[co-author: Michael Palmer*]

American businesses are under intense pressure to show a commitment to addressing climate change. One form of expressing that commitment will be through advertising. Companies claim to offer “green” products, target “net-zero carbon emissions” by future dates, use only “renewable energy” or operate “sustainably.”

Company actions to back up these statements are increasingly sophisticated. In the energy sector, for example, some companies are purchasing carbon offsets from third-party certifiers and marketing their products as “carbon-free” or “carbon neutral.”[1] By purchasing certified carbon offsets, these companies help finance projects that may reduce concentrations of greenhouse gases in the atmosphere, while reducing their own “carbon footprint.”[2]

Third-party certifiers, however, do not use identical methods to certify. As a result, companies making carbon offset claims – even when pursuing state-of-the-art carbon reduction projects – face some risk of having their advertising claims challenged. Companies need to understand these risks.

Background

The primary federal[3] law governing false advertising is Section 5 of the Federal Trade Commission Act (FTC Act).[4] The Federal Trade Commission (FTC or Commission) has the authority to bring actions against businesses for making false or misleading marketing claims[5] and seek both injunctive and monetary relief.[6]

FTC Act

Section 5(a) of the FTC Act provides that “unfair or deceptive acts or practices in or affecting commerce . . . are . . . unlawful.”[7] “Unfairness” is governed by one standard, “deception” by another. With respect to environmental claims, the focus primarily has been on potential deceptive green marketing claims. We provide some brief background on how “deceptive” is defined before turning specifically to the issues surrounding carbon offsets.[8]

Deceptive Acts or Practices

An act or practice is deceptive when there is a (1) representation, omission or practice that (2) misleads or is likely to mislead a reasonable consumer, and (3) the misleading representation, omission or practice is material.[9]

First, the FTC considers both express and implied representations and material omissions when determining whether an act or practice is likely to mislead.[10] The FTC can determine the occurrence and meaning of implied claims without empirical evidence.[11] For omissions, the Commission looks for missing information needed to prevent a consumer from being misled.[12]

Second, whether an act or practice is deceptive depends on how a reasonable consumer of the target audience would interpret the marketing material.[13] When marketing material is targeted at a specific audience, the standard becomes a reasonable consumer from that group.[14] Third, the representation, omission or practice must be material. A representation, omission or practice is material if it is likely to affect a consumer’s decision to purchase or use a product or service.[15] Generally, information regarding costs and benefits is material.[16] Intentional claims will also be presumed material.[17]

In short, the Commission will focus on whether there is a misrepresentation, omission or other practice that misleads and harms a reasonable consumer.[18]

Green Guides

The general lack of administrative or judicial precedent on carbon-related claims makes it difficult to apply the FTC’s standards. However, the FTC updated its Green Guides (Guides) in 2012 to help advertisers avoid making misleading or deceptive environmental claims.[19] The two sections most relevant to low-carbon claims are Carbon Offsets[20] and Certifications and Seals of Approval.[21]

The Guides advise that advertisers must have competent and reliable scientific evidence to support carbon offset claims, use appropriate accounting methods to ensure emission reductions are appropriately quantified and tracked and are not sold twice, disclose whether emission reductions will take two or more years to occur, and not claim as an offset activity that was required by law (for example, state or federal laws that require capture of greenhouse gas emissions).[22] They also warn that third-party certification “does not eliminate a marketer’s obligation to ensure that it has substantiation for all claims reasonably communicated by the certification.”[23]

While the Guides offer some clarification, there are still uncertainties surrounding low-carbon claims. First, the Guides expressly apply only to claims made about the offsets themselves (i.e., where the product being sold is the offset),[24] but do they also include claims that are substantiated by offsets, such as carbon neutral or net zero emissions? The answer, at least in part, would appear to be yes.

Substantiating claims such as carbon neutral or net zero emissions presents a number of challenges. First, to the extent that such claims rely on the use of carbon offsets, the use of the offsets should comply with the criteria set forth in the Guides. This means, for example, that there must be competent and reliable scientific evidence to support the claim that carbon is offset and in the amount claimed, that the same offset should not be used twice, that any offset not represent emissions reductions that are required by law, and that the advertiser disclose whether it will take more than two years for its emissions to be offset.

In general, it should be relatively straightforward for a company that sells carbon offsets to ensure that these standards are met. For example, the seller should know whether it has sold the same offset twice and should have the expertise to understand the length of time required for any offset and whether the activity that results in carbon reduction is mandated by law. However, determining whether these criteria are satisfied typically would be a more difficult task for an advertiser that wants to inform consumers that its products or services are carbon neutral. A fast-food chain, for example, is unlikely to have the necessary expertise to fully evaluate the nature and quality of carbon offsets that it purchases and that substantiate its carbon neutral claim.

