The legal landscape of carbon credit secured financing in China: Comparative insights into the verified carbon standard and the China certified emission reduction mechanism

Abstract

This paper provides a legal analysis of carbon credit secured financing, focusing on a comparative study of the verified carbon standard and China certified emission reduction (CCER) systems. Utilising doctrinal analysis and document analysis, it introduces a multidimensional framework to evaluate carbon credits’ eligibility as property to secure debts. The paper argues that verified carbon units (VCUs) should be regarded as contractual claims, whereas China certified emission reduction units (CCERUs) ought to be positioned as property rights in general carrying erga omnes (against the world) effect under the protection of Article 126 of the Civil Code of the People's Republic of China. It recommends using VCUs as debt security through a floating charge, while CCERUs are more suitable for a fixed charge. These findings provide practical guidance for stakeholders aiming to leverage carbon credits for financial security, contributing to optimising both China's domestic and the global green financing system.

Introduction

Human-driven climate change is intensifying, ¹ and many jurisdictions now use carbon markets to create economic incentives for emissions reductions. ² In cap-and-trade systems, regulators set a cap and issue tradable emission allowances that regulated entities must surrender against verified emissions. Carbon credits represent certified reductions or removals from projects (e.g. afforestation, methane control) after monitoring, reporting and verification. Some compliance regimes permit entities to use a limited quantity of eligible credits to meet their obligations. For example, under the California Cap-and-Trade Program, compliance entities may use offset credits to fulfil up to 4% of their emissions obligations for 2021–2025, and up to 6% for 2026–2030; ³ in the Korea Emissions Trading System (K-ETS), the limit is 5% in Phase 3; ⁴ and under the Québec Cap-and-Trade System, the allowable proportion is 8%. ⁵ This paper examines the China Certified Emission Reduction (CCER) Scheme, a national scheme that allows eligible emission reduction and carbon sequestration projects to generate tradable credits within China's carbon market, by comparing it with the verified carbon standard (VCS), an internationally recognised voluntary standard that certifies climate mitigation projects and issues credits for trading in voluntary carbon markets. This approach allows for an analyse of how participants in China's carbon market can improve secured financing through carbon sequestration credits, with particular focus on their legal status and the mechanisms of creation, perfection, and priority under Chinese law.

This article examines the legal strategy of using carbon credits as security for debt repayment, focusing specifically on voluntary carbon reduction project-based financing in China's present carbon market. In this context, the security interest is created by the project owner over their carbon credits that are already issued and recorded in the relevant registry to secure the satisfaction of debt obligations. For reasons of focus and space, the analysis does not address other important use cases, include inter alia, security over future/anticipated credits and related expected rights or receivables, the use of carbon futures or other derivatives for secured transactions, inventory/warehouse-receipt-style financing by traders or aggregators, repurchase arrangements, or margin lending and rehypothecation by secondary-market holders. These scenarios raise distinct questions of transferability, perfection, priority, and rights in insolvency that cannot be treated adequately within a single article; they are therefore reserved for subsequent work. While certain doctrinal conclusions here may offer analogies beyond the project-finance setting, any such extension is outside the intended scope of the paper.

Accordingly, this paper addresses three interrelated issues that are indispensable to its inquiry, because they concern the very foundations upon which carbon credits may be mobilised as financial instruments and therefore lie at the heart of any secured financing strategy. It first examines the proper understanding of the term ‘property’ in the specific context of carbon credits under the Civil Code of the People's Republic of China (PRC), against the background of competing doctrinal and theoretical interpretations in legal scholarship. It then considers the extent to which carbon credits issued under the VCS and the CCER schemes may be recognised as proprietary rights under the current Chinese legal framework, before analysing the legal mechanisms through which such credits may be deployed to secure debt satisfaction under Chinese law. Taken together, these issues underpin the paper's broader aim of enhancing secured financing practices in the Chinese carbon market by bridging doctrinal theory and current carbon sequestration business activities.

This paper identifies several gaps in the existing research and, ⁶ against this background, makes two principal contributions to the current scholarship. First, it advances an interpretive framework for determining the legal characteristics of carbon credits issued under the CCER and VCS systems. Second, the article proposes a non-mainstream but more reasonable pathway for carbon credits issued under the CCER and VCS systems, under the Civil Code of PRC (hereinafter Civil Code), to secure debt repayment as properties.

This paper uses China as a case study to argue that the financing difficulties of carbon sequestration projects should be understood not merely as a problem of market development or climate-policy implementation, ⁷ but also as a problem of legal infrastructure. ⁸ By analysing whether carbon credits issued under the CCER and VCS scheme can be recognised as proprietary assets and deployed through secured transactions mechanisms, the paper shows how an issue conventionally situated within environmental law may be reinterpreted through the framework of property law in order to render mitigation assets bankable, ⁹ reduce lenders’ risk exposure, ¹⁰ and channel private capital towards long-cycle decarbonisation projects. ¹¹ The environmental law significance of this inquiry lies precisely in that doctrinal translation: it connects the effectiveness of climate mitigation regulation to the capacity of private law to confer transferability, security value, priority and insolvency resilience on carbon credits, ¹² thereby helping to align financial flows with low-emissions development in the sense of Article 2(1)(c) of the Paris Agreement. ¹³ Read in comparative perspective, China's experience also speaks to a wider transnational debate, because other jurisdictions have already embedded different legal and institutional designs for carbon market governance, for examples the New Zealand Units, carbon units that issued under the New Zealand Emissions Trading Scheme, and the Australian Carbon Credit Units issued under the Australian Carbon Credit Unit Scheme, ¹⁴ each of which offers a distinct model of allocation, registry administration, trading architecture and, in some instances, asset-based protection or control.

Explanations of key terms

It is necessary to clarify several concepts used throughout this paper, because their meanings can differ across jurisdictions. The first one is ‘property’, which frames the legal status of carbon credits and is examined further in the section titled “Property” under Chinese civil law: an analytical framework’.

A universal meaning does not exist for ‘property’ across jurisdictions. This paper uses ‘property’ within the framework of the Civil Code of the PRC. It refers to objects that are protected by law, have economic value, and are capable of being controlled by people. This definition is not intended to displace any jurisdiction's existing understanding of property. It is included to help readers see why verified carbon units (VCUs) and China certified emission reduction units (CCERUs) can qualify as property under Chinese civil law.

