Carbon offsetting: the ban introduced by the Green Claims Directive and the risk of greenwashing

Does carbon offsetting really encourage eco-sustainable behavior in B2B organizations or, conversely, does it incentivize the organizations that use it to engage in greenwashing practices?

Organizations operating in the business-to-business (B2B) ecosystem , globally, are engaged in net-zero emissions initiatives to achieve levels of eco-sustainability in their business processes, in compliance with relevant national regulations and in line with the sustainable development goals of the United Nations 2030 Agenda and, for European companies, also with the objectives of the 2050 Agenda at the heart of the European Green Deal. 

The carbon offsetting mechanism provides that, after calculating a company’s carbon footprint, it can offset those emissions with carbon credits generated by certified projects that aim to reduce, avoid, or absorb an equivalent amount of CO2 from the atmosphere. This mechanism allows companies to participate in the emissions offset market on a voluntary basis by purchasing carbon credits on dedicated trading platforms , whose market price varies based on the matching of supply and demand , as well as the quality of the underlying project . Purchased carbon credits must be recorded in a public registry to avoid double counting and ensure transaction transparency . Each credit corresponds to one ton of CO2 absorbed or not emitted through investments in countries (primarily developing and emerging) for the implementation of afforestation, reforestation, waste and wastewater management, energy efficiency, renewable energy production, etc. projects .

Given the lack of regulation in the sector at the national level, some NGOs have developed specific credit certification mechanisms , such as the Verified Carbon Standard and the Gold Standard , which establish how carbon offset projects must be structured and implemented. Although each certification mechanism focuses on specific aspects, such as a project’s impact on the climate or its social and ecological implications, or the combination of different standards, all mechanisms share generally applicable criteria that must be respected: each project must be assessed (especially in terms of compliance with the SDGs of the United Nations 2030 Agenda) and verified by accredited third-party bodies (to guarantee the integrity of carbon credits according to recognized international methodologies). This process includes project validation and continuous monitoring to ensure that reductions are effective and not overestimated, in order to comply with the following criteria:

• additionality, according to which the project must reduce emissions beyond what is required by current regulations, use technologies that would not normally be used without the project, and be economically sustainable only thanks to the proceeds from the sale of carbon credits;
• long-term impact ;
• ban on double counting, whereby the same tonne of CO₂ must not be counted multiple times by different entities, in order to prevent the same carbon credits from being claimed simultaneously by multiple entities or markets, leading to an overestimation of actual emission reductions.

The Voluntary Carbon Market (VCM) is a parallel market to the regulated European Emissions Trading System ( ETS ) which, otherwise, helps meet the climate action obligations of industrialized countries by offsetting the emissions of governments, companies and other organizations in order to meet the obligations established by the Kyoto Protocol.

The two offsetting systems – ETS (mandatory) and VCM (voluntary) – are increasingly interconnected at a global level , so much so that, in some countries, it is now possible to purchase carbon credits from private certification systems to meet mandatory climate action obligations .

In the EU, the voluntary offsetting system cannot be applied , given that several existing incentive programs aimed at promoting renewable energy or increasing energy efficiency already exist, which do not meet either the double-counting ban or the additionality requirement. Furthermore, while the voluntary offsetting system undoubtedly represents an important alternative to the ETS for emissions reduction, the risk is that member states, by negotiating independently and in the absence of rules, could arbitrarily apply rules that are not particularly environmentally effective and could circumvent the double-counting ban.

The voluntary CO2 emissions compensation system for private law economic entities has given rise to many doubts:

• Does carbon offsetting really encourage eco-sustainable behavior in B2B organizations or, conversely, does it incentivize the organizations that use it to engage in greenwashing practices?
• In other words, how does the propensity to invest in carbon offsetting correlate with a greater risk of B2B market organizations engaging in greenwashing practices?

A first critical aspect concerns verifying the quality of projects to be financed . To mitigate the risk of greenwashing , it is essential to ascertain the actual levels of eco-sustainability of the projects being financed. This is achieved through ex-ante control of the investment strategy and effective ex-post monitoring of the financed projects . This monitoring is aimed at ensuring their actual implementation, full justification of the declared costs, the actual impact produced (comparing actual values ​​with estimated ones), and, at the EU level, that the project requirements are in line with the obligations introduced by the Corporate Sustainability Reporting Directive (CSRD) and with the criteria established in the Taxonomy Regulation.

The January 2023 journalistic investigation that rocked V., the world’s leading nonprofit for certifying carbon credits through the Verified Carbon Standard mechanism and prompted its CEO to resign, revealed that over 90% of the projects certified by the U.S. nonprofit under the REDD+ (Reducing emissions from deforestation and forest degradation in developing countries) scheme do not represent real carbon reductions and could actually worsen global warming . The REDD+ reforestation and anti-deforestation projects under investigation—launched in the context of the Conferences of the Parties (COPs) to the United Nations Framework Convention on Climate Change, with a major push from the Bali COP in 2007 and formalized in 2010 during the Cancun COP —were funded by Disney, Gucci, Shell, EasyJet, and other multinationals. 

A second controversial issue concerns the consistency of corporate carbon data dissemination . Data disclosure under voluntary schemes , such as the Carbon Disclosure Project ( CDP ), remains largely unverified , and companies have been found to employ a variety of methods to disclose direct and indirect emissions, potentially making such information unreliable ; in particular, many companies operating in carbon-intensive sectors do not disclose climate-related data at all. For example, studies have highlighted how in Japan only a few publicly listed companies, operating in sectors with the highest transition risks, have reported their emissions under the CDP disclosure framework. This situation, certainly not limited to Japan, increases the risk that company-level carbon data will continue to exhibit low levels of transparency and remain largely reliant on voluntary disclosure ; furthermore, mandatory reporting requirements are also often ineffective in increasing data comparability .

