HOW CARBON MARKETS ARE RESHAPING GLOBAL CLIMATE LITIGATION

Introduction

Climate litigation is heading into a new era. Traditionally, climate litigation concerned whether states had failed to reduce emissions or uphold fundamental rights. However, in recent times, climate litigation is shifting its focus to a more technical question: can carbon markets deliver credible climate action?

A carbon market sets a price on GHG emissions. In emissions trading systems, entities are allowed to trade emissions allowances. In contrast, carbon credits can be created by projects offering emissions reduction or removal, and then be traded or retired. Such mechanisms are expected to lower the costs of emissions reductions and mobilize private funding. Disputes have arisen around such concepts as additionality, double counting, permanence, verification, greenwashing, corporate climate claims and legal implications of reliance on offsets instead of emissions reductions.

From Emissions Regulation to Carbon-Market Accountability

Historically, environmental law set mandatory obligations for all polluters. In carbon markets, however, instead of specifying exactly how every emitter has to reduce emissions, the goal is achieved through economic incentives in the form of a tradable carbon price.

The best example of a carbon market is the European Union Emission Trading System (EU ETS). The UK has also started developing its own carbon market, while India has begun establishing a domestic carbon market. India’s Carbon Credit Trading Scheme, 2023 has established the basis of the Indian Carbon Market, where carbon-credit certificates represent quantifiable units of emissions reduction, removal or avoidance. The government has later developed an offset mechanism and methodologies for projects in renewable energy, green hydrogen, industrial energy efficiency, landfill methane recovery and mangrove afforestation.

The legal importance of the development is obvious-once compliance with climate obligations is made dependent on the validity of the carbon unit, its integrity becomes a justiciable issue.

ICJ’s 2025 Advisory Opinion: A New International Benchmark

The most important recent development is the Advisory Opinion of 23 July 2025 of the International Court of Justice on Obligations of States in Respect of Climate Change.

ICJ, unanimously recognizing binding obligations arising from climate agreements and other international law, emphasized the obligations to protect the climate system and prevent significant environmental damage. ICJ also recognized that climate due diligence imposes a rigorous standard of prevention.

Although the advisory opinion is not a conventional court judgment against a certain state, its legal significance is quite considerable. It gives courts and litigants an international law framework in which national climate policies can be judged.

New Carbon Markets, New Litigation Risks

Expansion of carbon markets is leading to some obvious types of litigation risks.

• Methodological litigation: Developers and regulators could face challenges in connection with baselines, additionality, leakage and measurement.
• Greenwashing claims: Companies could be faced with proceedings where carbon credits are used to justify claims such as “carbon neutral” or “sustainable”.
• Regulatory challenges: Environmental organisations could contest whether governmental carbon-market rules are compatible with statutory climate targets, constitutional environmental responsibilities or international obligations
• Contractual disputes: As carbon credits become valuable commercial assets, disputes are likely to arise in relation to ownership, invalidation, reversal, delivery, verification and allocation of regulatory risk.
• Environmental justice litigation: Land-based carbon projects can affect indigenous peoples, forest-dependent communities and land rights. A carbon credit may be legitimate in a registry while the underlying project is legally controversial.

These questions have already shaped market architecture. The UK ETS has been extended into a second phase for 2031–2040. In 2025, the UK and the EU made a commitment to link their emissions-trading systems.

The more integrated carbon markets will become, the more disputes there will be over legal and environmental characteristics of carbon units across borders.

India: An Emerging Frontier of Litigation

The Indian legal landscape is particularly interesting. The CCTS has been notified in 2023 and is being developed through a compliance mechanism and an offset mechanism. In February 2026, the government announced that the institutional mechanisms, GHG-emission-intensity targets for seven energy-intensive sectors, methodologies, monitoring, reporting mechanisms and verification procedures had been developed.

The Constitution of India creates an additional basis. Judicial interpretation has extended the provisions of Article 21 to encompass environmental protection. Additionally, Articles 48A and 51A(g) explicitly recognise environmental protection.

Therefore, Indian litigation could extend beyond the validity of issuance of a carbon credit. It could involve the question whether the carbon-market mechanism in question contributes to environmental protection, whether vulnerable groups have been protected, whether environmental claims are false and whether market-based compliance could replace reduction of emissions.

Indian courts have shown that they are willing to use constitutional principles and environmental doctrines including the precautionary principle, polluter-pays principle and public-trust doctrine in the context of environmental decision-making. The emergence of carbon markets provides new facts for application of these principles.

The Legal Problem of “One Tonne of Carbon”: A carbon credit is generally understood as representing one tonne of carbon-dioxide equivalent. But the legal and environmental value of that tonne is not self-evident.

Conclusion

Carbon markets were conceived as economic tools to achieve environmental ends efficiently. They have now become something else: an object of legal scrutiny in their own right.

The future of climate litigation, in other words, cannot be confined to suing governments or companies for “reducing emissions.” More and more, the courts will be expected to scrutinize how those emissions were measured, how a real reduction is defined, whether removals are permanent, whether credits are additional, whether there is any misleading going on, and, crucially, whether the carbon market machinery lines up with legal obligations on climate action.

This, then, is where the central issue lies: the question of credibility. It will not do, in other words, for a carbon market to substitute for climate action simply by virtue of its transactions’ formality. The greater the reliance of climate policy on carbon markets, the greater the need for transparency, scientific rigor, verification, and accountability.

Fossielvrij v. KLM, as well as the 2025 ICJ Advisory Opinion, are thus indicative of the coming generation of climate litigation, which promises to enter carbon markets themselves.

If the accounting mechanisms of carbon markets don’t reflect real environmental gains, carbon markets may be subject to legal, as well as economic, scrutiny.