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Top 5 Things To Watch When Evaluating Carbon Offset Purchase Agreements

Carbon-reduction claims, such as “carbon neutral” and claims about lower “carbon footprints,” are proliferating in the marketplace.

Many of these advertising claims are based on the purchase of carbon offsets, an environmental asset that represents a verifiable reduction in carbon dioxide emissions. Despite the popularity of carbon-reduction claims among businesses and the powerful effect these claims have on consumer purchasing decisions, carbon offset purchase agreements remain a mystery to many businesses. Below, we outline the top five issues to consider before your business invests in carbon offsets.

1. How Are the Offsets Produced?

In theory, any activity that results in a quantifiable reduction in carbon (or other greenhouse gas) emissions could generate carbon offsets. Generally, a project “sponsor” will identify a project that is likely to result in verifiable emissions reductions and provide capital to get the project off the ground, perhaps with the goal of recouping some of that initial capital through the sale of carbon offsets. This might include, for example, replacing cooking stoves in economically disadvantaged communities with lower emissions stoves, installing methane capture devices at landfills or agricultural facilities, or preserving forests that might otherwise be lost to deforestation. Knowing how your offsets are produced is a good first step to ensure you are buying a product with market value.

2. How Are The Offsets Verified?

Understanding how your offsets are verified goes hand-in-hand with understanding how they are produced. Given the wide range of activities that can theoretically generate carbon offsets, there is also a wide range in quality. Most carbon offset projects are therefore certified as being in compliance with one of several widely-accepted “standards,” such as the Verified Carbon Standard administered by VERRA, the Gold Standard administered by the Gold Standard Foundation, or standards developed by Climate Action Reserve or the American Carbon Registry. Each set of standards establishes criteria and processes to evaluate “source” projects and measure and verify their emissions reductions. Once projects are verified, they will often be listed in registries maintained by these organizations. Many carbon offset purchase agreements will expressly reference one of these programs.

3. How Have the Offsets Been Tracked from Source to You?

Once you have confirmed your offsets are appropriately produced and conform to a widely accepted standard, how do you verify that the offsets you are purchasing, which are, after all, little more than a sheet of paper or serial number, continue to have market value (e.g., haven’t been sold and resold a dozen other times)? There are a few key things to look for in carbon purchase agreements. First, carbon offsets are usually sold with a “vintage” year. This helps you verify that your offsets represent emissions reductions that occurred during a specific period of time and ensures that offsets are not double-counted. Be especially careful if you are purchasing offsets that have yet to occur – under the US Federal Trade Commission’s “Green Guides,” additional disclosures are required if advertising claims are based on emissions reductions that will not occur for two years or longer. In addition, offsets should be traceable, such as with a unique serial number, and must be “retired” after they are sold. Carbon offset registries will generally note when offsets are retired.

In addition, some offsets are verified by the Green-e® Climate program, a program of the Center for Resource Solutions, which provides chain-of-custody oversight in the offset market. The Green-e® Climate program requires project verification by an “Endorsed Program”  (i.e., the American Carbon Registry, the Climate Action Reserve, the Gold Standard, or the Verified Carbon Standard), and then monitors how offsets are transacted and advertised in the retail market. If the offsets are Green-e® certified, this will often be indicated in the purchase agreement.

4. What Is Additionality?

The idea of “additionality” is a key concept in the carbon offset market. Essentially, additionality signals that offsets represent a genuine reduction in greenhouse gas emissions beyond business as usual. The major carbon offset standards account for additionality, so if offsets are verified under a major standard, you are likely covered. From the FTC’s perspective, the most important factor is whether the underlying emissions reductions are legally required. In the Green Guides, the FTC advises that it is deceptive to claim, directly or by implication, that a carbon offset represents an emission reduction if the reduction, or the activity that caused the reduction, is required by law. Again, this gets to the idea of whether the offsets represent emissions reductions beyond business as usual. If the emissions reductions are legally required, then they would have occurred in the ordinary course, making it difficult to establish  “additional” environmental benefits.

5. Crafting Your Advertising Claims

So you’ve signed on the dotted line and purchased carbon offsets. Now what? To most businesses, the value of carbon offsets is their ability to serve as the basis for carbon reduction claims, but those must be made carefully, within a set of guardrails. As noted above, if your carbon reduction claims are based on emissions that will occur 2 or more years in the future, this will need to be disclosed.

More broadly, your advertising claims should be properly tailored to “fit” your substantiation. If, for example, the offsets you purchased represent only a portion of your emissions, make sure your advertising claims don’t imply that you are carbon neutral. In addition, the purchase of carbon offsets will not generally support unqualified environmental benefit claims, such as “sustainable” or “eco-friendly,” which the FTC has recommended that advertisers avoid. Finally, the FTC has cautioned that third-party certification, while helpful, does not relieve an advertiser of its substantiation obligations. In other words, make sure you, as the advertiser, have access to any documentation you might need to substantiate your advertising claims. One way to address this is to require the seller to provide such documentation as part of the purchase agreement and verify that anything they provide is sufficiently detailed to withstand regulatory review.

Why Does it Matter?

Regulatory approaches to carbon offsets and attendant advertising claims are still developing. To date, there has been little regulatory enforcement in this area. One notable exception is the National Advertising Division of the BBB National Programs, Inc., which referred an advertiser’s “carbon neutral” claims to the FTC after the advertiser failed to provide sufficient documentation to the NAD about the timing of its emissions reductions.

The US Securities and Exchange Commission has also started looking more closely at false or misleading environmental claims in investor communications and securities filings. Among other things, it is soliciting tips or complaints from the public about possible false claims. And, as reported previously, the European Union recently launched its first-ever sweep of deceptive “greenwashing” claims, which could presage additional enforcement in the US under the Biden Administration.

Takeaway

Companies considering purchasing carbon offsets should carefully review purchase agreements to make sure the offsets (and the sellers) meet minimum standards of reliability and transparency. Any advertising claims based on those carbon offsets should be carefully drafted and submitted for legal review.

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