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June 6, 2023

Legal challenges likely over carbon offset schemes vs indigenous rights

Protesters demonstrate over climate justice and other related issues during the 2022 UNFCCC COP27.  Civil court cases related to carbon offsets lodged by indigenous communities look likely to increase (Photo by Sean Gallup/Getty Images)
Protesters demonstrate over climate justice and other related issues during the 2022 UNFCCC COP27. Civil court cases related to carbon offsets lodged by indigenous communities look likely to increase (Photo by Sean Gallup/Getty Images)

A lawsuit in the Colombian Constitutional Court is set to determine how indigenous rights should be protected under the country’s voluntary carbon market, with potential repercussions for other jurisdictions.

Litigation over carbon offsetting is expected to account for a significant portion of climate-related lawsuits worldwide soon, with carbon credit projects increasingly being contested across jurisdictions and voluntary frameworks lacking longer-term guarantees.

Developments in recent weeks – such as US airline Delta facing a greenwashing claim because it allegedly paid for inadequate offset schemes, or the Zimbabwe government’s unexpected announcement that it will start pocketing 50 per cent of all carbon offset revenues on its territory – have shown that the validity and structure of carbon credits can change at any point, highlighting the uncertain nature of a self-regulating market. 

Holly Stebbing, litigation partner at Norton Rose Fulbright, recently told the audience of a Financial Times conference that an uptick in civil court cases related to carbon offsets is anticipated, as aggrieved customers, investors or even competitors expected to file claims.

Meanwhile, a lawsuit in Colombia could highlight the rights of those most affected by carbon credit projects on the ground – the communities who inhabit the land on which the carbon offset is calculated.

In April, the Constitutional Court of Colombia accepted to hear a case by an indigenous group that alleges its fundamental rights to cultural integrity, territorial integrity, self-governance and self-determination had been violated in the implementation of the Baka Rokarire project, located in the south-east Amazon region of Colombia.

The defendants in the case are three private companies that validated the project, a non-governmental organisation and a national environmental authority in charge of monitoring carbon credits.

“The legal issue at hand is that allegedly, the person who subscribed [to the project] was not the official representative of the indigenous community, and so he lacked legitimacy for the subscription of the contract with the developer of the carbon offset project,” explains Luis Fernando Macías, partner at Colombian law firm Philippi Prietocarrizosa Ferrero DU & Uría.

He adds that, according to the indigenous Pirá Paraná community, the public authorities failed to uphold their fundamental rights in the registration and development of this specific project, while the private companies did not apply proper due diligence standards.

Silvia M. Méndez-Parodi, head of the environmental law practice at Colombian law firm Muñoz Tamayo & Asociados, says the ruling could have a wider impact. “In our view, the court’s decision on this lawsuit could set a significant precedent at the national level for the development and implementation of a legal pathway or framework, which could establish guidelines on what can and cannot be done in carbon credit projects where indigenous communities live,” she adds. 

She also notes that, despite the ruling being enforceable only in Colombia, it could serve as an example for other countries seeking to establish or strengthen their own legal frameworks and regulations on carbon credit projects. The case could also promote the principle of international cooperation for the protection of the fundamental rights of indigenous communities and the environment, she adds.

Governance of the land

The ownership and governance of the land in which carbon offsets are established has proven contentious in voluntary carbon markets.

The fundamental flaw of nature-based offset projects is their lack of permanence, because of changes in land ownership, fires or political instability, warns Alexis Normand, co-founder and CEO of carbon accounting platform Greenly. “Businesses may be purchasing 40-year contracts for forest-based offsets without an effective guarantee,” he points out.

Just last month, an indigenous group in Guyana saw its complaint – which alleged that the government did not receive appropriate consent from the group to start issuing carbon credits on their territory – rejected by the Architecture for REDD+ Transactions Secretariat, a standards body. 

While grievance mechanisms have been embedded in carbon offset schemes, indigenous communities living deep in the forest can experience accessibility challenges – an issue often exacerbated by a lack of strong judicial frameworks in the countries where projects are located, according to Gilles Dufrasne, policy lead at non-profit Carbon Market Watch.

Greenly’s Normand says ensuring secure land ownership for local communities is crucial for the permanence of nature-based offset projects, and local governments should have legal frameworks in place that prevent the sale of these lands for commercial purposes, such as agriculture.

Despite land ownership not being a contested element of the lawsuit filed by the Pirá Paraná community, the issue at stake is the integrity of the territory as part of the community’s cultural and ancestral rights, according to Macías at PPU. He estimates the lawsuit could last between six months and a year.

MTA’s Méndez-Parodi highlights other legally significant aspects of governance in the Colombian lawsuit – for example, many carbon credit projects are located in lands that are collectively titled, meaning they belong to a community rather than to an individual. Therefore, to establish a carbon credit project, the community must give its consent through its governance bodies.

“If the governance bodies of a given community do not work properly, if there are disagreements inside the community or if the corresponding community governance procedures are not followed, legal challenges to the projects may arise,” says Méndez-Parodi.

