The U.S. Federal Trade Commission’s (FTC) recent efforts to evaluate marketing claims made within the carbon market are sending a clear message to consumers and businesses alike: buyers and sellers beware.

On Tuesday, FTC held a day-long workshop to examine the growing consumer and corporate market for carbon offset products and renewable energy certificates. The well attended workshop included participants from government agencies, carbon product vendors, renewable program certification organizations, consumer advocacy groups, and retail manufacturers. Despite the diversity of the attendees, however, the observations offered throughout the day emphasized the risks to consumers inherent in the lack of a consistently applied standard for evaluating the quality of carbon offset products.

1. FTC appears likely to use its authority under the Federal Trade Commission Act to monitor carbon marketing and enforce against fraudulent claims.

FTC is accepting comments through January 25 regarding the potential need to update its Green Marketing Guidance to address carbon offset and renewable energy certificate claims. While FTC declined at the workshop to commit to taking specific action with respect to its Green Guides until after it has reviewed public comments, the comments at the meeting and the tenor of FTC and EPA participants suggests that FTC is likely to decide further action is necessary. Even in the absence of specific action to update its existing guidance, FTC retains authority under the Federal Trade Commission Act to enforce against blatant acts of false advertising or misrepresentation in the voluntary carbon markets.

2. Carbon claims mean different things to different “consumers”

The lack of objective standards in the voluntary carbon marketplace is further complicated by the subjective and disparate preferences that reasonable individuals or companies can bring to a transaction. FTC’s false advertising standards revolve around the expectations of the “reasonable consumer,” whether a corporation or individual, and how the consumer would interpret the claims made for any given product. When it comes to carbon offset and renewable energy products, however, the FTC workshop discussions offered several examples of how diverse such conceptions can be.

• Additionality: Most participants agreed that a fundamental requirement for a true “carbon offset” product is “additionality” - the idea that the environmental benefits purchased under the carbon project were “in addition” to those that would otherwise have occurred due to regulatory requirements or other pre-existing circumstances. Just how to apply the additionality standard to specific products is not yet clear.

• Carbon Neutrality: “Carbon neutrality” is used to describe balancing an entity’s carbon emissions with commensurate investments in offset activities that reduce carbon emissions. Opinions differ on whether the purchase of offsets is adequate without an entity taking efforts to reduce its internal footprint.

3. There is no consistent standard governing acceptable marketing claims for voluntary carbon offset projects or renewable energy credits.

While some individual organizations that have developed relevant voluntary standards for certain types of claims (e.g., Gold Standard; Green-E; EPA’s draft offset standards for certain voluntary projects under the EPA Climate Leaders program), there is nothing requiring most projects to adhere to these voluntary standards. As a result, project investors or retail consumers that think they are paying for one set of environmental benefits may be getting something very different.

4. The lack of standardization increases the risk to investors considering investment in a new carbon offset or renewables project.

This current lack of standards within the exploding voluntary carbon market poses real risks to investors on every side of potential carbon market investments. For a developer considering a new clean energy project, the business model and financing may hinge upon the assumed marketability of RECs or carbon offset credits from the final project into a viable carbon market. For companies purchasing RECs or carbon offset products, participation may hinge upon the expectation that they can burnish their reputation for environmental stewardship or incorporate their actions into their brand. For the brokers involved in selling carbon instruments on the wholesale or retail market, the entire product line depends on the consumer’s confidence that paying money for a offset has real environmental value.

It was clear from FTC’s statements at the meeting that there are significant unanswered questions about some of the products and claims on the market. Businesses would do well to protect their own interests now without waiting for an FTC shoe to drop.

For further information about this topic, please contact Akin Gump.