This paper also uses ‘unit’ as a generic term for any tradable instrument equal to one tonne of CO₂-equivalent (CO₂e). This includes (i) emission allowances issued under compliance cap-and-trade systems and (ii) carbon sequestration project-based emission reductions. A unit serves as the standard measurement for carbon allowances and carbon reductions and is commonly used for registration and settlement. ¹⁵ VCUs and CCERUs each represent a defined quantity of CO₂e and are the basic denominations of carbon reductions recognised under the relevant carbon sequestration programmes.

Another key concept used throughout this paper is ‘carbon credit’. It represents a defined quantity of CO₂e generated by emission reduction activities, measured in ‘units’ under a baseline-and-additionality methodology and issued by relevant authorities. Carbon credits are typically issued ex post, following monitoring and third-party verification of emission reductions or removals against a defined baseline. ¹⁶ By contrast, ‘carbon allowances’ are allocated by regulators under an emissions trading scheme (ETS), typically by being auctioned and/or allocated for free to covered entities, which must then surrender allowances equal to verified emissions. ¹⁷ They underpin compliance carbon markets, which are established by domestic law and impose binding compliance obligations backed by penalties. ¹⁸ Some compliance systems also allow a limited quantity of offset credits to be used as compliance instruments, subject to eligibility rules and quantitative limits. ¹⁹ Voluntary markets, in turn, centre on carbon credits purchased for voluntary use rather than to meet legally binding obligations. ²⁰ Nonetheless, depending on the rules of a given compliance regime, certain carbon credits may be recognised as eligible for compliance purposes, so the boundary between ‘voluntary’ and ‘compliance’ use is not fully rigid.

In addition to the CCER scheme outlined above, this paper frequently refers to the VCS system. VCS is one of the world's leading voluntary carbon crediting programmes, in which China has played an active role. It provides a framework for certifying greenhouse gas emission reductions and removals. The programme is administered by Verra, a non-profit organisation that develops and manages standards designed to support the credibility and integrity of carbon credits issued under the VCS.

The rationale for the comparative analysis between the verified carbon standard and the China certified emission reduction mechnism

Article 12 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (hereinafter Kyoto Protocol) established the clean development mechanism (CDM) to support the economic restructuring of developing countries and provide developed countries with a more flexible means of fulfilling their carbon reduction commitments. ²¹ The CDM permits developed countries to purchase certified emission reductions (CERs) from developing countries to offset their own carbon emissions. This mechanism aims to allocate the responsibility of addressing climate change between developing and developed countries in a more equitable and efficient manner. In 2005, China approved its first CDM project, authorised by the National Development and Reform Commission (NDRC) as the authority responsible for the approval and management of CDM projects. ²²

Building on the Kyoto Protocol architecture, the Paris Agreement embeds removals by sinks in Parties’ mitigation pathways aiming for a balance of emissions and removals later this century, ²³ and expressly encourages the conservation and enhancement of sinks, including result-based support for reducing emissions from deforestation and forest degradation, plus the sustainable management of forests, and the conservation and enhancement of forest carbon stocks (REDD+). ²⁴ Together with the market and non-market-based cooperation approaches, ²⁵ this provides the international law backdrop for domestic schemes to generate and trade carbon sequestration credits and to mobilise finance.

Authorised by NDRC, the CCER programme started in 2012; due to various management and auditing issues, ²⁶ the CCER program suspended the registration and filing of new projects in 2017. In December 2020, the Ministry of Ecology and Environment approved the Measures for the Administration of Carbon Emissions Trading (for Trial Implementation) (MACET), which set the stage for the relaunch of the CCER program. In January 2024, the Interim Regulation on the Administration of Carbon Emission Trading (RACET) was promulgated, wherein the Chinese government once again affirmed the tradability of carbon sequestration credits generated from CCER projects in the carbon market.

This paper adopts China's carbon market and green-finance regime as the analytical context for the discussion, for three principal reasons. First, China is currently the largest emitter of carbon dioxide globally, accounting for 30% of the world's total emissions in 2021. ²⁷ China now faces significant pressure to fulfil its ‘double carbon commitment’ of reaching carbon peak before 2030 and achieving carbon neutrality by 2060. This strict timeline necessitates prompt climate change mitigation measures, positioning China as a focal point in global emission reduction efforts. Independent investigation reveals that, China is now nearing its carbon peak. ²⁸ Through ongoing industrial transformation and the optimisation of its energy structure, China's emission reductions will increasingly conform to the economic principle of diminishing marginal returns. The growth of carbon sequestration projects, supported by secured financing mechanisms, will become crucial for achieving carbon neutrality and thereby actively contribute to global emission reduction targets.

Second, the Chinese government is inclined to use carbon sequestration projects as a stimulus to revitalise the economy in the post-pandemic era. This approach, which has the potential to harmonise climate change mitigation efforts with economic development, warrants in-depth analysis. As China's real estate market declines, ²⁹ the Communist Party of China and the Chinese government are increasingly emphasising the critical role of the real economy and high-end manufacturing in future development. ³⁰ During a visit to Heilongjiang Province in 2023, President Xi Jinping introduced a term ‘new productive forces’, ³¹ which quickly gained traction within China's government and academic circles. The ‘new productivity forces’ aim to create an industrial structure with high added value and greater environmental sustainability. ³² However, the present global industrial layout indicates that, China's pursuit of ‘new productive forces’ presents a potential challenge to Western interests, compelling Western countries to adopt more protectionist measures. ³³ This development could alter the competitive dynamics between China and the West. The United States and its allies are likely to respond to this challenge from China by intensifying technological restrictions and engaging in trade wars, ³⁴ which could slow the pace of China's economic recovery and industrial transformation.

Given China's current challenging scenario, the international community cannot realistically expect significant reductions in its carbon emissions in the short term. At this juncture, carbon sequestration projects, which simultaneously support economic growth, create job opportunities, and offset carbon emissions, ³⁵ could serve as the most effective demonstration of China's progress in fulfilling its commitments to the international community.

