Environmental, Natural Resources, & Energy Law Blog

Brad Newsad, LLM

Enforcement under the FTCA for false, misleading, and deceptive corporate statements about carbon offsets

Corporations across the world, and in particular, the United States, are attempting to sway consumer opinion, perception, and patronage by advertising their status as, or goal to become, carbon neutral.Additionally, many companies are also offering opportunities for consumers to neutralize the carbon footprint of their own actions.Most of these claims involve some, if not a significant amount of “carbon offsets.”The weight of available evidence demonstrates that many claims of carbon offsetting are unfulfilled at best, and an outright scam at worst.The question is, what, if anything, should be done about these corporate actions?

Corporations should be held accountable for false, misleading, and deceptive statements regarding carbon neutrality and carbon offsetting, chiefly because these claims are hurting the climate change battle – companies are using claims of carbon neutrality and carbon offsetting as an excuse to avoid taking meaningful and sustainable carbon reduction actions.Importantly, it also creates an unfair advantage over those companies who have taken the moral high ground and refused to engage in the charade.While there may be several options for regulation – the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC) – the best currently available option for enforcement is under the Federal Trade Commission Act (FTCA).Several examples over the past decade demonstrate the viability of enforcement actions under the principles of the FTC’s “Green Guides.”[1]

Carbon Offsets

The Merriam-Webster dictionary defines “carbon offset” as “an action or activity (such as the planting of trees or carbon sequestration) that compensates for the emission of carbon dioxide or other greenhouse gases to the atmosphere.”[2]This definition accounts for the carbon offset theory of greenhouse gas (GHG) “removal” from the atmosphere.However, most organizations also include the GHG “reduction” or “avoidance” theory for carbon offsets.[3]Reduction and avoidance actions include supporting activities that reduce GHG emissions, such as funding GHG-free power generation projects (e.g., wind and solar power).Carbon offsets are often quantified and can be “bought, sold, or traded” for various purposes as discussed below.[4]Normally, offsets are accounted for on a one-for-one basis (one tonne of CO₂eq avoided or removed can offset one tonne of CO₂eq emitted).[5]

Generally, the motivation to buy or trade carbon offsets can be separated into two markets – the legally-required market and the voluntary market.Examples of the legally-required market include the actions taken in conformity with the Kyoto Protocol’s “Clean Development Mechanism” (CDM).[6]Under the Kyoto Protocol, developed country parties to the treaty were required to reduce their GHG emissions by a certain percentage as compared to their 1990 emissions.[7]However, for developed countries that were either unable or unwilling to reduce their actual GHG emissions to fully meet the required reduction, under the CDM they could fund projects in developing countries to earn “certified emissions reductions” (CERs).The CERs would offset a developed country’s actual GHG emissions, as long as the project was certified by an oversight committee to result in “[r]eal, measurable, and long-term benefits related to the mitigation of climate change” and the CERs were “additional to any that would occur in the absence of” the project.[8]These requirements form the foundation for legitimate carbon offsets – real, independently verifiable, long-term or permanent, and additive.[9]

In contrast to legally mandated actions to reduce GHG emissions, there is also an entire market based on voluntary action to offset GHG emissions of an individual or an entire corporation or organized entity.Basically, these are offsets bought by companies for public relations and marketing reasons or by consumers to make them feel better about their carbon footprint.As early as 2006, the global market for sales of voluntary carbon offsets was over a $100 million.[10]Since that time, the market has fluctuated between $146 and $790 million per year, with a cumulative total of $6.7 billion in global sales of voluntary carbon offsets as of November 2021.[11]The most concerning voluntary carbon offsets include those (1) purchased by large corporations (to offset their own GHG emissions), (2) sold by large corporations to consumers of their goods and services to offset the consumers’ apportioned GHG emissions from the goods and services purchased from the corporation,[12] and (3) sold by corporations to individuals and businesses to offset their own emissions unrelated to the selling corporation.

