Sep 2008

In an era of carbon neutrality and growing environmental awareness, the word 'sustainability' has become as com- mon place in business circles as 'profitability'. Consumer awareness and preference for products that are certified environmentally friendly mean that business has little choice but to respond. But it is not easy being green.

A recent spate of claims accusing New Zealand companies of making misleading claims in relation to the clean, green, nature of their products, highlights the temptations and difficulties for businesses in this new environment. The Commerce Commission has identified unsubstantiated environmental claims as an issue of growing concern and listed it as a focus area for the next three years.

This FYI highlights some of the potential hazards and pitfalls that can arise when businesses make environmental claims about their products and services.  We discuss the application of the Fair Trading Act to these claims and provide some guidance to help businesses navigate the hazards of the new clean green market place. 

Green marketing or 'greenwashing'?

Climate change is generally accepted as one of the biggest threats for the modern world.  In light of this, many businesses are setting their sights on offering low or zero carbon impact products and services and going to great lengths to inform consumers of their efforts in this regard.  Being 'seen to be green' is not without its hazards however.  When making any type of carbon neutral or environmentally friendly claim, businesses need to make sure that they stay on the right side of the Fair Trading Act prohibition against misleading and deceptive conduct. 

The term 'greenwashing' was coined by environmentalists in the late 1960s and early 1970s to describe the actions of companies who were spending millions of dollars on advertising in an attempt to convince consumers that their products were environmentally sound.  When pressed to substantiate their claims, some of these companies were not able to provide any real evidence that their product had any environmental benefits.  Thus the term 'greenwashing' was born as the colloquial phrase to describe unsubstantiated environmental marketing claims. 

Fast-forward to the 21st century and a carbon conscious world where businesses of all shapes and sizes are looking to market themselves and their products as sustainable and environmentally friendly.  Today, a brand that holds itself as being carbon neutral is perceived to have significant market advantage over one that does not.  But what does carbon neutrality mean? 

The very market pulling power which makes a carbon neutral statement desirable also means that this can not be treated just as a warm fuzzy phrase, but must be backed by substance.  The difficulty however is the absence of any universal definition or understanding of exactly what it means to be carbon neutral.  The potential to mean different things to different people, makes any low or zero carbon claim vulnerable to allegations of greenwashing. 

Carbon Neutrality

Talk to anyone actively operating in the carbon market and they will all agree that while the phrases 'carbon neutral', and 'low carbon' have become almost common place in the vocabulary of the 21st century, there is still significant debate as to what they mean.  One particularly common area of debate is the extent of carbon offsetting required.  Is it sufficient to cover only those emissions over and above normal emission levels? Or should offsets be required to cover all emissions? 

Many argue that neither approach is sufficient and that such claims, carbon neutrality in particular, are only meaningful if they provide authentic benefits additional to activities that would otherwise have taken place,  reflecting the concept of additionality required for carbon offset projects under the Kyoto Protocol.  Advocates of an additionality dimension for carbon neutrality argue that carbon neutrality is only achieved when avoidable carbon emissions have been identified and reduced, and offsetting is used only on those carbon emissions that are unavoidable. 

The New Zealand Government promotes additionality as a necessary pre-requisite for achieving carbon neutrality in its Carbon Neutral Public Service Programme.  The Ministry for the Environment, which is leading the Carbon Neutral Public Service Programme, has stated that "offsetting emissions without having made plausible efforts to reduce emissions first would compromise the creditability of the Carbon Neutral Public Service Programme and could possibly prevent external verification of the department's carbon neutral status". 

In Australia, the Australian Competition and Consumer Commission has issued guidelines for assessing carbon claims under the Trade Practices Act (which includes the Australian equivalent provisions to the New Zealand Fair Trading Act prohibition against misleading and deceptive conduct).  These guidelines accept the requirement for additionality and the idea that benefits of carbon reduction under a project should be in addition to steps that would have been taken in any event.  Examples are given of activities that cannot be regarded as additional - these include matters such as a routine upgrade of equipment or changes in response to a regulatory requirement.

Unless a business measures, reduces and then offsets its carbon emissions, with the second and third of these steps undertaken within an additionality framework, any claims to carbon neutrality should be approached with caution.  Methodologies and processes used to measure and identify carbon emissions should be robust and well documented. 

Carbon Offsets

Where the goal is a low or zero carbon impact, carbon offsets are purchased once carbon emissions have been measured and reduction of avoidable emissions implemented.  Carbon offsets might also be purchased where a business wants to demonstrate a commitment to low carbon impact or for corporate social responsibility purposes.  Carbon offsets purchased in this context are often referred to as being purchased in the voluntary carbon market. 

The voluntary carbon market contrasts to the compliance carbon market, where carbon offsets are purchased to meet a regulatory requirement – usually but not always the regulatory requirement will be set in a Kyoto context.  The compliance market includes mandatory domestic allocation markets implemented by Kyoto participants, such as the proposed New Zealand Emissions Trading Scheme. 

Carbon offsets may be created in a compliance market context or in the voluntary market context.  Compliance market offsets can be, and frequently are, sold for voluntary market purposes.  The reverse, however, does not apply - offsets created in the voluntary market cannot be acquired in satisfaction of compliance obligations. 

The voluntary carbon market has grown rapidly and is estimated to have doubled or even tripled in size from 2006 to 2007.  Even so, the voluntary carbon market remains comparatively small in comparison to the compliance carbon market. 

