms sign on, they are subject to
governance, rules and enforcement that have more in common
with state regulation than standards of voluntary bodies that can
be abandoned with little consequence.”64
While the NSMD framework omits any express reference
to due process rights for the NSMD system’s constituents, it is
recognized that “entities that are affected by the decisions of a
regulatory body [should] have access to a full and fair review of
the decision in question.”65 If NSMD systems are akin to demo-
cratic regulatory bodies, then it would seem logical to expressly
incorporate the protection of individual rights into the NSMD
theoretical analysis. The exclusion of due process principles
would appear to contravene the democratic ideals upon which
the NSMD systems are founded and rely.
It is possible that the second element of a NSMD system,
related to governance mechanisms, could be interpreted to
include due process rights. Within the governance aspect, “good
practice” is defined in terms of “fairness and procedural legiti-
macy,” but there is no consensus as to how to achieve it.66 Like-
wise, “practical reason” relates to ideas of procedural fairness.
Practical reason builds on the notion that reasons derive
from interpretative and dialogical processes (e.g.,
legal processes) in which intersubjectively validated
knowledge and normative understandings of fairness
play a role. [Practical reason] . . . concerns the epis-
temic requirements for democratic practice, which . .
. requires “discursive validation” [and] “ideal speech”
conditions where validity claims can be assessed.67
In other words, constituents should be afforded the opportunity
to challenge validity claims and be heard.68 “Practical reason,”
however, is interpreted on a case-by-case basis in accordance
with specific historical context and cultural values.69
Status as a NSMD system is important as these certifica-
tion systems pursue legitimacy as civil regulatory bodies.70
Otherwise, standards that cannot meet the NSMD test risk cat-
egorization as merely a string of coordinated activities adopted
by self-serving stakeholders. Under the existing five-part test,
three out of the four voluntary certification standards have the
elements of a NSMD system and one standard, CAR, which
has gained credibility through its connections with the State
of California, may be more aptly described as a public-private
partnership.
VCS
Under the five-part NSMD test, VCS meets all of the
requirements. As an industry-created standard, its power is
not derived from the state. It is governed by the VCS Standard
12WINTER 2011
2007.1 and Program Guidelines 2007.1,71 which outline the
rules and methodologies required of project developers, verifi-
ers, and validators.72 VCS meets the third element of the orig-
inal NSMD analysis because its authority is derived from the
market. In 2009, VCS held thirty-five percent of the transaction
volume in the voluntary market.73 VCS also meets the fourth
and fifth NSMD elements because it is concerned with the social
domain (its mission is climate change mitigation) and its rules
are enforceable. The VCS Secretariat operates the Standard on a
day-to-day basis and is responsible for, inter alia, a mechanism
to license auditors as VCS validators and verifiers.74 In addition,
“[t]he VCS Board reserves the right to sanction validators and
verifiers, project proponents and registry operators based on evi-
dence of an improper procedure.”75
CAR
The first NSMD prong, prohibiting the standard to have
derived any power from the state, is where CAR falls short
because it was created by the State of California. Despite its
subsequent separation from the state to become an independent
nonprofit organization, CAR is still recognized and rewarded for
its early connection, and may thus be more appropriately cat-
egorized as a public-private partnership.76 In arguendo, suppos-
ing CAR did comply with the first NSMD prong, the standard
would easily satisfy the remaining original requirements: CAR
has established its own governance mechanisms with the Veri-
fication Program Manual and Climate Action Reserve Program
Manual; its power is market-based (it had thirty-one percent
of the voluntary market share in 2009);77 it is concerned with
climate change, and it has instituted enforcement mechanisms
and mandatory requirements in the form of a detailed program
schedule and penalty structure.78
ACR
Like VCS, ACR also meets the five NSMD requirements.
First, as a standard founded and owned by NGOs, its power
is not state-based. Second, it also has strict rules. Generally,
ACR’s project cycle is similar to that used by VCS.79 ACR eas-
ily meets the third and fourth elements because its authority is
market-based, with four percent of the voluntary market share,
and its mission is also to mitigate climate change. 80 ACR’s
rules are enforceable, but it relies primarily on domestic courts.