A subsequent difficulty could appear when the land is occupied and shared by several different communities. Méndez-Parodi points out instances where entire communities have been excluded from decision-making, despite their lands being included in carbon offset projects. This exclusion could endanger prospective carbon offset schemes and lead to other legal challenges, she says, “especially, when as a result of the inclusion of their lands in the projects, the excluded communities have been asked by the other communities or the companies administering the projects to stop performing certain activities in their territories, some of which may represent their ancestral practices and their right to ensure basic needs and food supply”.

Due diligence and middle-men

When it comes to the due diligence of carbon offset projects, the two main dimensions to consider are avoiding harm and ensuring benefits, says Dufrasne at Carbon Market Watch, adding that environmental and social integrity are different aspects of the due diligence process.

With carbon markets expected to expand significantly in the race to net zero, Greenly’s Normand says: “Offsetting firms are said to be approaching indigenous communities in the Amazon, offering financial benefits through the sale of carbon credits if the communities allow projects to develop on their lands.”

Dufrasne says at present it is difficult to establish how inclusive these projects are of indigenous communities, given there are no set standards for the level of engagement required: “We don’t have a complete view on communities’ willingness to participate: some do, others don’t.” Moreover, the proof required of companies that they have conducted proper consultation with local communities is currently poorly defined, he adds: “Speaking to three representatives can be considered a lot or not much at all. Who decides?”

Normand says carbon credit generation “most certainly remains opaque” and that middle-men see most of the financial benefits initially targeted at local communities. “For every dollar paid by a company committing to net zero, it’s very reasonable to estimate that indigenous communities collect less than 20 cent,” he says.

These middle-men include the initial project promoter, auditing firms, technology firms that sell tools to verify the reality of offsets, carbon offset marketplaces that distribute to retailers, and the final distributors, such as climate consultancies or offset partners that advise companies on their climate strategy.

MTA’s Méndez-Parodi also talks of “carbon cowboys”, a reference to intermediaries who exploit lack of information or knowledge to convince communities to participate in projects under unfair conditions or without realising the extent of the engagement being agreed to.

Although both Colombian lawyers told Sustainable Views that, generally, carbon offset projects have been well received in Colombia, the number of controversies has increased in recent years. Macías says the most frequent grievances relate to the veracity of the offset emissions, the legitimacy of those who negotiate and contract on behalf of the community, and the violation of indigenous rights in the development of the projects.

Méndez-Parodi says that projects are not always aligned with the government’s methodology on deforestation rates, often leading to inflated carbon credits. This problem is exacerbated by an institutional weakness and a lack of adequate monitoring where buyers are not able to conduct a proper due diligence and verify if the credits they are buying are completely legitimate, she adds.

Regulation the way forward?

Colombia’s carbon tax framework allows companies to purchase carbon credits to avoid paying the tax on the condition their projects are located in the country. However, given the carbon tax is considered too low, this translates into low prices for carbon credits – resulting in carbon project promotors preferring instead to sell carbon credits abroad to a foreign buyer, according to Méndez-Parodi. However, if calls to increase the carbon tax (currently about $5 per metric ton of CO₂) are answered, the Colombian carbon credit market would receive a boost and could become more competitive, she says.

In fact, Colombia has already passed legislation to strengthen its carbon market (such as the climate change law of 2018 and the climate action law of 2021) but implementation is still pending. The ministry of environment and sustainable development is tasked with establishing and regulating an emission trading system but has not yet produced any documentation. Sustainable Views contacted the ministry for comment but did not receive a response.

The country’s carbon market would benefit from stricter regulations on carbon standards and/or methodologies, as well as strengthened validation and verification bodies, says Macías.

And Normand says typically, a clear legal framework is the best way to avoid future litigations, and would also mitigate risks for all stakeholders involved, including companies falsely claiming to be carbon neutral not understanding the backlash they are facing; customers being misled; and local communities seeing natural habitats being privatised.

However, he also notes that “nature-based offsets still feel like the Wild West, and bringing a sheriff in town won’t be enough”, given they are traded like private commodities when perhaps they are in fact public goods. He calls for the establishment of a framework similar to the Kunming-Montreal Global Biodiversity deal signed at COP15, to be established for offsets at COP28, with the aim of regulating and enforcing voluntary carbon market standards.

“Governments definitely need to regulate offsets to ensure that projects respect the core principles of additionality, verifiability, immediacy and permanence. They also need to regulate land ownership to enforce this permanence,” Normand says.

Dufrasne argues that an integrity council could be a first step but doubts the effectiveness of a potential global regulator. He instead advocates bringing more transparency to the market by making carbon offset contracts publicly accessible. “Given these contracts can include anything, disclosure would be welcome, especially on benefit sharing agreements,” he adds.

Regardless of the way future regulations might be shaped, oversight and enforcement mechanisms in carbon markets will be a key factor for avoiding claims in court and decrease countries’ carbon emissions.

Méndez-Parodi at MTA also says oversight and monitoring are important, since projects can be subject to “double accountability” or inflated figures. In those instances, the loss is double, she explains, as the carbon credits do not really represent a decrease in emissions and the state does not receive the carbon tax, which in turn prevents it from investing in programmes to mitigate climate change or counteract its negative effects.

A service from the Financial Times