Neutralizing “Carbon Neutral”? Use of Carbon Offsets Faces Increased Global Scrutiny

All around the world, there is a growing focus on stopping companies from “greenwashing” their activities—i.e., making false or misleading statements about the environmental benefits of a product or practice. Related to this, there has been growing distrust and skepticism surrounding the use of carbon offsets. Carbon offsets have been an especially popular strategy in the Retail and Hospitality space, where consumers increasingly “vote with their wallets” while businesses grapple with reliable and effective methods to reduce their carbon footprints. As a sector that relies heavily on customer trust and loyalty, however, Retail and Hospitality businesses must ensure they take a methodical and measured approach to the use of carbon offsets in light of recent and ongoing developments.

What are Carbon Offsets?

Carbon offset programs allow individuals or companies to invest in projects around the world with environmental benefits as a way to balance out their carbon footprints. They are typically tradable “rights” or certificates to projects or activities that lower the amount of carbon dioxide (“CO₂”) in the atmosphere. These rights or certificates are then frequently sold to a person or business who use them to compensate for their emissions, in lieu of reducing those emissions directly. This allows that person or business to claim a lower carbon footprint or even “carbon neutrality”.

Like any product or service, however, the quality of different types of carbon offsets can vary greatly, especially where the market has been largely voluntary with many different standards and approaches. Recently developments indicate this is changing. For example, in March 2023, the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent governance body for the market, outlined its Core Carbon Principles (CCPs), which serve to define a threshold standard to ensure integrity in the voluntary carbon market. The CCPs include no double counting, tracking, and robust independent third-party validation and verification in order to bring transparency to the carbon offset market.

U.S. Developments

Retail and Hospitality businesses’ use of environmental marketing claims such as “carbon neutral” and “net zero” could soon face restrictions in the U.S. due to heightened regulatory and legal focus on the carbon offsets underlying those claims.

As part of its current update to the Guides for the Use of Environmental Marketing Claims (“Green Guides”), the Federal Trade Commission (“FTC”) has put carbon offset claims front and center. The current section of the Green Guides on offsets, at 16 C.F.R. § 260.5, is ambiguous about the standards against which carbon offset claims should be judged and whether they must be substantiated. Environmental groups and State Attorneys General are urging the FTC to update the Green Guides to require firms to substantiate the “additionality” of carbon offset claims to prevent consumer deception—that is, offsets should represent actual greenhouse gas (“GHG”) emission reductions that are additional to those that would already reasonably be expected to occur. They argue that a carbon offset that does not have this additionality is not really an offset, and carbon offset claims not backed by additionality would be per se deceptive.

The Green Guides often serve as either a legal standard for determining liability under state law or a persuasive metric for evaluating whether a claim is otherwise objectively “deceptive” or unfair under state law. Because carbon offsets are at the core of companies’ environmental claims, such as “carbon neutral” and “net zero”, changes to the Green Guides’ carbon offset guidance could have a profound impact on the ability to use these claims in environmental marketing in the U.S.

In the meantime, the U.S. plaintiffs’ bar is not waiting around for the FTC. Recent class action lawsuits against Danone (maker of Evian water) and Delta Airlines have challenged these firms’ use of “carbon neutral” where those claims are based on carbon offsets that allegedly do not represent GHG reductions that would not have taken place without the carbon offset.  Notably, Danone has filed a motion to dismiss the complaint based on the arguments that (1) the carbon offsets used to support the “carbon neutral” claim on the bottle are backed by industry-leading third-party verification firms, and (2) no reasonable consumer could interpret the carbon neutral claim to mean that no carbon is emitted in the manufacture, transportation to the U.S., and ultimate retail sale of the water bottles.

Additionally, JBS, the largest animal protein company and second largest food company in the world, is challenging a recommendation of the National Advertising Division (“NAD”), a division of self-regulatory group BBB National Program.  As part of a challenge brought against JBS by the Institute for Agriculture and Trade Policy (“IATP”), the NAD recommend that JBS “discontinue claims relating to its goal of achieving ‘net zero’ greenhouse gas emissions by 2040” and asserted that JBS’s aspirational claims were not backed by concrete plans. In its challenge, JBS claims it had “tangible investments and projects” to reach its target, though it has agreed to discontinue “one challenged net-zero claim”.