The Guidelines specifically state that any legal responsibili-
ties or rights of ACR or parties involved (verifiers, proponents,
members, etc.) are outlined in the contractual agreements they
sign with one another.81 For example, the attestation agreement
signed by parties seeking to become ACR-approved verifiers
requires the parties to obtain their own liability insurance, agree
to limit ACR’s liability, indemnify ACR, and submit any claims
that may not otherwise be provided for in the contractual lan-
guage to the courts and laws of Arkansas.82
GS
The GS also meets the five-part NSMD test. First, like ACR,
GS was founded by NGOs. Second, it has strict governance
mechanisms. The Gold Standard Requirements (“GSR”) detail
a multi-step project cycle for its voluntary standard in which the
project proponent must first assess the eligibility of the project
against the GS’s criteria, including strict rules regarding addi-
tionality and sustainable development.83 The third NSMD fac-
tor, requiring market-based authority, is also satisfied here. In
2009, GS accounted for seven percent of the transaction volume
in the voluntary market.84 Fourth, the GS mission’s concern for
social impacts is two-fold: it seeks to promote sustainable devel-
opment and mitigate climate change through its offset projects.
Finally, the GS rules are enforceable. The GS Terms and Condi-
tions (“GSTC”) provide that a breach of its rules may be “pros-
ecuted as a violation of [GS’s] intellectual property rights.”85 In
addition, Section 10 of the GSTC addresses sanctions, including
fines and/or the freezing of a GS registry account, for a violation
of the GS’s rules.86
PRIVATE PARTY DISPUTE RESOLUTION
MECHANISMS IN THE CARBON MARKETS
There are several types of potential disputes that may arise
between a private party project proponent and a certification
standard.87 The first type involves the investment relationship.88
Project development requires large up-front capital expenditures
and, because certification is a time-consuming process, investors
may not see returns for a few years. Consequently, even a slight
delay may change the investment analysis. Second, disputes
can arise over registration, issuance, or revocation decisions.89
These disputes could involve a myriad of scenarios, such as
when a standard rejects a project, revokes credits based on
changes to the project, or where one project participant claims
that the certification standard issued credits to the wrong party.
Third, disagreements over bookkeeping could escalate into
a potential dispute over, for example, an allegedly erroneous
transfer.90 Fourth, a certification standard may invalidate credits
where it has reason to believe the project documentation was
fraudulent.91 Finally, disputes could arise in connection with the
validation or verification reports from the third-party auditor on
issues including, but not limited to, carbon quantification or the
correct application of a methodology. A dispute could also arise
when the certification standard accepts an allegedly defective
validation or verification report.
Litigation may be the obvious recourse in the event of a dis-
pute between a private party project proponent and a certifica-
tion standard. However, here, litigation may be an inadequate
mechanism for several reasons. A compliance market certifi-
cation standard, such as the Clean Development Mechanism,
may be afforded sovereign immunity.92 In the case of a private
certification standard, domestic court systems may not have the
technical expertise to properly adjudicate registration, issuance,
revocation, or auditing decisions, and hiring the appropriate
expert witnesses can be expensive for both sides. Furthermore,
project proponents may not reside in the same country as the
private certification standard, and a foreign party may distrust
the ability of a foreign court to be impartial.93 Private arbitra-
tion may be a better forum for disputes with public or private
certification standards because it has the potential to be less time
13 SUSTAINABLE DEVELOPMENT LAW & POLICY
consuming and less expensive than litigation, parties can select
independent, technically qualified judges, and some arbitration
bodies provide standing to both public and private parties.94
More importantly, unlike potentially hostile foreign courts, a
project proponent will not question the allegiance of an arbitra-
tor if it was involved in the selection process.95 On the other
hand, private arbitration may not be well suited to resolve dis-
putes between project proponents and a certification standard
because of the lack of uniform decision-making and difficulty
