Regulations & Compliance

International Frameworks

Paris Agreement Article 6

Article 6 of the Paris Agreement provides the framework for international carbon markets under the new climate regime. It establishes cooperative approaches allowing countries to transfer mitigation outcomes to help achieve their Nationally Determined Contributions (NDCs).

Article 6.2 - Cooperative Approaches:

• Bilateral or multilateral agreements between countries
• Internationally Transferred Mitigation Outcomes (ITMOs)
• Corresponding adjustments to avoid double counting
• Flexibility in design while ensuring environmental integrity

Article 6.4 - Mechanism for Sustainable Development:

• Centralized mechanism supervised by UN body
• Successor to CDM with updated rules
• Generates A6.4ERs (emission reductions)
• Shares proceeds for adaptation finance (5%)
• Overall mitigation in global emissions (OMGE)

UNFCCC & Kyoto Mechanisms

While the Kyoto Protocol's commitment period ended, its mechanisms influenced current systems:

• CDM: Over 8,000 projects, 2B+ CERs issued, methodologies still used
• JI: Joint Implementation between developed countries
• IET: International Emissions Trading of assigned amount units

CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation)

ICAO's global market-based measure to address aviation emissions:

• Mandatory for international flights from 2027
• Airlines offset growth in CO2 emissions above 2019 baseline
• Eligible credit types: strict quality criteria
• Projected demand: 2.5 billion credits by 2035
• Drives significant demand for high-quality offsets

Regional & National Regulations

European Union

EU ETS:

• Legally binding emissions cap declining 4.2% annually
• Compliance requirement: surrender allowances equal to emissions
• Non-compliance penalty: €100 per tonne + surrender requirement
• Annual compliance deadline: April 30
• Expanding to maritime (2024), buildings and road transport (2027)

Carbon Border Adjustment Mechanism (CBAM):

• Equalizes carbon price for imports and domestic production
• Covers cement, iron/steel, aluminum, fertilizers, electricity, hydrogen
• Reporting phase: 2023-2025
• Financial obligations begin: 2026
• Prevents carbon leakage, encourages global climate action

United States

California Cap-and-Trade:

• Covers 75% of state emissions
• Quarterly allowance auctions with price floor
• Compliance periods: 3-year cycles
• Offsets limited to 4-6% of compliance
• Linked with Quebec system

Regional Greenhouse Gas Initiative (RGGI):

• 11 Northeast/Mid-Atlantic states
• Power sector only
• 100% auction of allowances
• Proceeds fund energy efficiency and renewables
• $3.8 billion raised since 2008

Federal Developments:

• Inflation Reduction Act: $369B climate spending
• 45Q tax credit: $85/tonne for carbon capture
• SEC climate disclosure rules (proposed)
• No federal carbon pricing yet, but state/regional action expanding

China

China's national ETS covers power sector with expansion planned:

• 5+ billion tonnes CO2 annually (world's largest)
• Free allocation based on benchmarks
• Compliance deadline: end of year
• Penalties: 20,000-30,000 RMB plus publicized violations
• Planned expansion to 8 sectors by 2025
• Considering allowance auctions and paid allocation

United Kingdom

• UK ETS post-Brexit, aligned with more ambitious targets
• Covers power, industry, aviation
• Cap declining faster than EU (68% reduction by 2030)
• Auction reserve price: £22
• Exploring linkage with EU ETS

Other Jurisdictions

Corporate Compliance

Emissions Reporting Requirements

GHG Protocol:

• Global standard for corporate GHG accounting
• Scope 1: Direct emissions from owned sources
• Scope 2: Indirect emissions from purchased energy
• Scope 3: Value chain emissions (suppliers, customers)
• Widely adopted by thousands of companies

CDP (Carbon Disclosure Project):

• Annual disclosure requested by investors
• 13,000+ companies disclose
• Climate, water, and forests questionnaires
• Public disclosure and scoring
• Influences investment and purchasing decisions

SEC Climate Disclosure (Proposed):

• Mandatory climate risk disclosure for public companies
• Scope 1 & 2 emissions reporting
• Scope 3 if material or company has targets
• Third-party assurance required
• Implementation timeline being finalized

