One Genus, Two Species

The last three posts described carbon-linked financial instruments and the institutions that make them work. Instruments also need a legal foundation. Does carbon have one?

It does, and there is a mature example. The European Union created the ETS market twenty years ago, and allowances have traded at scale ever since, held by institutions and financed like any other position.

Received wisdom holds that this proves nothing, because allowances and credits are not the same. An allowance is permission to emit a tonne, granted before the fact. A credit is evidence that a tonne was removed or avoided, earned after it. An allowance is complete when issued; a credit carries an obligation that runs for years, because the tonne has to comply with international permanence requirements.

All of that is true, and none of it settles anything. Oranges and lemons are different fruits. But they are distributed with common infrastructure; they travel in the same crates, in the same refrigerated holds, on the same ships, through the same ports, because that machinery was built for their common genus, Citrus.

Credits and allowances are likewise two species of one genus. Both units are scarce because a sovereign decided they would be: an allowance because a government legislated a cap, an authorized credit because the exporting country gave up its claim. Both are serialized entries in a registry. Both are denominated in one tonne of carbon dioxide equivalent. Both can be retired exactly once and are worthless thereafter.

Regulators and standards bodies already deal with carbon at the genus level. The EU classifies emission allowances as financial instruments under MiFID II. The CFTC treats both species as commodities, and in 2024 issued guidance for listing voluntary carbon credit derivatives. And in May 2026, FASB put allowances and offset credits under one definition, with a single measurement model.

None of that makes a carbon credit a security, and it does not need to. What it establishes is narrower and more useful: nothing about a member of the carbon genus is legally intractable. It can be owned, traced, held inside supervised market structure, and accounted for like anything else.

One species difference does matter. An allowance is created by one legislature for use inside its own legal system. A credit, on the other hand, is created in one country to be used by a buyer in another, and no sovereign’s authority covers that. So a credit must inherit its legal standing from two different sources: from the wrapper, which puts the investor’s interest under one settled law, and from a covenant, given by the country of origin, that travels with the tonne.

Next up: The Corresponding Adjustment Is a Sovereign Covenant.

Part of No New Parts, a sixteen-part series by Andrew Gilmour.