For the first time since 2012, the Federal Trade Commission (FTC or Commission) is actively evaluating potential updates to its Guides for the Use of Environmental Marketing Claims (Green Guides or Guides) to provide clarity to marketers labeling products or making claims that, among other things, products or businesses:

• are "carbon neutral"
• have "net zero emissions"
• are "low carbon" or
• are "carbon negative"

The Commission is also evaluating whether any other guidance should be issued or updated with respect to any claims based upon the retirement of carbon offsets. The Green Guides also cover claims related renewable electricity certificates, or RECs, which share many of the same issues as carbon offsets. However, the FTC is not currently seeking comment related to RECs.

In the December 2022 publication initiating the review, the FTC sought comment on several overarching issues, including the continuing need for the Green Guides, their economic impact and their effect on preventing deceptive advertising claims. (See Holland & Knight's previous alert, "FTC Seeks Input on Potential Updates to Its Green Guides," Dec. 19, 2022.) The FTC also invited comment on the Guides' interaction with other environmental marketing regulations and whether the Commission should consider a rulemaking to establish independently enforceable requirements to address unfair and deceptive environmental claims. Finally, because the FTC seeks to ensure the Green Guides appropriately respond to changes in consumer perception, the Commission solicited consumer survey evidence and consumer perception data addressing environmental claims, including carbon offset-related and climate change claims.

The FTC's request for comments follow its chair's acknowledgement that the average consumer is not able to personally verify claims of "low carbon footprints," "energy efficiency" or "sustainability," and the FTC's advancement of 36 enforcement actions since 2013, with the largest penalty advanced in the amount of $5.5 million. The request for comments yielded more than 7,000 from a wide range of stakeholders, including environmentalists, industry groups and companies.

Based on a review of several of the submitted comments, the general sentiment is that there is a continuing need for the Guides. However, a common request is for the FTC to clarify aspects of the Guides, including the extent of its authority to require companies to use specific certification schemes to verify that carbon offsets represent real carbon reductions.

Stakeholder Input: Summary of Key Themes Emerging

A significant component of the Green Guides is its sections on carbon offsets and RECs, which deal with the claims companies can make when the environmental attributes of renewable electricity production or carbon reduction projects are unbundled from their source and sold to an unrelated company to make claims about its own products or operations. The Guides currently require companies to employ competent and reliable scientific and accounting methods to claim emissions reductions, ensure the same reductions are not claimed by multiple parties and ensure the reductions were voluntary and not required by law. The Guides also specify that environmental claims based on offsets must result from offsets that have already reduced emissions or will do so in the next two years.

The request for comments seeks input on whether there is a continuing need for guidance related to carbon offsets and whether any updates are needed. The request further seeks input on whether guidance should be issued for additional specific claims including "low carbon," "net zero," "carbon neutral" and "carbon negative." Because such claims are usually based, at least in part, on retirement of carbon offsets, most of the comments focused on standards for carbon offsets that are used in making such claims. Although the request did not seek specific input on RECs, several commenters provided input on RECs in conjunction with comments on carbon offsets because of the related issues. A wide range of stakeholders weighed in on the topic, including consumer brands companies, industry trade associations, and environmental and consumer protection organizations.

Key issues and trends addressed in comments include:

• Use of Third Party Verifiers and "Additionality": There was general support among commenters that parties that use offsets to make climate change claims should be required to use some sort of independent certification scheme that verifies the quality of the offsets. In particular, commenters generally agreed that third-party verification is crucial to ensuring that carbon reductions actually occur and are in addition to any reductions that would have occurred in a business-as-usual scenario or were required by law, a concept known as "additionality." Though some commenters argued that the FTC should restrict such verification to specific trusted sources, most argued that this would be outside the FTC's authority. Some commenters feared that FTC will stifle the offset market if it tries to restrict verification methodologies.
• Avoidance Versus Removal Based Offsets: Avoidance-based offsets are those that represent actions taken to prevent emissions that would have otherwise occurred. Removal-based offsets are those that represent actions to remove from the atmosphere and sequester or utilize carbon that has previously been emitted. Some commenters argued that climate change-related claims should be grounded only in the use of removal based offsets. The FTC may require disclosure of whether an offset is removal- or avoidance-based. One group argued that avoidance-based offsets should never be allowed for "net zero" claims but instead only for "carbon neutral" claims. It is clear from the comments that many people are confused by the distinction between "net zero" and "carbon neutral" and wish for the FTC to clearly define these terms.
• Time and Location Restrictions: Commenters disagreed about whether RECs and, to a lesser extent, carbon offsets should have to be matched in location and/or time to the electricity consumption or emissions underlying the related marketing claims. The theory behind this argument is that renewable electricity generation off-peak on the western grid shouldn't be allowed to form the basis of a claim for renewable energy consumption on the unconnected eastern grid at peak load because it does not result in any actual reduction of fossil fuel use. Regardless of where the FTC lands, this standard may still be required by other agencies or jurisdictions.
• Focus on Certain Business Units: Many commenters argued that it is deceptive for businesses to use marketing campaigns that actively promote the climate benefits of niche lines of business that make up a relatively small part of the company's overall revenue in a way that implies the entire company is green.
• Carbon Intensity Versus Absolute Carbon Reductions: Commenters disagreed about whether companies should be allowed to make unqualified climate-related claims when companies reduce carbon intensity of their products but, due to expanded business, raise their overall emissions.

Voluntary Carbon Offset Initiatives

Several organizations have developed or are in the process of developing voluntary protocols to make responsible claims based on carbon offsets. Most recently, on June 28, 2023, the Voluntary Carbon Markets Integrity Initiative issued its Claims Code of Practice. The Claims Code of Practice follows on a draft released in 2022 and establishes foundational principles for responsible offset-based claims. It is important for organizations to remember that when setting such standards, voluntary schemes are forced to make policy decisions on controversial issues, such as those above, that might not conform to the beliefs of every reasonable consumer. Compliance with a voluntary scheme is not a license to make unqualified marketing claims. Businesses should continue to evaluate the basis of every claim and disclose the basis of claims to the extent necessary to mitigate risk.

Conclusion

In addition to the aforementioned comments, there were numerous others addressing technical issues around the use of carbon offsets and RECs. Ultimately, the FTC is unlikely to outright ban any particular accounting methodology with respect to carbon offsets but may require that suspect methodologies be disclosed in conjunction with the related marketing claims. It is important for businesses to remember that the FTC is not the only regulator that addresses marketing claims based on carbon offsets or associated technical issues. States generally have similar marketing laws, and other federal agencies such as the Commodities and Futures Trading Commission and IRS are evaluating similar technical issues.