Third, by supporting carbon sequestration projects through a secured financing system, China seeks to cultivate an image as a responsible global power, potentially influencing climate change policies of the United States, as President Trump continues to have ambiguous positions on addressing climate change. ³⁶ This strategic approach warrants an in-depth analysis of China's role and impact on the global stage. The competition between China and the United States is not merely a contest for leadership between the world's two largest economies; it is also a battle of discourse power that will ultimately shape the trajectory of global development. ³⁷ This competition occurs not only on economic, political, and cultural levels but also as a contest of international image. ³⁸ This is a fundamental reason why China is actively responding to climate change and seeking to lead international and regional climate agreements. In maintaining its international leadership, the United States is likely to adopt a more responsible stance to counter China's image competition, which could objectively benefit the achievement of global emission reduction goals.

Under the China National Emissions Trading Scheme (CN-ETS), there are several distinct sources for carbon credits. The first source is the CDM established under the Kyoto Protocol framework. The second involves international third-party verified emission reduction mechanisms, notably the VCS and the gold standard (GS). The third source comprises the CCER and various provincial level verified emission reduction mechanisms in several pilot areas. This paper conducts a comparative analysis between the VCS and CCER systems, which are currently the two most active carbon reduction systems involving China. On the contrary, as will be further explained in the following text, other mechanisms have ceased to play active roles within the CN-ETS and are thus excluded from this research.

Following the financial crisis of 2008, the reduction in European industrial capacity led to a substantial decrease in carbon market prices, which rendered CDM projects economically unviable. ³⁹ Post-2012, the European Union Emissions Trading System (EU-ETS) declared that it would only accept CERs from CDM projects in the least developed countries. ⁴⁰ This policy shift directly precipitated the decline of the CDM mechanism in China, forcing Chinese CDM projects to explore new avenues for profitability. According to the CDM database, China has not registered any new CDM projects since June 2017. ⁴¹ Given that the CDM mechanism is currently inactive within the CN-ETS, there is no need to analyse the carbon credits from CDM projects.

Similar to the position under the CDM mechanism, China's participation in the GS system, an international voluntary carbon crediting programme with stricter sustainable-development and assurance requirements, ⁴² remains far less significant than its participation in the VCS system. Figures 1 and 2 demonstrate clear trends that highlight the divergence in China's involvement in these two carbon reduction mechanisms.

Figure 1.

China's GS projects: annual distribution of quantity and global percentage. GS: gold standard.

Figure 2.

China's VCS projects: annual distribution of quantity and global percentage. VCS: verified carbon standard.

Figure 1 illustrates the sharp decline in both the quantity and international share of China's participation in GS projects over the years, suggesting a shift away from the GS framework. As of 2012, the number of GS projects peaked, with China accounting for 60 projects and holding a 41.72% share globally. However, this participation sharply declined post-2013, with only 25 projects (17.57% of the total) in 2014, and dropping to single digits from 2015 onwards. By 2023, the number of projects had decreased to just 1 project (0.31%), showing that China is essentially phasing out its involvement in the GS market.

By contrast, China's participation in the VCS system has remained strong. Figure 2 shows that although the number of China's VCS projects has fluctuated, it has never dropped to the low levels observed in GS projects. In 2019, China registered over 400 VCS projects, capturing an international share of 51.72%, the highest recorded. Although there was a slight dip after 2020, with 26.09% of the global projects still in 2020 and 24.30% in 2024, the overall trend shows that China continues to maintain a significant presence in the VCS mechanism.

The comparison between Figures 1 and 2 suggests that China will increasingly rely on the VCS system for its carbon reduction efforts at the international level. The GS framework will no longer play a significant role in China's participation in the global carbon market.

At the domestic level, the withdrawal of support by the Chinese government for local carbon markets is a key reason why this paper focuses exclusively on the CCER scheme, the national-level carbon reduction system, rather than engaging with China's provincial local carbon markets. Article 29, paragraph 2 of the RACET stipulates that once it comes into effect, no new local carbon trading markets shall be established, and enterprises shall no longer engage in carbon emissions trading in local markets for the same type of greenhouse gas and the same industry. ⁴³ This decision to halt the creation of new local carbon markets indicates an absence of supportive policies tailored to local economic development and environmental protection needs. Capital investment is inherently forward-looking, ⁴⁴ and the central government's removal of prospects for local carbon markets diminishes their appeal to private capital, thereby preventing them from evolving into fundamentally independent carbon trading systems. Furthermore, Article 29, paragraph 1 of the RACET mandates that existing local carbon markets must refine their management systems to align with RACET's requirements, ⁴⁵ which are statutory requirements designed for the national-level carbon market. This underscores that the destiny of present local carbon markets is to gradually integrate themselves into the CCER framework.

The legal Status of carbon sequestration credits

‘Property’ under Chinese civil law: an analytical framework

Before addressing specific legal strategies for employing VCUs and CCERUs to secure the performance of obligations, this paper must first consider whether they qualify as ‘property’. The property status of carbon credits is critical, as it determines whether they can be reliably traded, used as security for debt repayment, or enforced through public authority. Clarifying this status is essential to building market confidence and protecting participants against legal uncertainty when seeking secured financing through CCERUs and VCUs.

The Civil Code makes extensive use of the term ‘property’ yet nowhere defines it. Having surveyed all provisions in which the word appears, this paper argues that, within the structure of the Civil Code, ‘property’ is used in two analytically distinct senses.

First, it operates as a generic designation for social wealth. For example, Article 246 of the Civil Code provides that ‘property owned by the State as provided by law belongs to the State, namely, the whole people’. ⁴⁶ China monopolised categories of wealth constituting the commanding heights of the economy (such as mineral resources, forests and land) through a system of State ownership. ⁴⁷ Despite reform and opening-up, the State retained control over the principal categories of social wealth, many of which have remained outside free-market circulation. In this sense, the ‘property’ in Article 246 functions as a collective label for social wealth.

Secondly, ‘property’ functions as the object of legal relations. For instance, Article 390 provides that where property furnished as security is damaged, destroyed or expropriated during the term of the security, the secured creditor has a priority right to be compensated out of the insurance proceeds, damages or indemnity. ⁴⁸ Here, ‘property’ denotes the object to which civil rights, duties and liabilities are directed.