The first type includes corporations and other organizations voluntarily “seeking to green up their act.”[13]These could be spurred by a number of motivations, including “a sense of corporate social responsibility, a perceived market advantage in claiming voluntary carbon neutrality, or the potential advantage of pre-compliance” before the enactment of legal requirements.[14]A specific example is Nestle S.A.’s pledge to make its KitKat candy production carbon neutral by 2025.[15]Nestle’s plan includes “restoring forests and supporting a transition to regenerative agriculture “ and investing “in high quality offsetting based on natural climate solutions.”[16]An example of the second type – where a corporation shifts the burden to their customers to offset the corporation’s GHG emissions – is where Southwest Airlines, for an extra fee (based on aircraft type, fuel consumption, and flight distance), offers to invest your money in a project to offset the GHG emissions attributable to you from your flight (projects include a wind farm in Uruguay and forest protection in Haiti and Tlingit).[17]This example can be replicated for almost any business (assuming they can calculate, and apportion, the GHG emissions from their goods and services with reasonable accuracy).An example of the third type is where corporations, such as Native and Terrapass, sell carbon offsets to individuals and businesses to offset their own GHG emissions.Individuals or businesses provide information about their actions and carbon use and the corporations use algorithms to calculate the particular carbon footprint (in CO₂eq).The business or individual then pays the corporation to invest in projects that, in theory, are intended to offset their GHG emissions on a one-to-one basis.Projects offered by Native and Terrapass include a wind farm in Crow Lake, South Dakota (Terrapass), a landfill gas capture project in Henrico County, Virginia (Terrapass), solar power projects in Cortez, Colorado and Forest City, Iowa (Native), and an “avoided grassland conversion” project in Prowers County, Colorado (Native).[18]

The Problem(s) with Carbon Offsets

Carbon offsets are not necessarily all a scam; despite a lack of widespread empirical data, one can safely assume that most carbon offset projects are real and verifiable.The question is whether a particular project, or a credit purchased in that project, regardless if it is legally mandated or voluntary, is effective – will it result in additional and long-term or permanent GHG emission removal, reduction, or avoidance without leakage?[19]Despite an entire industry of standard-setting and auditing organizations to provide review of carbon offset projects, the scientific evidence and investigative reporting generally indicate that most offset projects do not achieve their stated goals.[20]

A good example of a project that provided real, verifiable, long-term, and additional GHG emission avoidance, but failed to provide the stated corporate carbon offset goal, is the 56MW wind farm in Tuppadahalli, India.[21]The wind farm was built from 2010 to 2012 during the Kyoto Protocol enforcement period and was registered with the CDM.[22]As part of the CDM, Acciona, the farm’s owner, sold CERs to subsidize its business.[23]In early 2021, Delta Airlines announced it was going to be fully carbon neutral by spending money on sustainability efforts, including carbon offset projects.[24]At the same time, Delta announced that it had spent $30 million on carbon credits, some of which came from the Acciona wind farm in Tuppadahalli.[25]However, the problem is that the wind farm construction was completed nine years earlier and it had been profitably operating for nearly a decade.The money spent by Delta to purchase the carbon credits presumably went to Acciona as business profits, not as a subsidy for an otherwise unprofitable venture that was under threat of failure or closure.[26]At a minimum, Delta’s purchase of these CERs fails to provide any “additional” emissions reduction or avoidance than what would have occurred without their purchase because the money used to purchase the CERs did not increase the wind farm’s power capacity, electricity distribution, or life-span.

For a few examples of carbon offset projects that are laughably ineffective, and in some cases knowingly so by all involved, watch John Oliver’s 23-minute segment from August 2022 from “Last Week Tonight with John Oliver.”[27]Oliver highlights several offset projects including a private hunting club in New Jersey selling offsets to stop logging which it has no intention of ever allowing anyway, JP Morgan Chase purchasing offsets to prevent logging of an already protected nature preserve, and private landowners selling credits to defer logging for as little as one year.Accepting that some (if not most) carbon offset projects are not effective, the concern is that corporations are aware of this, yet make public statements to the contrary.And if it can be shown that a corporation knew, or should have known, that the project would, could, or did not achieve the offsetting goal, how can it be held accountable?

