We’ve all seen the ads or noticed the promotion material on websites. Click here and we’ll offset your emissions from flying. Stay in “eco-chic” accommodations and we’ll help save cheetahs in Africa. Pull up to the pump and use our credit card, and we’ll plant trees for each gallon you use. Drive guilt free.
In theory, the companies that make these claims are buying offsets from developers of projects who are complying—or say they are complying—with voluntary standards and criteria for the offset industry. The project in question must be verified by an independent organization. And the offsets must be registered with a neutral entity to ensure they cannot be sold twice to avoid double counting the same offset.
Nonetheless, there are greenwashing problems with many offsets. The toughest of the voluntary standards—and the most elusive—is the requirement that the project be “additional,” meaning that the project is in addition to the status quo. Put another way, the project would not have occurred but for the offsets. If, for example, someone hadn’t bought offsets and paid the landowner to leave the trees standing, the forest would have been cut down. If the solar plant developer hadn’t been able to sell offsets (and receive additional revenue), it would not have broken ground on the project.
A related problem, critics allege, is the lack of transparency. Just try, they say, to follow the money. A company, for example, might tell retail consumers it will offset their purchase or activity (like driving or flying or staying at their hotel). But what do they really do? Many will hire a nonprofit to decide where and how to invest money received from the sale of offsets. The nonprofit may only have pretty pictures on its website, and even the supposed documentation may fall short: a report showing that a dam in Guatemala, for instance, produces clean energy, but on further investigation, the facility was built 10 years ago and is owned by a utility that operates coal plants elsewhere. In recent years, dozens of articles in the business and popular press have documented abuses in the voluntary market. Leading environmental groups and policy institutes have concluded that many forestry offsets are ineffective.
Recent Federal Activity
In response to these complaints, three federal agencies have now gone on record saying they intend to impose disclosure requirements or to publish enforcement guidance this year on the voluntary carbon market:
- The Securities and Exchange Commission (SEC) will likely issue long-anticipated rules this spring that require registered companies to provide climate-related information in their registration statements and annual reports. The disclosures include the registrant’s GHG emissions. The focus of the proposed rule, the SEC said, is on the material impact of climate risks on the finances and operation of companies. Among the topics covered in the rule are voluntary carbon offsets and the role that offsets play in meeting company GHG reduction goals.
- The Commodity Futures Trading Commission (CFTC) took two steps in 2023 to clamp down on abuses in the voluntary carbon offset markets. First, the CFTC’s Whistleblower Office issued an alert in June inviting the public to identify and report fraud or manipulation in the markets. Second, the CFTC issued draft guidance in December for commodity exchanges (“designated contract markets”) that list tradeable voluntary carbon credits. The purpose of the guidance, the CFTC said, was to advance the standardization, transparency, liquidity, and integrity of the carbon markets. Commodity exchanges should consider (among other things) the additionality of the offsets before they are listed. Comments on the draft guidance are due by February 16, 2024.
- The Federal Trade Commission (FTC) said it intends to revise the Green Guides for environmental marketing claims. The updated document will address voluntary carbon offsets, a topic that was covered only briefly in the last revision in 2012. Although the FTC statements in the guides are not enforceable—they do not establish environmental performance—they can provide useful examples to bolster cases brought by the FTC. In addition, state attorneys general and the private plaintiffs’ bar can cite the Green Guides if they pursue greenwashing cases under state false advertising laws. In May 2023, for example, Nike USA, Inc., was sued in federal district court in Missouri over its claims that its footwear and other products were made with recycled fibers that reduce the company’s carbon footprint.
California has just enacted its own disclosure requirement. The Voluntary Carbon Market Disclosures Act (the Act), signed into law in October 2023, requires companies that market or sell voluntary carbon offsets within the state to disclose on the company’s website basic information about the location, project timeline, the protocol used to estimate emissions reductions and other information. The Act also applies to companies doing business in the state that make claims regarding the achievement of “net zero emissions” or carbon neutrality. There is no revenue threshold. The Act—AB 1305—went into effect January 1, 2024. Penalties are $2,500 per day for each violation up to $500,000. There is no private cause of action. The state attorney general and the district attorney of each county (or the county counsel or city attorney) can enforce the legislation through civil action.
The Need for Risk Assessments and Due Diligence
These developments clearly create challenges for companies that have made (or plan to make) environmental claims regarding voluntary carbon offsets. And that means corporate executives have good reason to start an internal due diligence review—a risk assessment—of their existing and proposed offsets to get their house in order.
Here’s a sample checklist of questions they should ask:
- What was said to the public when the offsets were offered to consumers?
- Who spent the money? On what?
- What was stated in securities filings?
- Are the company statements still accurate? Can the entity that verified the project still demonstrate the project’s effectiveness? E.g., Is the forest still protected? Did the wind energy plant perform as expected? Did it displace fossil fuels?
- Can the company back up its claims of “carbon neutrality”?
- Who has the records and documentation?
- If new offset projects are under consideration, can they meet the “additionality” criteria?
- Are there risk mitigation measures that can help ensure that the offsets remain effective and retain their integrity?
Legal counsel can expect major changes in the way that voluntary carbon markets operate in the United States. Rigorous due diligence is not a luxury—it’s a necessity for companies that value their credibility and want to avoid enforcement problems, reputational risk, or litigation.