Net-Zero Commitments

Over 5,000 companies have made net-zero commitments, creating compliance obligations:

Science Based Targets Initiative (SBTi):

• Validates corporate emission reduction targets
• Requires 1.5°C alignment with Paris Agreement
• Specific criteria for target setting
• Annual progress reporting
• Restrictions on offset use (residual emissions only)

Industry-Specific Regulations

Financial Sector:

• Task Force on Climate-related Financial Disclosures (TCFD)
• EU Sustainable Finance Disclosure Regulation (SFDR)
• Net-Zero Banking Alliance (NZBA)
• Portfolio emissions reporting

Aviation:

• CORSIA compliance for international flights
• EU ETS coverage for intra-European flights
• UK ETS for UK flights
• Sustainable Aviation Fuel (SAF) mandates

Maritime:

• IMO carbon intensity regulations (CII)
• EU ETS inclusion from 2024
• FuelEU Maritime regulation
• Increasing pressure for sector-wide pricing

Compliance Process

For Regulated Entities

1. Registration: Register in applicable trading system
2. Monitoring: Track emissions throughout compliance period
3. Reporting: Submit verified emissions report by deadline
4. Surrender: Submit allowances equal to emissions
5. Verification: Annual verification by accredited auditor

Verification Requirements

• Must use accredited verification body
• Material misstatement threshold (typically 5%)
• Site visits and document reviews
• Verification statement submitted to authority
• Penalties for non-verification or late verification

Non-Compliance Penalties

Voluntary Market Integrity

Integrity Council for Voluntary Carbon Markets (ICVCM)

Establishes Core Carbon Principles (CCPs) for high-quality credits:

• Rigorous quantification and verification
• Additionality and causality
• Robust independent third-party validation/verification
• Permanence for carbon storage projects
• No net harm to environmental and social well-being
• Transparent governance and reporting

Voluntary Carbon Markets Integrity (VCMI)

Provides guidance on credible corporate use of carbon credits:

• Claims Code defining acceptable claims
• Credits must supplement, not replace, emissions reductions
• Transparency in credit use and retirement
• Quality thresholds for credits purchased

Greenwashing Risks

Regulatory scrutiny increasing on misleading climate claims:

• FTC Green Guides (US) on environmental marketing
• UK ASA rulings on carbon neutral claims
• EU Green Claims Directive (proposed)
• Securities fraud liability for material misstatements

Emerging Regulations

Scope 3 Mandates

Increasing requirements to address value chain emissions:

• SEC proposed rules including material Scope 3
• California SB 253 requiring Scope 3 reporting
• EU Corporate Sustainability Reporting Directive (CSRD)
• Growing investor pressure for comprehensive reporting

Carbon Taxes

Alternative to trading systems, direct price on emissions:

• Canada federal carbon tax ($65/tonne in 2023, rising to $170 by 2030)
• Nordic countries with long-standing carbon taxes
• Singapore carbon tax on large emitters
• Proposals in various jurisdictions

Supply Chain Due Diligence

• EU Deforestation Regulation: proof of deforestation-free supply chains
• German Supply Chain Due Diligence Act
• Proposed EU Corporate Sustainability Due Diligence Directive
• Increasing liability for value chain impacts

Compliance Best Practices

Governance

• Board-level oversight of climate risks and compliance
• Clear roles and responsibilities
• Regular reporting to senior management
• Integration with enterprise risk management

Systems & Processes

• Robust emissions tracking and reporting systems
• Internal controls and quality assurance
• Documentation and audit trails
• Regular internal audits
• Training for relevant personnel

Proactive Management

• Monitor regulatory developments
• Engage with regulators and industry associations
• Scenario planning for future regulations
• Hedge compliance obligations through forward purchasing
• Invest in emission reduction to reduce exposure

Looking Forward

The regulatory landscape for carbon markets is rapidly evolving and expanding. Companies must stay informed and adapt their strategies to maintain compliance and capitalize on opportunities. The next chapter examines real-world case studies demonstrating successful navigation of this complex environment.