Depending on the outcome of the FTC’s Green Guides update and the results of these false advertising claims, the future of “carbon neutral” marketing claims based on offsets could look very different in the U.S.

European Developments

In Europe, carbon offsetting schemes appear to be similarly in the spotlight, particularly as they are used as the basis for “carbon neutral” or “net zero” claims.

On the E.U. level, there is a pending proposal for a new Green Claims Directive, which would require companies to substantiate their environmental and sustainability marketing claims using robust, science-based, and verifiable methods. Since the proposal of the new directive by the E.U. Commission in March 2023, each of the European Council and European Parliament has adopted its negotiating position on the proposed Green Claims Directive. With both positions adopted, negotiations to issue the final directive can occur.

The Parliament’s negotiating position includes a notable departure from the positions taken by the Commission and Council on the topic of carbon offsets. Specifically, the Parliament proposes a ban on environmental claims that are based solely on carbon offsetting schemes. The proposed language includes: “In cases where it cannot be substantiated by scientific evidence, it is particularly important to prohibit claims suggesting, based on carbon offsetting, that a product or service has a neutral, reduced, compensated or positive carbon emissions’ impact on the environment as it can mislead consumers by making them believe that the product they buy or the trader’s business has no impact on the environment.”

The goal, if this proposal is adopted in the final Green Claims Directive, would be to increase transparency and accountability related to the “carbon neutral”, “net zero”, or similar claims advertised by businesses. Companies would be required to submit such green marketing claims to stricter scrutiny, including independent verification, before such claims can be made and put on the market.

On the individual country level, regulators are also cracking down (even before the finalization of the Green Claims Directive) on “carbon neutral” and “net zero” claims. In the U.K., for example, the Advertising Standards Authority (“ASA”) recently updated its Advertising Guidance due to “low understanding and lack of consensus around the meaning of carbon neutral and net zero claims”. The updated guidance specifically addresses how marketers “should ensure that they include accurate information about whether (and the degree to which) they are actively reducing carbon emissions or are basing claims on offsetting, to ensure that consumers do not wrongly assume that products or their manufacture generate no or few emissions.” It also suggests that, where “claims are based on offsetting, they should comply with the usual standards of evidence for objective claims set out in this guidance, and marketers should provide information about the offsetting scheme they are using.”

The ASA emphasizes that unqualified claims are “likely to breach existing rules, and the ASA will be taking proactive action immediately to address such claims.” This applies more broadly to the ASA’s scrutiny of green marketing claims, as the regulator looks to crack down on greenwashing tactics. In fact, the same month that the ASA issued its new guidance, it banned a Lufthansa ad campaign that featured a circle, with the top half consisting of an airplane and the bottom half the Earth. The ad also read: “Connecting the world. Protecting its future.” Per the ASA, this ad campaign was misleading the public because Lufthansa, while working to reduce carbon emissions now, was not actually protecting the world’s future since it will take years or even decades to become a truly green company.

Best Practices

It is not all doom and gloom for companies wishing to market their environmental and sustainability initiatives, though, including those based on carbon offsets. There are a range of practical steps that Retail and Hospitality businesses can take to mitigate the risk of litigation or enforcement actions related to carbon offsets, including but not limited to:

1. Ensure your environmental and sustainability claims are clear and can be substantiated. As definitions and standards take form, it is important to avoid ambiguous or otherwise problematic terms. Similarly, companies should follow regulatory developments that may add clarity and/or restrictions.
2. Consider a range of tools to help your business achieve its emission reduction goals. Carbon offset programs can play an important part in your overall strategy, but they are just one tool in your toolbox.
3. Businesses that are looking to responsibly use carbon offsets as a part of their emission reduction strategies should do their due diligence. This includes verifying and documenting the integrity of carbon offsets you purchase, such as through the ICVCM CCPs. For those already using carbon offsets, periodic internal due diligence reviews may help guard against greenwashing claims.

Clark Hill’s ESG & Sustainability advisory practice deploys multidisciplinary attorneys, consultants, and professionals to advise clients across industries and sectors. Our team includes experienced Environmental & Natural Resources, Energy & Renewables, Corporate, and Litigation attorneys, who counsel clients on emission reduction strategies in the US and EU.

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The views and opinions expressed in the article represent the view of the author(s) and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.