Given that the aim of this paper is to develop legal strategies for deploying CCERUs and VCUs to secure debt satisfaction, the analysis proceeds on the second sense of property identified above – namely, property as the object of legal relations. Although the Civil Code does not define ‘property’, Chinese private law scholarship commonly treats it as the aggregate of rights bearing monetary value. ⁴⁹ Three dimensions for the criterion of identifying ‘property’ within Chinese civil law context may be distilled from the existing scholarship.

Legal dimension. Under the Civil Code and Chinese private law theory, an object qualifies as ‘property’ only if it is accepted and protected by law; ⁵⁰ Article 233 of the Civil Code makes clear that, where a real right is unlawfully infringed, the right-holder may seek relief by settlement, mediation, arbitration or litigation. ⁵¹ The very existence of property rights forms part of the social contract: to escape insecurity and conflict in the state of nature, individuals constitute a political community and establish public authorities that secure core protections. ⁵² Through legislation, the State determines what is to be protected by property rights and confers on individuals the entitlement to exclude others by their own acts or with the aid of public authority, thereby safeguarding their powers to possess, use, enjoy the fruits of, and dispose of their property.

Economic dimension. Property must be an object bearing economic (pecuniary) value. Economic value need not be reflected in a quoted market price; price is a contingent, outward manifestation of value, sensitive to market depth, information asymmetries, and institutional constraints, ⁵³ whereas ‘economic value’ denotes civil interests amenable to monetary assessment. ⁵⁴ Purely personality-based interests (e.g. reputation, privacy, liberty) are not capable of monetary valuation and therefore do not qualify as property. ⁵⁵ Accordingly, the economic aspect of identifying property does not depend on the existence of market liquidity; the decisive question is whether the interest carries benefits measurable in money.

Technological dimension. In Chinese civil law, property must be an object susceptible to human control and disposition. ⁵⁶ By ‘control’, this paper refers to a person's capacity to formulate and implement decisions regarding an asset's disposition to constrain its future states and narrow the range of its possible developments over time. For example, John Bechhoefer explicitly defines ‘accuracy of control’ as a statistical reduction of the uncertainty regarding the state of the controlled system, namely, the progressive narrowing, over time, of the set of attainable states. ⁵⁷ Control over an object may be mediated by different technological substrates: so long as the technology permits, both corporeal things and intangible assets can be brought within human control. Conversely, where an object lacks any reasonable pathway to control under foreseeable technological and organisational conditions – for example, an extra-terrestrial planet – it ought not to be included within the category of property.

The property qualification of China certified emission reduction units and verified carbon units

Legal dimension

In a nutshell, this paper defines CCERUs and VCUs as property, since they satisfy all three dimensions within the analytical framework.

VCUs and CCERUs are objects protected and remediable at law. Under the Verra Registry terms of use (ToU), a document setting out the contractual conditions for access to and use of the Verra Registry, disputes are governed by the law of the District of Columbia and must first proceed to mediation administered by JAMS (formerly Judicial Arbitration and Mediation Services, Inc.) in Washington, DC; ⁵⁸ if unresolved within 30 days, they are to be submitted to arbitration under the JAMS Comprehensive Arbitration Rules and Procedures. ⁵⁹ The ToU further provides that any mediated resolution or arbitral award may be enforced by any court of competent jurisdiction, and that the prevailing party may recover costs and attorney's fees. ⁶⁰ This framework indicates that rights arising from the registration, retirement (cancellation) and disposition of VCUs enjoy judicial protection.

Administrative enforcement also plays a significant role in protecting the VCUs. In October 2024, the U.S. Commodity Futures Trading Commission (CFTC) announced its first enforcement action targeting fraud in the voluntary carbon credit markets, filing suit against CQC Impact Investors LLC (hereinafter CQC), its former CEO Kenneth Newcombe, and Tridip Goswami, Head of CQC's Carbon & Sustainability Accounting Team. The defendants allegedly reported false and misleading information to at least one carbon credit registry and to third-party verifiers to obtain credits far more than what was warranted, which the project developer could – and did – sell to others. According to the CFTC, it seeks disgorgement, civil monetary penalties and permanent injunctive relief against CQC and the individuals involved. ⁶¹ On the same day, the U.S. Attorney's Office for the Southern District of New York announced a criminal indictment of Newcombe and Goswami, alleging manipulation of survey data to procure excess VCUs. ⁶²

Although the CQC action sought to set aside VCUs procured by fraud, its effect is likewise to safeguard VCUs lawfully obtained by other project developers. Holding demand constant, an expansion in the supply of VCUs depresses unit prices, thereby eroding the economic returns available to lawful holders. Fraudulently issued VCUs may also be transferred to bona fide third parties in the voluntary carbon market, exposing unsuspecting counterparties to loss. More fundamentally, project-level fraud undermines the credibility of the voluntary mitigation architecture and ultimately harms all project developers. Disputes concerning the verification, issuance and trading of voluntary emission reductions are proliferating and are increasingly framed as climate-litigation claims. ⁶³ These cases indicate that voluntary carbon units – including VCUs – now fall within the scope of judicial remedies.

Like VCUs, CCERUs are objects whose entitlement is confirmed and publicised through registration, and which attract public-law remedies against interference. The Measures for the Administration of Voluntary Greenhouse Gas Emission Reduction Trading (For Trial Implementation) (MAVGERT) lay down uniform, nationwide rules that establish CCERUs’ eligibility to participate in China's carbon market and govern the basic order of trading. ⁶⁴ They also specify the rules for project establishment and operation, and for the verification, issuance and registration of emission reductions, thereby supplying project owners with a clear legal basis and supervisory framework. ⁶⁵ Crucially, under Articles 14 and 16 of the Provisional Rules on the Registration of Voluntary Greenhouse Gas Emission Reductions, CCERUs may be judicially frozen, debited, or subjected to compulsory enforcement. ⁶⁶

Judicial practice now engages CCERUs disputes: on 3 June 2024, Beijing's Tongzhou District People's Court heard two tax cases stemming from CCERUs trades. The central issues concerned whether special value-added tax invoices should be issued and how tax burdens should be allocated. ⁶⁷ Although CCERUs themselves were not the direct point in dispute, these cases show that controversies surrounding CCERUs fall within the courts’ jurisdiction and are justiciable. They also indicate a judicial willingness, within the existing legal framework, to subject CCERUs transactions to substantive and procedural scrutiny, treating them as relations of rights and obligations that are subject to judicial oversight.

