Carbon Credit Series – Key Legal Considerations for Purchasers

As the global imperative for decarbonisation accelerates, carbon credits have become a strategic instrument for companies seeking to achieve their net-zero targets, manage residual emissions, or demonstrate voluntary climate leadership. In Malaysia, where the carbon market is evolving alongside global standards, purchasers of carbon credits—whether corporates, financial institutions, or intermediaries—must approach transactions with legal precision and strategic foresight.

This article examines the key legal considerations for prospective buyers of carbon credits, offering guidance on risk mitigation, contractual protections, due diligence, and alignment with ESG frameworks.

Understanding the Carbon Credit Ecosystem

Purchasers must first understand the fundamental attributes of the credits they intend to acquire. Carbon credits are generated through verified emission reduction or removal projects and certified by recognised standards such as Verra’s Verified Carbon Standard (VCS), the Gold Standard, or, the Climate Action Reserve (CAR) etc.

The type of project—whether it be forestry, renewable energy, or carbon capture—along with the credit’s vintage, additionality, permanence, and co-benefits, all influence its value. It is critical for buyers to assess whether these characteristics align with their environmental objectives, voluntary disclosures, or compliance requirements under frameworks such as the ISSB, SBTi, or the EU Carbon Border Adjustment Mechanism (CBAM).

Avenues for Purchasing Carbon Credits

In Malaysia, carbon credits can be procured through various channels, each offering distinct legal and commercial implications:

Understanding the method of procurement is critical for structuring the transaction, managing title transfer risk, and aligning with broader corporate ESG objectives.

Contracting Through ERPAs and Spot Market Agreements

Carbon credit transactions are commonly structured through Emission Reduction Purchase Agreements (ERPAs), which form the contractual backbone of credit procurement. Whether executed as spot purchases or forward contracts, ERPAs must be carefully negotiated to address key terms such as volume, price, delivery conditions, verification procedures, and risk allocation.

Buyers should ensure that ERPAs include robust representations and warranties on the authenticity, title, and non-encumbrance of credits, as well as remedies in the event of underperformance or credit invalidation. For pre-purchase or milestone-based agreements, clauses on credit replacement, delivery guarantees, and force majeure must be aligned with the crediting standard’s requirements and local legal enforceability.

Legal Due Diligence: Verifying Project and Registry Integrity

Although third-party verifiers play a critical role in certifying the environmental validity of carbon credits, comprehensive legal due diligence is essential to ensure that the credits being purchased are legitimate and aligned with the buyer’s objectives. This includes reviewing project documentation, land tenure rights, host country authorisations and/or stakeholder engagement records. See our article Carbon Credit Series - Key Legal Lessons from the Sabah Nature Conservation Agreement for case study on issues that arose from the Sabah Nature Conservation Agreement.

Equally important is the review of registry transactions. Purchasers must verify that the credits have not been previously retired, cancelled, or transferred and ensure that the registry account details are accurate. Legal due diligence safeguards the traceability and legal soundness of the credits being acquired, mitigating potential risks to the buyer.

ESG Reporting and Climate Claims Management

Purchasers intending to use carbon credits to support ESG disclosures or climate-related claims must ensure that such representations are legally defensible and aligned with prevailing standards. Misleading or unsubstantiated claims can expose companies to allegations of greenwashing, regulatory penalties, or investor backlash.

In Malaysia, this includes adherence to Bursa Malaysia’s Sustainability Reporting Guide and the National Sustainability Reporting Framework disclosure mandates. Legal oversight is also critical in structuring representations and disclaimers in public-facing documents to mitigate greenwashing risks and substantiate ESG claims.

Cross-Border and Tax Considerations

For Malaysian entities purchasing international credits, or foreign buyers acquiring Malaysian-origin credits, cross-border legal issues must be carefully navigated. These include jurisdictional enforcement, currency risks, and dispute resolution mechanisms.

Additionally, the tax treatment of carbon credits—whether treated as inventory, intangible assets, or financial instruments—can influence the structuring and reporting of such transactions. Buyers should obtain legal and tax advice to ensure compliance and optimise commercial outcomes.

Conclusion

Carbon credit transactions represent more than a commercial exchange—they are instruments of corporate climate strategy, reputational accountability, and stakeholder engagement. As such, legal oversight is essential to ensure that credit purchases are contractually sound, ESG-compliant, and aligned with global best practices.