Although the Task Force on Climate-Related Financial Disclosures ( TCFD ) recommends that companies disclose information in their financial documents , European companies— especially those not required to report sustainability —have so far included such information in unaudited sustainability reports . Significant ambiguity surrounding the methods used in these reports has so far demonstrated the problem of inconsistency and the use of carbon data.

Another topic that has sparked much debate concerns the methodology used for accounting for carbon emissions , as the measurement and evaluation of emissions seems to leave companies a lot of leeway to arbitrarily declare their environmental performance and, in particular, their declared efforts to reduce carbon emissions . For example, the declaration of Scope 3 emissions , due to their nature, which often makes their accurate quantification difficult, still appears rather approximate.

Under voluntary schemes, this determination is optional, and according to some studies, only a small number of companies at EU level have declared these emissions in their sustainability reporting . This poor or approximate reporting exponentially increases the risk for the majority of companies of presenting sustainability reports that are inaccurate with respect to their actual carbon emissions performance. This appears even more serious considering that for many companies, Scope 3 emissions represent a significant portion of their total carbon footprint . Furthermore, there is a risk that companies may outsource their carbon emissions to the supply chain , thus reducing their declared emissions and maintaining or even increasing the amount of overall emissions generated in relation to their products, activities, and assets.

Recent international studies have, for example, shown that organizations that resort to carbon offsetting practices tend to slow down their propensity to create sustainable value and delegate environmental efforts to carbon creditors, rather than investing in the decarbonization of their internal processes; this would have the potentially harmful effect of diminishing the sense of environmental responsibility and encouraging a greater propensity to engage in greenwashing practices . In this regard, it would be interesting to develop a quantitative analysis of the relationship between an organization’s emissions, carbon offsetting, and greenwashing , especially considering that the latter can be measured precisely like the divergence between the internalization of sustainable practices and the externalization of sustainability ( green claims ). Less sustainable companies tend to resolve this misalignment through the purchase of carbon credits and the use of carbon offsetting. 

The more significant this misalignment, the more it is symptomatic of poor sustainability levels in the organization, which typically adopts misleading green marketing based on a lack of scientific evidence, the limited relevance of claims, reliance on fragile certifications, and resorts to imprecise or opaque carbon offsetting practices. In the short term, carbon reduction policies, combined with well-designed green marketing, can represent an effective shortcut to improving an organization’s profit targets , reputational levels, and market positioning , triggering “ low risk-high return “ mechanisms and a related increased frequency of greenwashing behaviors : in other words, an organization’s willingness to purchase carbon credits would appear to reveal a preference for low environmental performance and high green marketing communications. 

Ultimately, carbon offsetting may represent, in the short term, a corporate attempt—often ambiguous and opaque—to hide their true environmental impact behind carbon offsetting efforts . This is not the case with undertaking a thorough business lifecycle analysis that considers every aspect of an organization’s operations, identifying the areas where environmental impact is most significant, understanding critical issues, and developing an action plan that identifies best practices and innovative solutions to improve the organization’s environmental performance. In this way, organizations can build trust with stakeholders and ensure governance that expresses a clear desire to create sustainable value , combining the ambition of increasing economic output with greater environmental responsibility. Therefore, only after achieving significant reductions in emissions should B2B organizations consider mitigating their residual impact through the purchase of carbon credits . This approach would prevent carbon offsetting from becoming a mere symbolic act and would prevent companies from engaging in greenwashing practices , adopting offsetting initiatives to cover up shortcomings or non-existent environmental efforts.

Finally, it is important to note that Directive 2024/825/EU of 28 February 2024 , on empowering consumers for the green transition by improving protection from unfair practices and information ( Green Claims Directive ) – in force since 26 March 2024 and which must be transposed by Member States by 27 March 2026 – has introduced specific rules to protect consumers , aimed at combating unfair commercial practices adopted by B2C organisations that deceive consumers and prevent them from making sustainable consumption choices .

The Directive amended Annex I of Directive 2005/29/EC , on unfair commercial practices by businesses towards consumers, including misleading environmental and social claims ( greenwashing and socialwashing ) among unfair commercial practices.

Among the prohibitions introduced by the Green Claims Directive is the ban on making claims based on greenhouse gas offsetting that claim the neutral, reduced, or positive impact on the environment of a good or service in terms of greenhouse gas emissions. This ban was introduced by the Green Claims Directive, among others, in Annex I of Directive 2005/29/EC, as it creates the mistaken belief among consumers that such claims refer to the product itself or to the supply and production of that product, or that the consumption of that product has no environmental impact (climate-neutral, certified CO2-neutral, net-zero climate emissions, climate offsetting, reduced climate impact, reduced CO2 footprint, etc.).

Claims regarding carbon offsetting are permitted only if they are based on the actual impact of the product’s life cycle and not on the offsetting of greenhouse gas emissions outside the product’s value chain . This is because the emissions produced by the good or service and the offsetting of these emissions through carbon credit project financing are not equivalent. Companies can disclose green claims relating to their investments in environmental initiatives, including carbon offsetting practices , provided they provide non-misleading information and comply with the requirements established by European Union law .

*Marco Letizi, PhD, Lawyer, Chartered Accountant, Auditor, Global Consultant to the United Nations, European Commission and Council of Europe, Author.