Taken together, CCERUs are objects whose indicia of entitlement are defined by a unique identifier in a unified registry; whose changes in entitlement are publicised through the registration and trading systems; and whose enjoyment is secured by public authority, through judicial adjudication and the powers of compulsory enforcement.

Economic dimension

VCUs and CCERUs are interests amenable to monetary assessment. Third-party annual market reports show an observable statistical distribution of prices and market value across various VCUs. In 2023, the average transaction price on the voluntary carbon market was USD 6.53 for 1 tonne of CO₂e, with a reported market size of USD 723 million, evidencing a continuing stream of measurable monetary consideration and aggregate scale. ⁶⁸ In parallel, the spot-futures linkage around VCUs has yielded standardised pricing and delivery mechanisms. For example, on the New York mercantile exchange, part of CME Group's derivatives marketplace for energy and environmental products, the CBL global emissions offset futures contract specifies 1,000 eligible emissions units per contract and carries a minimum price fluctuation of USD 0.01 per unit, and uses the CBL spot price as the final settlement reference. ⁶⁹ These pricing data confirm that VCUs, as tradable credits, have clear monetised valuation and settlement pathways. Moreover, the coupling between carbon credit futures and spot markets enables observable forward curves and predictable delivery, thereby furnishing price-discovery and hedging functions that reduce valuation uncertainty and counterparty risk. ⁷⁰

Although no futures are currently listed in China's carbon market, and thus no spot-futures linkage exists, ⁷¹ CCERUs nonetheless display a clear, observable price distribution. In the unified national CCER spot market, the trade-clearing-settlement pathway is implemented via end-of-day interfacing between the trading platform and the central registry, with delivery-versus-payment gross settlement on a trade-by-trade basis and book-entry delivery effected by the registry operator. ⁷² Reference prices, daily limits and tick sizes supplemented by the venue's daily quotes and periodic reports ensure price observability. ⁷³ Given this predictable settlement pathway and observable price distribution, creditors can calibrate measurable haircuts (valuation discounts), providing a basis for valuing security interests over CCERUs.

Technological dimension

Both VCUs and CCERUs are objects susceptible to human control. For VCUs, each unit exists as a discrete book-entry in an electronic registry, accompanied by a unique serial number and status information. An authorised account holder (or its agent) may, via the registry interface, effect a transfer, retirement, or cancellation; the system records the operation and publicly reflects the resulting status change. ⁷⁴ The registry also maintains account-level sanctions and correction mechanisms to address over-issuance or misstatements, ⁷⁵ thereby ensuring that the consequences of a holder's dispositions are clear and stable.

The CCER mechanism likewise relies on a registration system that enables project owners to dispose of CCERUs by electronic instruction – e.g. by concluding a sale contract and, by agreement, executing a transfer within the system. ⁷⁶ For non-consensual, law-driven changes in entitlement such as succession, judicial freezing, debiting or compulsory enforcement, the relevant party may apply to the registry for an amendment on the strength of valid legal instruments. ⁷⁷ In addition, project owners, key emitting entities in the carbon market, and other holders may voluntarily cancel some or all their CCERUs, thereby relinquishing proprietary claims. ⁷⁸

These rules show that holders and interested parties exercise effective control over VCUs and CCERUs through a defined pathway as they take decisions, implement them via the electronic system and registry, and thereby produce respective legal effects.

The legal status of China certified emission reduction units and verified carbon units

The joint study prepared by the United Nations Commission on International Trade Law (UNCITRAL) and the International Institute for the Unification of Private Law (UNIDROIT) reports that the private law status of verified carbon credits (VCCs) remains unsettled. Jurisdictions exhibit markedly divergent tendencies in characterising VCCs, and no uniform private law classification has yet emerged, with implications for legal certainty when VCCs are traded across borders. The report identifies three principal pathways and stresses their respective consequences for transactions and risk management: ⁷⁹

Defining VCCs as bundle of contractual rights. VCCs are treated as a set of contractual claims held by the account holder against the registry. In some settings, however, the contract may be fully performed upon issuance, leaving any residual entitlements to depend chiefly on the registry's ToU.

Defining VCCs as intangible property. VCCs are characterised as intangible objects enforceable against third parties, on the basis that they satisfy general property criteria such as definability, identifiability, third-party effect, and persistence.

Defining VCCs as digital assets. Given their existence as electronic records with unique serial numbers, VCCs can be analysed within a digital assets framework. Yet under UNIDROIT's principles on digital assets and private law, the touchstone for the digital asset is factual control; ⁸⁰ unlike blockchain-native assets, current registry infrastructures do not typically confer exclusive control on VCCs holders. The suitability of the digital asset pathway for VCCs is therefore contestable.

In recent years, UNCITRAL and UNIDROIT have increasingly oriented the core characterisation of VCCs towards a proprietary rights framework with erga omnes (against the world) effect. Contractual obligations between registries and account holders remain significant, but they operate only as in personam claims alongside the in rem proprietary relationship. In the Draft UNIDROIT Principles on the Legal Nature of Verified Carbon Credits, the working group defines VCCs as ‘units’ recorded in a registry under a unique identifier, with ‘unit’ expressly defined as an individuated intangible asset. Principle 3(1) provides that a VCC may be the object of proprietary rights, and a transfer – including the grant of a security right in favour of a secured creditor – is treated as a change in proprietary rights in the VCC. ⁸¹

This paper does not seek to harmonise the legal status of VCUs and CCERUs at the level of international law; rather, it seeks to clarify their legal characteristics within the Civil Code and, on that basis, to analyse the available security strategies.