Regulation of the quality of offsets is widely recognised as one of the biggest challenges facing the voluntary carbon market, particularly the voluntary offset market.  The range and type of carbon offset available in the voluntary carbon market varies enormously, from Kyoto compliant offsets such as certified emissions reduction units created under the Kyoto Protocol Clean Development Mechanism, to what are sometimes referred to as "junk offsets".  Junk offsets originate from projects that have little in the way of quality assurance. 

An example of junk offsets are carbon offsets derived from a reforestation project where the plantation is not properly managed with the result that many of the trees relied on to provide the carbon offsets die before reaching maturity and so the claimed levels of sequestration are never in fact achieved.  Another example might be where offsets are double sold and not retired.

Widespread concern around the quality of offset credits being offered in the voluntary offset market has seen a number of independent voluntary carbon standards emerge.  Some of the more widely recognised international standards include the Voluntary Carbon Standard (VCS), the Gold Standard (GS) and the VER plus (VER+).  Other standards have a national focus, such as the Greenhouse Friendly Standard in Australia, which is administered by the Department of Climate Change, and in the UK, the Department for Environment Food and Rural Affairs Draft Code of Best Practice.  Accreditation by one of these standards increases the integrity of the resulting carbon offset and also promotes consumer confidence. 

Although the array of carbon offsets available for purchase is bewildering, purchasers in the voluntary market would be well advised to verify the quality of any offsets they are contemplating buying, particularly if they wish to market their business on the basis of those offsets.  A business that has put rigorous effort into identifying, reducing and offsetting its carbon footprint may still find itself unable to defend a challenge to its environmental marketing, simply because the quality of the offsets it has purchased do not withstand scrutiny. 

As if these challenges are not enough for any aspiring voluntary carbon market participant, questions are also being raised regarding how the compliance and voluntary carbon offset markets can work together. This is particularly topical as New Zealand moves to implement a compliance market with the proposed emissions trading scheme.  Some commentators argue that it is possible for voluntary carbon market activities to legitimately occur within the overall framework of a compliance scheme operating under the Kyoto protocol. 

Others argue that to the extent voluntary carbon market activity reduces a country’s overall emissions and that reduction is identified and counted as part of that country’s compliance under the Kyoto Protocol, the requirement for additionality is not met.  This is because the offsetting activity is, in effect, double counted – once at a voluntary level and again as part of the global commitment, at national level, under the Kyoto Protocol.  The end result is that the climate impact of the individual activity is not offset.  How this debate will translate into, and impact on, the merits of voluntary carbon marketing claims remains to be seen. 

What happens if you get it wrong?

In New Zealand, the Commerce Commission recently warned Wellington Combined Taxis about claims made on its website that the Company was "going green".  The Commission warned the company that its claims ran the risk of breaching the Fair Trading Act by saying that LPG cars reduced CO² pollution "by up to 25%" and the Nissan Maxima was "20% more fuel efficient than traditional automatic transmissions", when there was no information available to substantiate these claims and tests carried out by the Automobile Association suggested that the difference between the Nissan Maxima and other motor vehicles was negligible. 

While the Commission chose to issue a warning on that occasion, it has recently released a statement warning businesses about the obligations associated with claims regarding the impact (or lack thereof) that products have on the environment and in particular, the prohibition on misleading and deceptive conduct contained in the Fair Trading Act.  Businesses have been very clearly put on notice that the Commission will be taking a 'no nonsense' approach in the future. 

The Commission's advice is that businesses need to be specific in their environmental claims to allow consumers to verify those claims.  The Commission's Director of Fair Trading has stated that the Commission will publicise cases of greenwashing that are prosecuted or result in a warning, and will use this as a tool to educate businesses about their obligations. 

The Commission has also indicated it is working with a number of its counterpart organisations overseas to compare the types of environmental claims occurring in different jurisdictions.  For this reason, overseas experience can provide some useful lessons for New Zealand business.  You do not have to look far to find examples where greenwashing claims have provoked drastic measures from regulators. 

In Norway, the Norwegian Consumer Ombudsman has effectively banned statements such as 'green', 'clean' or 'environmentally friendly' in response to a large number of unsubstantiated green claims.  The ACCC has taken action against a number of large companies including Goodyear Tyres, GM Holden and De Longhi for misleading and deceptive marketing claims.

Businesses should be in no doubt that the New Zealand Commerce Commission will prosecute in appropriate cases and so should be prepared and able to justify any carbon claims being made.  Penalties under the Fair Trading Act for misleading and deceptive conduct can include fines of up to $60,000 for an individual and $200,000 for a company.  Perhaps most damaging of all from a reputation perspective, is the power to order corrective advertising.

Moving Forward

When making any environmental claims, businesses need to consider the perspective of a consumer.  This is particularly so with carbon impact claims irrespective of whether these are made directly or indirectly.  Attention to detail is essential and consideration should be given to things such as whether the carbon neutrality principles can be applied to the entire life cycle of the product or the whole of the organisation's activities.  It is also important to remember that carbon neutrality and other carbon impact claims are time bound.  Carbon offsets must be retired and replaced if they are to be effective beyond the short term. 

All of these aspects should be clearly stated or the business may be vulnerable to greenwashing claims.  While a 'low carbon' statement may avoid some of the hazards of a carbon neutrality statement, it carries other hazards by virtue of being a comparative claim.  Like any comparative claims, if these are made without context, then they are open to a variety of interpretations and have the potential to be misleading. 

The best approach is to clearly state the limits and nature of any carbon claims rather than risk devaluing brand reputation as well as undermining all the good steps actually taken.