Top 5 Things to Watch for When Selling Carbon Credits
In a previous alert, we outlined the top five issues to consider for businesses considering investing in carbon credits. In this alert, we will outline the top five legal considerations for entities considering selling carbon credits.
1) Advertising Substantiation 101
For many buyers of carbon credits, the value in the credit is the ability to make environmental advertising claims. Under federal and state advertising and consumer protection laws, advertising claims may not be false or misleading and advertisers must have a “reasonable basis” for their claims. For environmental marketing claims, advertisers must generally be able to substantiate their claims with “competent and reliable” scientific evidence.
That’s where the carbon credits come in. When an entity purchases carbon credits, they are essentially purchasing the substantiation they need to make environmental marketing claims. If the buyer’s advertising claims are challenged, the advertiser will need to produce documentation proving that the credits are scientifically sound. A regulator or class action attorney, for example, might request documentation about the source project, how the credits were quantified, any third-party certifiers involved, and the chain of title. Whether you provide these details and related documentation at the time of sale or not, your buyers will expect you to have them if their advertising claims are challenged.
2) The Role of Third-Party Certifiers
Most carbon credits that are sold to businesses and consumers are produced or verified according to published standards issued by major project certifiers such as the Verified Carbon Standard or The Gold Standard. These standards are developed by independent, third-parties to ensure that source projects result in real and verifiable emissions reductions. Once a project is certified under one of these published standards, it and the credits it produces can be listed on one of the third-party registries that serve as marketplaces for verified carbon credits. These registries can also be used to track the chain of title for the credits and ensure that credits are “retired” after they are sold to an ultimate user. These safeguards—published standards, independent certifiers, registries—all help ensure that credits can be tied to a specific environmental benefit that occurred or will occur at a specific place and time and therefore have real value to the environment and the buyer.
While carbon credits sold to utilities and other regulated entities are generally legally required to be certified according to these widely-accepted published standards, credits can be sold to voluntary purchasers (such as businesses and consumers) without third-party certification. In the event of a challenge, however, it will be incumbent on the seller to be able to produce documentation showing that its credits are based on sound scientific methodology, accurately quantified, subject to audit or verification, and adequately tracked.
3) Indemnifying the Buyer
For the seller of carbon credits, it can be tempting to look the other way when your buyers start crafting advertising claims based on your carbon credits. After all, it might be months before your buyer revises their packaging or website to start marketing their goods or services as “carbon neutral,” and it’s unlikely you’ll have the chance to review the new marketing materials beforehand. But before moving on, it’s important to consider the scope of the indemnity you offered your buyers. For example, a buyer may ask you to indemnify them against any damages related to false or misleading advertising claims based on your credits. Before agreeing to indemnify your buyers, make sure you know the types of claims they will be making. In advertising, seemingly minor differences or changes in phrasing or context can transform a truthful claim into a misleading or deceptive one, potentially triggering indemnity obligations. Restricting the scope of your indemnity to the buyer can be one way to limit your potential liability.
4) Obtaining Indemnification From the Buyer
Just as you may want to restrict the scope of your indemnity to the buyer, you may also want to consider requiring the buyer to indemnify you for advertising claims that are outside the scope of the sales agreement. Consumers are often willing to pay a premium for products marketed as environmentally sustainable or carbon-neutral, and that price premium — the difference between the price of the eco-friendly product or service and the price of a comparable product or service without eco-friendly advertising claims — can form the basis of a consumer class action or civil complaint seeking disgorgement of profits. Requiring the buyer to indemnify you for damages related to claims that fall outside of certain defined parameters can help reduce the risk that you will face significant legal exposure from a buyer who stretches the truth or disseminates a poorly-worded environmental benefit claim.
5) The Value of Carbon Credits
While the carbon credit market can seem daunting, it can also provide significant opportunities for businesses of all types. Carbon credits can be produced in a multitude of ways, including as “byproducts” of routine agricultural, industrial, or commercial practices. Businesses that invest in new technologies or processes that reduce their emissions may be able to offset the cost of those investments and potentially develop new revenue streams by commoditizing their reduced emissions in the form of carbon credits.
As demand for environmentally-friendly products and services increases, so will demand for environmental commodities like carbon credits. These assets can offer significant opportunities for businesses, helping to offset investments in new more environmentally-friendly technology and potentially providing a new revenue stream. Nonetheless, sellers should be mindful of the unique legal and regulatory considerations affecting carbon credits before embarking on any new transactions.