The legal status of verified carbon units

A defining feature of VCUs issuance is platform dominance: Verra designs and controls the entire VCS project lifecycle, and project proponents must obtain Verra's cooperation to receive VCUs. Under the Verra Registry ToU, five categories of actions by the project owner require Verra's prior consent and cooperation, and Verra retains absolute discretion whether to grant such requests. ⁸²

Verra's dominance on the VCS project is most evident at the issuance stage. After validation/verification by validation/verification bodies (VVBs), namely independent third-party auditors approved by Verra to assess whether projects comply with the VCS rules and methodology requirements, the project owner must submit the verification outcome for Verra's internal review. That review, aimed at ensuring conformity with Verra's standards on environmental integrity, transparency, and impact, is a substantive assessment independent of the VVBs’ opinion. Therefore, even where VVBs confirm methodological soundness and accurate crediting, Verra may still decline to issue VCUs if the project fails to meet these standards. ⁸³ Verra also conducts ongoing quality monitoring post-issuance and may cancel credits or require make-good for over-issuance, including where erroneous registration or fraudulent trading is detected. ⁸⁴ As a package, these terms vest ultimate decision-making authority in Verra and its registry.

Another critical feature of the VCUs issuance procedure is the establishment of the mandatory buffer account for agriculture, forestry and other land use (AFOLU) projects, designed to manage carbon reversal risk. On issuance, each AFOLU project must, in accordance with a VVB-approved non-permanence risk assessment, set aside up to 60% of verified reductions as buffer credits, ⁸⁵ which are transferred directly into a platform-controlled buffer account. The buffer account is centrally administered by Verra; the credits are non-tradable, and project owners have no direct access to or control over them. ⁸⁶ Only where subsequent monitoring demonstrates a sustained absence of carbon reversal may Verra consider releasing part of the buffer credit; ⁸⁷ the project owner merely holds a right to apply for releasing, with both the decision and quantity resting on Verra's review outcome. This architecture precludes project owners from enjoying full proprietary entitlements in buffer credits: release is available only on application under pre-formulated, non-negotiable boilerplate terms and subject to Verra's approval with unilateral disposition excluded.

Given Verra's lifecycle control of VCS projects, project owners lack exclusive proprietary control in VCUs and instead possess in personam claims against Verra as a determinate counterparty. Ancient Roman jurists distinguished private law actions into actio in rem and actio in personam. The latter referred to claims brought against a specific individual, requiring that person to perform a particular obligation. ⁸⁸ Through the efforts of the legal glossators in the middle ages, actio in personam subsequently evolved into the doctrinal category of jura in personam. ⁸⁹ Given that different jurisdictions construe jura in personam differently, it is necessary to clarify that this paper employs the concept of jura in personam within the Chinese civil law theory. The Civil Code does not itself employ the terminology of jura in personam but instead enumerates various types of rights that exhibit its characteristics and prescribes their specific content individually. In academic discourse, however, jura in personam is widely adopted by scholars, where it denotes a right to demand performance of an obligation from a specific counterparty. ⁹⁰ The use of this concept serves to generalise the rights that conform to this definition under the Civil Code, thereby facilitating the systematisation of civil rights in China.

Jura in personam arise, depending on the cause, from contract, tort, negotiorum gestio (voluntary management of others’ affairs without prior mandate) and unjust enrichment. ⁹¹ Verra is a private non-profit organisation and does not possess any legislative or regulatory authority. ⁹² It does not stand above other market participants in terms of legal status or institutional power. The ToU it issues are not laws or public regulations; they are contractual terms binding only on those who choose to participate in the system. Therefore, the legal relationship between the project owner and Verra is created by consent through boilerplate contracts; accordingly, within the framework of Civil Code, VCUs are best characterised as contractual claims.

The legal status of China certified emission reduction units

CCERUs are issued by operation of law, and the key feature of the process is automatic issuance: once verification and public notice are complete and unopposed, the registry issues CCERUs, with no discretionary approval required. Under Article 22 of MAVGERT, upon receiving the proponent's application, the CCER registry conducts only a formal review focusing solely on the completeness of documents and, within 15 working days, records the verified reductions. ⁹³ Additionally, the CCER framework contains no buffer account arrangement. Where complete documentation is submitted, the project owner is entitled under MAVGERT to have the reductions registered in the system and thereby available for subsequent trading on China's carbon market. ⁹⁴

Accordingly, this paper submits that the issuance of CCERUs is strictly law-bound, with the CCER platform/registry enjoying only minimal discretion. As project owners need no platform cooperation to obtain CCERUs, these credits do not bear the attributes of jura in personam; conversely, project owners enjoy full dominion over CCERUs and may dispose of them without another party's involvement. Moreover, third parties must abstain from interfering with the holder's exclusive rights in CCERUs, the entitlement therefore belongs to the right in rem that carries erga omnes (against the world) effect.

In parallel with the case of jura in personam, the Civil Code does not itself employ rights in rem, but instead enumerates specific rights that exhibit its characteristics, with particular emphasis on the most typical category of rights in rem: real rights. In academic discourse, however, the concept of ‘right in rem’ is widely employed among scholars. It refers to rights that may be exercised exclusively by the right-holder and that entitle the holder to exclude interference by any third party. ⁹⁵ The definition illustrates that, the core of the right in rem does not lie in a legal relationship centred on a ‘thing’ as its object, but rather in the erga omnes effect of the right itself. It is in this sense that this paper employs the concept of ‘right in rem’.

Scholars have classified the following categories of rights under the Civil Code as forms of rights in rem: (1) the rights to life and health; (2) real rights; (3) intellectual property; and (4) personality or status rights. ⁹⁶ As CCERUs are not corporeal, they cannot be the object of real rights; such rights attach only to corporeal things, as discussed further below. Nor are CCERUs manifestations of personal dignity or a particular social status, so they do not fall within the regimes of personality or status rights. Intellectual property rights protect information that holds commercial value; ⁹⁷ As CCERUs are not informational assets, intellectual property protection does not naturally attach.

