Analysis: Forest carbon credits are not a ‘free pass’ for forest destroyers

China’s supreme court permits carbon credits as an alternative to compensation in forestry cases, but these will not preclude fines and other punishments
<p>If a perpetrator in a civil case of environmental damage purchases forest carbon credits to offset compensation liabilities, that could serve as the basis for a decision to not prosecute, or to show leniency (Image: Alamy)</p>

If a perpetrator in a civil case of environmental damage purchases forest carbon credits to offset compensation liabilities, that could serve as the basis for a decision to not prosecute, or to show leniency (Image: Alamy)

Those who damage forest ecosystems will be permitted to purchase forest carbon credits as an alternative to paying compensation, under a new interpretation published by China‘s supreme court.

The interpretation clarifies how courts should handle civil cases involving disputes over forestry resources.

Forest carbon credits are earned by absorbing and sequestering atmospheric carbon through afforestation and reforestation, improving forest management, reducing deforestation, and protecting and restoring forest vegetation. Those credits can then be traded on carbon markets, in line with the relevant regulations.

The view of the supreme court – that the purchase of these credits can substitute for paying compensation for ecological damage – has sparked debate.

Does this mean those who damage forests will be able to reduce or avoid their legal responsibilities via these purchases, leaving ecosystems unrestored? Might they even then make a profit by selling them on?

These concerns are not unwarranted, as the mechanisms that will be used require improvement. But an analysis of the civil, criminal and administrative liabilities arising from damaging forests shows that the new rules are no “free pass” – merely buying forest carbon credits will not absolve those responsible.

The use of credit purchases as an alternative to paying ecological compensation expands the range of options available to the courts and may, in fact, be a positive innovation.

The ‘ecology first’ principle

In China, those who damage forest ecosystems can be held to account through civil, criminal and administrative routes. The aim is to protect forests and repair any damage, with the three approaches coordinated to achieve this.

In cases of environmental pollution and harm to ecosystems, China’s 2021 Civil Code made a distinction between liability for damage to private interests, such as the health or property of another person, and damage to the environment or ecosystem itself – the public interest. The purchase of forest carbon credits is intended to apply mainly in the latter case, as a restoration of the public interest.

On 1 January 2018, China put in place a nationwide system for compensating for ecological damage. However, the supreme court ruled in 2019 that the responsibilities of perpetrators for harming the public’s environmental interests are not limited to paying compensation. Besides providing monetary compensation, they can also be ordered to restore the environment, stop their infringements, remove obstructions, eliminate risks, and apologise. Most common are orders to restore the environment and to compensate for losses. Ecological compensation can cover a range of harms including: losses due to permanent impairment of ecological functions and services; the costs of cleaning up pollution or restoring the environment; and the costs of preventing harms occurring or worsening.

The sanctions described above – monetary compensation, enviromental restoration and so on – are not exclusionary. In most cases, they run in parallel and the courts can apply more than one. But in some cases one may substitute for another. Most typical is perpetrators being ordered to restore the environment, or to compensate for damage to it, but not both. An order to restore the environment requires the perpetrator to make restoration within a certain timescale. If that is not done, they will bear the costs arising – the duty to restore the environment is thus replaced with a duty to make a cash payment. Orders to pay ecological compensation are normally given when restoration is not possible. Restoration is prioritised.

According to regulations on ecological compensation, courts should force perpetrators to repair environmental damage where possible, and order them to pay costs when they fail. This matches up with the “ecology first” principle of remedying ecological damage and managing the environment.

The supreme court’s new interpretation offers the purchase of forest carbon credits as an alternative only to paying ecological compensation, but not to restoration. It should therefore not make any difference in cases where restoration is possible, and that course of action will remain the priority. It will only come into play where restoration is entirely or partially impossible – for example if the tree species cut down cannot be replanted – or the perpetrator fails to comply with a restoration order. In those cases, the purchase of approved forest carbon credits could be used instead of the payment of compensation – and the court will still have the option of the other above-mentioned sanctions.

Administrative and civil liabilities working in parallel

The interpretation is mainly applicable in civil forest resource cases. But when forests are damaged, the perpetrators are also liable to administrative penalties. According to China’s Forestry Law, those can include orders to cease the relevant behaviour, to replant trees, restore vegetation and forestry output, pay fines, and hand over illegal earnings. The authorities can also impose direct punishments on the managers or other people responsible.