for the prevailing party to enforce an award.96 Instead, an inde-
pendent internal dispute mechanism, tailored to the standard’s
rules, could be the best forum for resolving such disputes.97
DISPUTE RESOLUTION UNDER THE CDM
The significance of the CDM lies in the way it marries the
public and private sector. “The CDM is unique in regulating a
market dominated by private players that depend, in the creation
of the market’s underlying asset, on a United Nations commit-
tee, the CDM Executive Board that approves calculation meth-
ods and projects.”98 However, as the CDM grows—at the time
of this writing, over 2,000 projects have been registered and the
pipeline of undeveloped projects is equal or greater in size99
questions about the CDM’s governance structure have arisen. In
particular, the EB functions as a regulatory agency issuing deci-
sions and creating rules that have financial and legal implica-
tions for private parties.100 But, unlike many regulatory agencies
that operate in accordance with democratic notions of good gov-
ernance, including “legality, certainty, formal equality, account-
ability, due process and access to justice,” the EB is not subject
to the same governance controls.101 Compounding the problem,
there is no independent tribunal for reviewing the EB’s deci-
sions and, consequently, CDM project proponents have little, if
any, due process rights.102
DISPUTE RESOLUTION IN THE VOLUNTARY CARBON
MARKETS
VCS, CAR, ACR, and GS have all developed their own
frameworks for appeals. Likewise, the CDM is following suit
in developing an appeals process and can look to the voluntary
market for guidance.103 Understanding how the different certifi-
cation standards address due process rights may provide insight
into how the CDM should evolve.
VCS
The VCS Program Guidelines acknowledge the possibility
of disagreements between project proponents and the valida-
tors and verifiers empowered to certify their project under the
VCS Standard.104 Contractual disputes under the VCS program
involving verifiers, validators, and project participants are gen-
erally governed by English law and will be heard exclusively in
English courts.105 The VCS Guidelines do provide “an appeal
process for cases where project proponents feel that the vali-
dator or verifier [has] misinterpreted the VCS Program and all
avenues of discussion with the validator or verifier have been
exhausted.”106 In those instances, “[t]he VCS Association will
commission an independent consultant to perform this review.
The independent consultant will be selected by the VCS Sec-
retariat and paid for by the project proponent demanding the
review.”107 Ultimately, though, the final decision rests with the
VCS Board.108
CAR
CAR offers a means of recourse for parties adversely
affected by its decisions that is tailored for the specifics of its
program.109 For example, CAR explains that disputes between
a verifier and project developer are to be handled by the veri-
fier’s internal procedures, but nonetheless offers itself as an
informational resource to assist in the resolution process.110
However, if the parties cannot reach resolution through private
negotiation, then the parties can look to CAR to play the roles
of judge, jury, and prosecuting attorney.111 Once the verification
is complete, a committee of at least three CAR staff members
will review the submitted paperwork and interview the verifiers
and project developers involved before issuing a final, written
determination.112
Likewise, disagreements with regard to CAR’s decisions
affecting verifiers and project developers are also addressed
in CAR’s Verification Guidelines.113 Upon written request for
appeal, CAR will assemble a Dispute Resolution Committee
containing “an odd number of individuals, including at least
one Reserve staff member not directly involved in the case, one
Reserve Board member, [and] a representative from an appro-
priate oversight agency—potentially . . . [a] regulatory or gov-
ernment agency—that is knowledgeable of Reserve policies and
procedures.”114 The Dispute Resolution Committee will review
all relevant paperwork and is authorized to consult outside
experts.115 A decision is reached by majority vote and is consid-
ered final and not appealable.116
ACR
ACR, unlike its aforementioned counterparts, does not
detail any appeal process in its Program Guidelines and although
the framework for the program provides project developers
opportunities to resolve issues discovered in the verification
process, there is no express recourse in the event of a material
disagreement or breakdown of communication.117 Instead, as
discussed above, ACR relies primarily on domestic courts for
dispute resolution.