Beyond these typical categories of rights in rem, Article 126 of the Civil Code protects civil rights in a more general sense. ⁹⁸ The scope of protection is broad, encompassing, inter alia, all kinds of proprietary interests not falling within the four types of rights in rem mentioned above, regardless of whether they produce erga omnes effects, provided they rest upon a clear statutory basis. ⁹⁹ CCER project owners possess such a foundation: from project establishment through issuance and trading of CCERUs, the MAVGERT sets out detailed rules that suffice to ground a civil right in general capable of protection under Article 126. Accordingly, this paper contends that CCERUs constitute property rights in general carrying erga omnes effect, protected under Article 126 of Civil Code.

Secured financing strategies for verified carbon units and China certified emission reduction units

Secured financing strategies for verified carbon units

The UNIDROIT draft principles strongly support the view that voluntary carbon credits (VCCs) may be used to secure debts. However, the choice of security device and the applicable statutory requirements are left to domestic legislation in each jurisdiction. Views diverge on whether the secured transactions framework of the UNCITRAL Model Law on Secured Transactions (MLST) should apply.

The MLST adopts a functional approach: in principle, any movable, corporeal or incorporeal, as well as a wide range of rights (including receivables) may be the object of a security right. ¹⁰⁰ Because the MLST does not override domestic prohibitions or limitations on creating security over specific assets, ¹⁰¹ the MLST applies only where, under the relevant jurisdiction's domestic law, the asset is recognised as an object of rights and may lawfully be encumbered, so that the grantor has authority to grant a security right in favour of the secured creditor. ¹⁰²

Cases have already emerged in China's carbon market in which VCUs and CCERUs are used as securities for financing. ¹⁰³ In these cases, pledge is typically selected as the security device, ¹⁰⁴ both by pledging spot VCUs/CCERUs and by pledging entitlements to proceeds from forward VCUs/CCERUs. ¹⁰⁵

However, having regard to the Civil Code's basic rules on the right of pledge, this paper takes the view that pledging VCUs or CCERUs lacks a proper legal foundation. Article 440 of the Civil Code exhaustively enumerates the rights that may be pledged: (i) bills of exchange, promissory notes and cheques; (ii) bonds and deposit certificates; (iii) warehouse receipts and bills of lading; (iv) transferable fund units and equity interests; (v) proprietary interests in intellectual property; (vi) existing and future accounts receivable; and (vii) other property rights that laws or administrative regulations permit to be pledged. ¹⁰⁶ Article 116 establishes the numerus clausus principle, namely, that the types and content of rights in rem are prescribed by law. ¹⁰⁷ Without statutory authorisation, no party shall extend the catalogue of the right in rem by analogy. A pledge is a real right and thus counts as a right in rem under the structure of Civil Code. As VCUs and CCERUs do not fall within the categories enumerated above as eligible for pledge, creating a pledge over them is not legitimate under the Civil Code.

In the section titled ‘The rationale for the comparative analysis between VCS and CCER’, VCUs are defined as contractual claims, and contractual claims can be used to secure debts as accounts receivable. ¹⁰⁸ According to Article 440, paragraph 6 of the Civil Code, a debtor may pledge accounts receivable to secure the satisfaction of debts. Moreover, Article 3 of the People's Bank of China's Measures for the Unified Registration of Security Interests over Movable Properties and Rights defines accounts receivable as encompassing both existing and future monetary claims and their proceeds, ¹⁰⁹ thereby equals accounts receivable to monetary contractual claims. However, the VCUs are not monetary contractual claims because the legal relationship between the project owner and the Verra Registry does not involve a commercial transaction requiring any payment of money. Pledge thus becomes an impossible secured financing strategy for the VCUs.

Considering that the owners of VCS projects cannot obtain all the VCUs at once, the quantity and total value of the assets used as remain in a fluctuating state. Floating charge is the most suitable strategy for VCUs, as it offers creditor security interests over a debtor's present and future properties but, unlike a fixed charge, does not initially attach to specific and currently recorded assets. This arrangement continues until specific conditions are met, which then trigger the ‘crystallization’ of the charge, causing it to become fixed.

Article 396 of the Civil Code stipulates that enterprises, individual businesses, and agricultural producers may establish a floating charge on their existing and future production equipment, raw materials, semi-finished products, and finished goods. ¹¹⁰ If the debtor fails to fulfil their obligations, the creditor is entitled to priority repayment from the secured assets once they have been crystallized. It is therefore necessary, as a matter of doctrinal analysis, to consider whether VCUs fall within any of the categories enumerated in Article 396. According to the Civil Code (Property Book) commentary, ‘products’ are defined as things produced through manufacturing. ¹¹¹ There is, however, a doctrinal debate as to whether the Civil Code's term – thing – is confined to corporeal objects. ¹¹² This paper takes the view that ‘thing’ in the Civil Code ought to be limited to corporeal objects, since various incorporeal objects are already governed by specialised proprietary regimes (e.g. patent rights, trade marks and equity interests). If ‘thing’ were read to include incorporeal objects, the systematic rationale for maintaining these specialised regimes within the architecture of the Civil Code would be undermined.

Given that ‘things’ should be corporeal objects, carbon credits – being intangible assets – would, prima facie, fall outside the categories of ‘semi-finished goods’ and ‘finished products’ and thus could not, together with the physical infrastructure of a carbon sequestration project, be brought within the scope of a floating charge to secure the repayment of debt. That said, it must be noted that Article 396 is not merely a rule of property law; it is, more fundamentally, a financing rule aimed at facilitating corporate fundraising. From a creditor's perspective, the central question is not whether the assets subject to a floating charge are corporeal, but whether they are capable of realisation in the market, as this determines the debtor's capacity to repay the debt upon default. Put differently, the meaning of ‘products’ in Article 396 cannot be derived solely from the dogmatics of the law of property; it must also be grounded in accounting, a principal framework for the recognition and quantification of corporate assets.

In October 2011, the PRC Ministry of Finance promulgated the Accounting Standards for Small Enterprises. Article 11 defines ‘finished goods’ as ‘products that have completed the entire production process, passed acceptance into inventory, conform to prescribed specifications and technical requirements, and can be delivered to purchasers under the contract or sold externally as merchandise’. ¹¹³ This definition indicates that the core of the ‘product’ concept is market liquidity. When a company creates a floating charge over its raw materials, semi-finished and finished goods, banks naturally size the loan by reference to the market value of those assets, rather than asking whether they are corporeal objects. It follows that the ‘products’ referenced in Article 396 are not confined to corporeal objects; what matters is their liquidity in the market. Although carbon credits are intangible assets, they are tradable in China's carbon market, which means they can be treated as ‘finished goods’ and used to secure debt satisfaction by establishing floating charge, thereby giving the secured creditor priority repayment on the debtor's default.