In April 2022, a number of government departments jointly issued a set of regulations on ecological compensation, ruling that punishments issued via the administrative or criminal routes do not preclude the possibility of an environmental compensation order – the relevant authorities should complete their own processes, without fines and compensation substituting for one another. Perpetrators, therefore, can be liable to pay both fines and compensation. Similarly, the purchasing of forest carbon credits as an alternative to compensation will not help a perpetrator avoid paying fines or receiving other administrative punishments.

Although the civil and administrative routes run in parallel, in some cases the administrative authorities may pursue a perpetrator more vigorously if they have failed to fulfil their obligations under the civil strand. The aims of administrative orders to replant trees and the environmental restoration orders of the civil process overlap considerably. Both are intended to maintain forest size and quality, and require a matching or greater replacement of trees and vegetation than those that have been illegally felled or damaged, either in the original location or elsewhere, to restore forest ecologies. So, rules on ecological compensation state that when a perpetrator cooperates with the compensation process, administrative bodies should, as allowed for in the Administrative Penalties Law, regard that as a cause for leniency and so reduce the penalties imposed.

Criminal responsibility

The parts of China’s Criminal Code used to punish damage to forest ecosystems are Article 338, on pollution, and Article 345, on illegal logging. Illegal logging of forests or other trees – either by the theft of trees from land the perpetrator does not own or by logging in excess of permitted amounts – may, when a certain degree of harm is caused, constitute criminal behaviour incurring associated punishments. Even unintentional damage caused by pollution is covered.

That criminal process operates in parallel with the civil and administrative strands, and administrative or criminal penalties imposed in response to an environmentally harmful act do not offset the liability to pay ecological compensation. However, cooperation with the civil process may mean leniency is shown in the criminal courts. According to the regulations on ecological compensation, judicial authorities can use a perpetrator’s cooperation with the compensation process as a cause for leniency or not prosecuting.

In terms of legal principles, a perpetrator who cooperates with the civil processes by paying compensation or restoring a damaged environment is regarded as having participated in “restorative justice” and so can be treated leniently, or not prosecuted. If a criminal perpetrator actively participates in the restorative justice process by removing risks and restoring damaged interests, this will earn leniency. It reduces the harm to interests caused by the crime, and fits with the criminal law’s rules on “tempering justice with mercy”. But there should be strict limits on the application of restorative justice in order to prevent misuse, and it is of course only appropriate when restoration is possible.

The supreme court’s new interpretation applies to civil responsibility for environmental damage and does not rule on criminal matters. But if a perpetrator purchases forest carbon credits to offset compensation liabilities, that will help to restore the environment and serve as an indicator of admission of guilt, willingness to make amends, and participiation in restorative justice. That could serve as the basis for a decision to not prosecute, or show leniency.

There are already a number of relevant criminal cases where judges have reduced punishments for this reason. For example, one court found a defendant had broken the Forestry Law by cutting down a large number of trees on his own land without a logging licence. However, as the defendant had reported the case himself, made a full confession, handed in the proceeds of the sale and made restoration via the purchase of carbon credits, the court showed leniency.

Challenges and outlook

In China, civil penalties include an order to pay compensation or restore the damage. Criminal and administrative penalties are also possible.

It is understandable, given the current legal system, if there are concerns about the use of forest carbon credit purchases instead of compensation orders. One significant challenge for the courts is deciding the value of credits to be purchased in an accurate and scientific manner. If that cannot be done, the purchases may not fully make up for the loss of ecological functions and damage to the public interest. And methodologies may differ across different regions, meaning a mismatch between punishments imposed for similar crimes.

Another issue worthy of note is whether the perpetrator can then sell the carbon forest credits on. If so, a profit may be earned, undercutting any element of punishment. Currently, some courts handle this by offsetting the carbon credit purchased against local emissions, and then having them written off by the trading platform. This seems more reasonable, but the new interpretation only rules for the purchase of the credits, not their subsequent use. The handling of purchased credits in a way that achieves the aims of the law will need to be clarified in future judicial practice.