GS
GS also provides an appeals process that protects constitu-
ents’ due process rights in a manner akin to traditional govern-
mental regulatory bodies. In July 2010, GS released a proposal
for an appeals procedure to provide project developers with
recourse against adverse decisions by GS regarding registration,
issuance, or labeling.118 The purpose of the appeals procedure is
to “fill the gap in remedies between the decisions from the certifi-
cation standard and the consequences for project developers.”119
It is the first of its kind in the voluntary carbon markets.120
Although the GS appeals process is in its pilot phase, it is
currently the most developed dispute resolution mechanism in
the voluntary carbon markets. If successful, it can serve as an
14
WINTER 2011
example for other certification standards—both in the compli-
ance and voluntary markets—that do not currently afford their
project proponents the same level of independent review.
The GS Rules for Appeals on Registration, Issuance and
Labeling (“Arbitration Rules”), which are based on the Interna-
tional Bureau of the Permanent Court of Arbitration’s (“PCA”)
“Optional Rules for Arbitration of Disputes Relating to the Envi-
ronment and/or Natural Resources,” (“Environmental Rules”),
will govern the arbitration procedure.121 Created in 2001, the
Environmental Rules fill a gap in international environmental
dispute resolution by providing a forum in which governments,
NGOs, private entities, and individuals can seek redress.122 Cer-
tain changes have been made to the Environmental Rules to
account for the particular characteristics of GS projects and the
GS project cycle.123
Initially, the scope of the proposed appellate procedure would
be limited to project proponents, project applicants, and project
owners.124 These parties would be required to submit their dis-
agreement with a GS decision to mediation within six weeks.125
If the mediation proves unsuccessful, the parties would have the
option to appeal the dispute to the PCA at the Peace Palace in
The Hague, who will serve as the registrar of proceedings and will
channel communications between or among the parties.126
In accordance with the GS Arbitration Rules, the parties will
have the option to choose one arbitrator or a tribunal of three
arbitrators, with opportunities to challenge the appointment
of an arbitrator on various grounds.127 The arbitrators will be
appointed from a list of specialized arbitrators to be created and
maintained by a neutral appointing committee.128 Hearings may
be held in person, or via telecommunication and parties may call
experts to provide evidence during the hearings.129
With regard to the award, the purpose of the arbitration pro-
cedure is not to award damages or pecuniary compensation.130
Rather, the award will determine whether the adverse decision
was well-founded and in accordance with the relevant version
of the GSRs.131 If it is determined that the adverse decision was
not well-founded or it violated the relevant GSRs, the arbitra-
tion tribunal may issue an alternative decision or provide for an
alternative action.132
CONCLUSION
The right to due process is fundamental to democratic ide-
als and governance systems. As the compliance markets and, in
particular, the CDM, evolve, they will likely seek to incorpo-
rate mechanisms to protect individual procedural rights. Those
best positioned to play the part of role model are CAR, ACR,
VCS, and GS, having all achieved a level of market credibility
measured by the NSMD framework. However, the appeals pro-
cedures provided for by these four standards vary widely. The
voluntary carbon markets, and the offset certification standards
that operate within them, are gaining credibility and can set the
tone for the compliance markets.
1 Steven Bernstein, When Is Non-State Global Governance Really Gover-
nance? 2010 UTAH L. REV. 91, 104 (2010) (citing Errol Meidinger, Beyond
Westpahlia: Competitive Legalization in Emerging Transnational Regulatory
Systems, in LAW AND LEGALIZATION IN TRANSNATIONAL RELATIONS 121, 121
(Christian Brutsch & Dirk Lehmkuhl eds., 2007)).
2 Id. (citing Benjamin Cashore, Legitimacy and the Privatization of Environ-
mental Governance: How Non-State Market Driven (NSMD) Governance Sys-
tems Gain Rule-Making Authority, 14 GOVERNANCE 502 (2002)).