Options to regulate and impose civil penalties – SEC, CFTC, FTC

Corporations should be held accountable for false, misleading, and deceptive statements regarding carbon neutrality and carbon offsetting.Not only do these claims hurt the climate change battle – pursuit of carbon neutrality through ineffective carbon offsetting allows corporations to avoid taking meaningful and sustainable GHG emission reduction actions – they also create an unfair advantage over those companies who have taken the moral high ground and refused to engage in the charade.There are several federal agencies that could regulate these statements, including the SEC, the CFTC, and the FTC.

The SEC submitted its proposed regulation to “enhance and standardize climate related disclosures for investors” for notice and comment in March 2022.[28]The SEC has yet to announce the final regulations.However, it’s unclear that these new regulations will provide the basis to impose civil penalties on a corporation for false, misleading, and deceptive statements regarding carbon neutrality and carbon offsetting projects.More importantly, it is likely that once the final SEC regulations are announced, they will be challenged in federal court.[29]Given the U.S. Supreme Court’s recent holding in West Virginia v. EPA, it’s likely any challenge will raise the “major question doctrine” challenging whether Congress delegated to the SEC the authority to regulate corporate actions related to climate change.[30]

The CFTC has expressed recent interest in regulating the voluntary carbon market.In June 2022, the CFTC convened a discussion panel and invited market participants and experts to discuss issues surrounding carbon offsets, most importantly standardization.[31]Even more recently, seven Democratic party U.S. Senators wrote a letter to CFTC Chairman Rostin Behnam urging the CFTC to “pursue strong oversight” over the voluntary carbon offset market.[32]The Senators argued that the “CFTC should take concrete steps to implement rules … [that] include a clear definition of a carbon credit and a robust standard for auditing” and recommended that the CFTC pursue cases of fraud.[33]CFTC has authority to regulate the carbon market as it has jurisdiction over “derivatives products such as futures contracts based on offsets.”[34]

While the CFTC may present an opportunity to regulate some carbon offset claims, its jurisdiction is narrow and some (if not a significant portion) of offset projects may not qualify as derivatives products or futures contracts.More importantly, any meaningful action is too far away – on average it takes 4 to 8 years from regulation development to enforcement.[35]And the Senators’ letter acknowledges that the CFTC is still be in the early stages of regulation development – their first recommendation is that the agency investigate the current situation.[36]

The urgent need to reduce global GHG emissions and the United States’ commitment under the Paris Agreement, counsels that the federal government should pursue all presently available actions before engaging in the long process of promulgating new regulations.The best currently available option for enforcement action is under the Federal Trade Commission Act (FTCA).Specifically, the FTCA makes it unlawful to use “unfair or deceptive acts or practices in or affecting commerce.”[37]The FTC’s Green Guides, which the FTC declares are administrative interpretations of the FTCA that do not carry the force of law, contain a specific section on “Carbon Offsets.”[38]That section, published in 2012 revisions to the Green Guides, gives notice to corporations that statements related to carbon offsets can be false, misleading, or deceptive.[39]As such, the Guides advise corporations to “employ competent and reliable scientific and accounting methods to properly quantify claimed emission reductions.”[40]

Over the last seven years alone, the FTC and the Department of Justice have successfully pursued 20 cases to enforce the statutory basis for the Green Guides, demonstrating the viability of their enforcement.[41]Just this year, Kohl’s and Walmart settled complaints, for $2.5 and $3 million in civil penalties, respectively, for making deceptive and misleading environmental claims in their products.[42]

Ultimately, while the best enforcement action for false, misleading, or deceptive statements by corporations about carbon offsets may be through the SEC or the CFTC, those options are at least four years down the road.In order to make a positive effect today, the federal government should use the FTCA and the Green Guides to stop the carbon offset charade and impose penalties on those corporations making false, misleading, or deceptive statements.