So how do such companies ensure that they are in compliance with the Guides? The Guides do not explicitly say; however, in analogous situations, the FTC has made clear that while it expects an appropriate level of due diligence, it will not hold companies in this situation to a “strict liability” standard. For example, in the case of an advertising agency designing creative materials for a company’s product, there may be numerous clinical studies that support the product’s performance claims but the advertising agency, unlike the advertiser, likely lacks the necessary expertise to evaluate the quality of the studies in detail. The FTC thus only requires that the agency engage in a facial review of the studies to look for any easily identifiable flaws. Further, such a requirement makes good sense when it comes to carbon neutral claims. If the bar were raised too high for companies purchasing carbon offsets, it might serve to unnecessarily discourage the purchase of offsets and do more harm than good when it comes to the environment.

What steps, then, should be taken by a company desiring to purchase offsets to facilitate a carbon neutral or carbon reduction claim? First, purchase offsets from a reliable vendor. In the past, less-well-known offset providers have been criticized for dubious offset projects such as creating algae blooms. Second, ask for some basic information about the offsets you are purchasing, including how the amount of carbon being offset was calculated and the time period over which the offset occurs. Third, ask your offset provider to certify that it is not selling the same offsets twice and that the offsets are not occurring through activity which is required by law. Finally, use some common sense. If after reviewing the information and materials provided something seems wrong, it probably is. In that case, choose another provider for your offsets.

Of course, making sure that you are working with a reliable offset provider is only part of what is needed to make a substantiated carbon neutral claim – you also need to know how much carbon your company is emitting so that you can purchase the requisite amount of offsets. The broadest type of carbon neutral claim involves neutrality “from cradle to grave” – looking at carbon emissions associated with product or service inputs and manufacturing, use, and disposal. Calculating such carbon emissions requires conducting a life cycle analysis (LCA) – which, as the FTC recognized when it promulgated the Guides, is not an exact science, and there are numerous different potentially reasonable methods to conduct an LCA. Data relating to supplier emissions or emissions associated with product use or disposal also may not be readily available. Given the difficulty and potential time and expense required to evaluate emissions from cradle to grave, advertisers can opt to qualify their carbon neutral claims – for example, by only claiming that the manufacturing process is carbon neutral. There are also numerous third parties available to assist with quantifying carbon emissions.

Finally, as noted above, the Guides caution that while third-party certification can be a useful tool, it does not eliminate a marketer’s obligation to ensure that it has substantiation for all claims reasonably communicated by the certification. A decision from the National Advertising Division[25] from several years ago provides a good example of an advertiser that obtained a third-party certification but then “reasonably communicated” claims that went beyond the scope of the certification.

In 2016, Energizer Brands LLC alleged that LEI Electronics Inc. (LEI) had made false or misleading environmental claims about its Eco Alkalines batteries, including claims such as “Certified Carbon Free,” “Every Purchase is Carbon Neutral” and “The only 100% carbon neutral alkaline battery.”[26] LEI maintained that its carbon offset claims were not misleading because it purchased quarterly carbon offsets from third-party certifiers to support projects that reduced the batteries’ carbon footprint.[27] To support its claims, LEI provided a life-cycle assessment calculating the batteries’ carbon footprint and evidence that its carbon neutral claim had been certified by two third parties.[28]

NAD used the Green Guides to evaluate the claims, and found the carbon neutral claim misleading. While NAD did not take issue with the quality of the carbon offset projects or the methodology of the LCA analysis, NAD found that the evidence was not a “good fit” for the carbon neutral claim. First, NAD found that LEI had failed to provide evidence that the claimed offsets would occur within the mandated two-year period. Second, NAD found that a claim of carbon neutrality for products sold in the United States could not be substantiated because the LCA and carbon neutral certifications pertained only to batteries sold outside the United States.[29] For these reasons, NAD concluded that the claims were misleading and recommended that LEI discontinue its carbon offset claims.[30] LEI refused, and NAD referred the case to the FTC.[31] The FTC did not pursue the claim, however.

Conclusion

As illustrated above, it can be difficult to successfully navigate the regulatory waters to make a non-misleading carbon neutral claim. Demonstrating carbon neutrality requires vetting of any purchased offsets as well as accurately counting the emissions that are to be offset. Finally, the claim itself must be carefully crafted so that it does not imply a greater benefit than what the company has actually achieved. The sensitivity surrounding environmental benefit claims and the keen competition among companies to cater to consumers’ desires in this area likely makes these claims even higher risk. Even promoters of wind and solar energy projects may face risk if a life-cycle assessment of carbon usage in materials, construction and power distribution becomes the touchstone for substantiating carbon-free claims. Businesses should ensure that their carbon-related advertising claims are adequately substantiated or qualified in order to avoid potential liability under the FTC Act.

*BakerHostetler thanks Michael Palmer, second-year student at the Northwestern University Pritzker School of Law, for research and drafting support.