Article 403 of the Civil Code provides that, where a movable is mortgaged, the security right arises when the mortgage contract takes effect. If the mortgage is unregistered, it cannot be asserted against a bona fide third party. ¹¹⁴ This article supplies the operative rules for debtors mortgaging movables.

Under English law, mortgage and charge are parallel security devices. The core distinction is that a mortgage (in the strict sense) entails a transfer of title to the creditor, whereas a charge does not. ¹¹⁵ By contrast, under the Civil Code, creation of a mortgage does not require any transfer of title in the secured property; it operates as a non-possessory security right that constrains disposition and confers priority on enforcement. ¹¹⁶

Within the mortgage framework, the Civil Code further distinguishes ordinary mortgages from maximum mortgages. ¹¹⁷ Within the former it recognises both ‘fixed’ and ‘floating’ mortgage. ¹¹⁸ At least in respect of the absence of title transfer, the ‘mortgage’ in the Civil Code functions much like the English ‘charge’. It is for this reason that this paper adopts the terms ‘fixed charge’ and ‘floating charge’ when discussing the optimal security device for VCUs and CCERUs, to aid readers in accurately understanding the argument.

Another issue concerns the meaning of ‘movable’ in the Civil Code, which can be construed within two semantic frames: ‘thing’ and ‘property’. In interpreting Article 403 – the provision governing the creation of mortgages over movables, including floating charges as a subtype of ordinary mortgage –the term should be read considering its position within the Civil Code. ¹¹⁹ Article 394 defines an ordinary mortgage, ¹²⁰ the higher order category encompassing both fixed and floating charges as a security device that secures performance without transferring possession of the ‘property’ (rather than a ‘thing’). It follows that ‘movable’ in Article 403 should be understood as ‘movable property’; on this view, both tangible and intangible movables may be subjected to a floating charge. When a debtor grants a floating charge over its carbon credits, Article 403 supplies the operative rules and governs that secured financing arrangement.

Secured financing strategies for China certified emission reduction units

There have been doctrinal debates within Chinese legal scholars and practitioners on the appropriate security device to be used, in financing transactions, for carbon assets – including emissions allowances and CCERUs. ¹²¹

This paper proceeds on the basis that CCERUs are property rights in general carrying erga omnes effect, and they do not align with any of the categories of property rights listed in Article 440(1)-(6). Nor is there any statute or administrative regulation that expressly authorises the pledging of CCERUs. It follows that creating a pledge over CCERUs neither satisfies Article 440(7) nor accords with the numerus clausus principle in Article 116. By contrast, Article 395(7) adopts a different legislative technique: property not prohibited by laws or administrative regulations from being mortgaged may be the subject of a mortgage. ¹²² Accordingly, under the Civil Code, establishing a mortgage over CCERUs does not contravene the numerus clausus principle.

Compared with VCUs, CCERUs are better suited to be subject to a fixed charge. The Civil Code does not define ‘fixed charge’, but fixed and floating charges together constitute an ordinary mortgage. Article 395 enumerates the forms of asset that may be the subject of an ordinary mortgage; save for item (4), which corresponds to assets eligible for a floating charge, the remaining items are the domain of the fixed charge. ¹²³ Those assets are specific and identifiable at the time the security is created. Accordingly, unlike a floating charge, which attaches to a fluctuating pool of assets whose quantity and value are not yet determined, a fixed charge under the Civil Code must be granted over specific, identifiable property, such that the secured property is determinable (and its market value ascertainable) when the charge is created. ¹²⁴ Construed within the semantic frame of ‘movable property’, CCERUs fall within the ‘movable’ referenced in Article 403. It follows that a fixed charge over CCERUs is governed by Article 403: the security right arises when the mortgage contract takes effect but is effective against a bona fide third party only upon registration.

Finally, space constraints permit only a brief note on enforcement. Article 401 prohibits the mortgagee and the mortgagor from stipulating, prior to the maturity of the secured debt, that ownership of the mortgaged property shall automatically be transferred to the creditor upon the debtor's default. ¹²⁵ Nevertheless, it permits the parties to agree in advance that, in the event of default, the secured property may be realised through one or more methods such as appropriation at a discounted value, private sale, or auction, with the proceeds to be applied in priority satisfaction of the creditor's claim. ¹²⁶

Conclusion

Legal treatment of carbon sequestration credits as objects of secured financing is a question of real significance for both climate mitigation and sustainable finance. Its importance lies not simply in the doctrinal classification of carbon credits, but in the broader issue of whether climate-positive projects can become legally reliable and financially bankable. By comparing the VCS and CCER systems under Chinese law, the article has demonstrated that the mobilisation of carbon credits in secured financing depends on the prior clarification of their legal nature and the corresponding choice of security structure. This inquiry is therefore closely connected to environmental law. Carbon markets are regulatory instruments created to incentivise emissions reduction and carbon removal, yet their practical effectiveness depends not only on public-law rules governing project approval, verification, and market access, but also on whether private law enables the resulting credits to carry transferability, enforceability, and security value. In that sense, this study reinterprets a central environmental law issue through the framework of property law: how law can help direct capital towards mitigation activity by making environmental assets capable of supporting finance.

The wider significance of this topic lies in its implications for carbon market design, green-finance architecture, and the relationship between market integrity and financial mobilisation. China serves as an especially valuable case study because it brings together an expanding carbon market, a civil law property system, and strong policy pressure to finance decarbonisation, but the issues examined here are not unique to China. They raise broader comparative and theoretical questions about how legal systems should accommodate emerging climate-related assets within mainstream private law without weakening environmental objectives. The next question opened by this article is therefore not only how existing credits should be classified, but how law should deal with future credits, expected proceeds, and increasingly complex cross-border transactions involving different registries, standards, and governing laws. That issue will be central to the next stage of research on the legal infrastructure of carbon finance.