3 The Kyoto Protocol, which established the most prominent international
carbon market, is an international agreement linked to the United Nations
Framework Convention on Climate Change that was adopted on December
11, 1997 and later entered into force on February 16, 2005. For the purpose
of determining national commitments, the 185 nations that have ratified the
Protocol are categorized as an Annex I country, an Annex II country or a devel-
oping country. To aid nations in attaining their emissions targets, the Protocol
created two offset mechanisms: the Clean Development Mechanism (“CDM”),
and Joint Implementation (“JI”). See generally Kyoto Protocol to the United
Nations Framework Convention on Climate Change, Dec. 11, 1997, 32 Stat. 97,
34 U.N.T.S. 243 [hereinafter Kyoto Protocol].
4 See Procedures for Appeals in Accordance with the CMP Requests in Para-
graphs 42-43 of Decision 2/CMP.5, UNITED NATIONS FRAMEWORK CONVENTION
ON CLIMATE CHANGE [hereinafter Procedures for Appeals], http://cdm.unfccc.int/
public_inputs/2010/cmp5_para42_43/index.html (last visited Jan. 19, 2011).
5 See generally, Kyoto Protocol, supra note 3.
6 See Emissions Trading System, EUROPEAN COMMN, http://ec.europa.eu/clima/
policies/ets/index_en.htm (last visited Jan. 28, 2011).
7 See REGIONAL GREENHOUSE GAS INITIATIVE, http://www.rggi.org/home (last
visited Jan. 28, 2011).
8 See, e.g., RGGI Oversupply Risks Being “Reminiscent of Phase 1 of EU
ETS” – Observer, CARBON FINANCE (Sept. 3, 2008), http://www.carbon-finan-
ceonline.com/index.cfm?section=lead&action=view&id=11498.
9 See generally RICARDO BAYON ET AL., VOLUNTARY CARBON MARKETS: AN INTER-
NATIONAL BUSINESS GUIDE TO WHAT THEY ARE AND HOW THEY WORK 22-23 (2007).
10 Id. at 22.
11 Once a carbon credit is retired, it cannot be re-sold. Companies, organiza-
tions, governments, or individuals looking to reduce their carbon footprint must
retire a corresponding number of carbon credits. See id. at 31.
12 See Rolf H. Weber & Aline Darbellay, Regulation and Financial Interme-
diation in the Kyoto Protocol’s Clean Development Mechanism, 22 GEO. INTL
ENVTL. L. REV. 271, 279-80 (2010) (explaining that “[o]ne CER represents one
ton of carbon dioxide equivalent . . . . No tangible certificate is created upon
issuance, but an electronic database tracks the output of CER. Carbon units are
accounting units that have their own unique serial numbers and are tracked and
recorded through the CDM registry or any subsequent registry. CER are trans-
ferable and can be traded in the carbon market.”).
13 Id. at 278-79; Kyoto Protocol, supra note 3, at art. 12, ¶ 1.
14 Kyoto Protocol, supra note 3, at art. 12, ¶ 3; See generally Conference of the
Parties Serving as the Meeting of the Parties to the Kyoto Protocol, Report of
the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto
Protocol on its First Session, Montreal, Can., Nov. 28-Dec. 10, 2005, ¶¶ 28-31,
U.N. Doc. FCC/KP/CMP/2005/8/Add.1 (Mar. 30, 2006), [hereinafter UNFCCC
Report], http://cdm.unfccc.int/Reference/COPMOP/08a01.pdf.
15 Id. at 14-15.
16 Weber & Darbellay, supra note 12, at 278 (explaining that DOEs are des-
ignated by the CDM Executive Board); UNFCCC Report, supra note 14, ¶¶
27(e), 35-40; Kyoto Protocol, supra note 3, at art. 12, ¶ 5.
17 Weber & Darbellay, supra note 12, at 278; UNFCCC Report, supra note 14,
¶¶ 36,43; Kyoto Protocol supra note 3, at art. 12, ¶ 5(c).
18 Weber & Darbellay, supra note 12, at 279; UNFCCC Report, supra note 14,
¶¶ 44-47; Kyoto Protocol supra note 3, at art. 12, ¶ 5(b).
19 Weber & Darbellay, supra note 12, at 279.
20 Id.
21 Id.
Endnotes: Due Process Rights in the Carbon Markets
Endnotes: Due Process Rights in the Carbon Markets
continued on page 75