EU Parliament adopts first reading position on the Green Claims Directive

On 12 March 2024, the European Parliament adopted its first reading position (i.e. its negotiating position) on the proposed Directive on the Substantiation and Communication of Environmental Claims, commonly known as the Green Claims Directive. 

Background

The EU Commission published its proposal for the Green Claims Directive on 22 March 2023 (read more in our previous blog post). The Directive aims to combat greenwashing by establishing minimum criteria that companies must meet when making claims to EU consumers about the environmental benefits and performance of their products or services. It also sets minimum criteria for environmental labelling schemes. 

The Green Claims Directive complements the Directive on Empowering Consumers for the Green Transition (Empowering Consumers Directive) which has recently been adopted and aims to tackle greenwashing and other unfair commercial business practices that prevent consumers from making sustainable consumption choices (read more in our previous blog post).

The Parliament’s negotiating position

The Parliament's position includes the following: 

Scope and application 

• The Parliament would like to clarify that the Directive also applies claims made about products placed on the market or put into services through online platforms.
• MEPs suggested delaying the application of the Directive until 30 months after it comes into force, and for small enterprises, until 42 months.
• The Parliament supported the Commission's proposal regarding penalties up to 4% of the company’s total annual turnover in the relevant Member State.

Environmental claims and labelling schemes

• MEPs have added more details to the requirements already specified in the Empowering Consumers Directive for environmental claims based on the future environmental performance of a trader. In particular, such claims should require science-based and measurable commitments (in addition to being time-bound) and an implementation plan containing measurable and verifiable interim targets and other necessary elements for implementation, such as allocation of resources, a monitoring plan and a reporting plan based on reporting and verification at regular intervals. Information on both aspects needs to be made publicly available (the exact form for this is not specified).
• MEPs want the information used to substantiate environmental claims to be based on independent, peer-reviewed, robust and verifiable scientific evidence in addition to being widely recognised and taking into account “Union or international standards”. Given the detailed standards prescribed, for example under the European Sustainability Reporting Standards (ESRS) in connection with environmental reporting (including climate and biodiversity), this latter obligation is likely to become more significant over time. 
• In relation to highly-polluting industries, the MEPs added that environmental claims by such industries should be made "in relative terms to allow consumers to understand the product’s overall negative impact on the environment".
• The Parliament did not agree with the Commission’s proposal to prohibit the Member States from establishing new environmental labels of their own. However, the Member States’ environmental labels, as well as labels established in third countries to be used in the EU market, will require the Commission’s approval. 
• Approved environmental labelling regimes must comply with additional requirements: (i) decision-making bodies of environmental labelling regimes must be free of conflicts of interest and independent from traders using the label; (ii) reasonable and non-discriminatory fees should be set proportionate to size and turnover of companies; and (iii) schemes must have a robust monitoring and evaluation systems to regularly review objectives, strategies, performance and impacts based on latest best practices, scientific data and evidence. 
• The MEPs voted in favour of a 30-day deadline for the verification of environmental claims and labelling schemes, with a potential extension for another 30 days. However, the Commission is tasked with developing a simplified procedure that may include a presumption of conformity for simpler claims and products.

Carbon credits 

The provisions dealing with carbon credits are far more restrictive and prescriptive than would be expected in the context of consumer protection legislation:

• In substantiating an explicit climate related claim, a trader will be required to separate carbon credits used for the purposes of that claim, from green-house gas emissions, and also to specify whether those credits relate to reductions or removals. This requirement reflects the general focus in the EU and more broadly on transparency in connection with the use of carbon credits.
• Where a trader makes a contribution claim using carbon credits (that is, a claim in connection with the purchase of carbon credits which does not relate to its value chain emissions), this must be clearly distinguished from any claim involving an improved climate or environmental impact of the product or trader. This requirement similarly reflects the general focus on transparency and accuracy in connection with the use of carbon credits.
• The ban established under the Empowering Consumers Directive on environmental claims in connection with products which are based on the use of carbon credits, received support from the MEPs. 
• However, the MEP text goes on to propose that ‘compensation claims’ based on the use of carbon credits (that is, where carbon credits are used towards a climate target) may only be made in respect of the ‘residual emissions’ of a trader. The Commission will be tasked with adopting a method for defining residual emissions, based on an emission reduction pathway compatible with limiting global warming to 1.5°C, within a year of the Directive's entry into force. Given the express link to the ESRS in this context, it is likely that the MEPs have in mind the concept of residual emissions as defined in the ESRS: “…(after approximately 90-95% of GHG emission reduction with the possibility for justified sectoral variations in line with a recognized sectoral pathway).” In our view effectively prohibiting corporates from using carbon credits until the very end of their decarbonization pathway deprives them of flexibility in taking climate action and the associated cost benefits. Importantly, given the reality of many sectors’ decarbonisation trajectories, the MEP’s position is also very likely to disincentivise corporates from minimising their climate impact along the way through the use of carbon credits. And the amount of carbon emitted prior reaching the universal goal of Net Zero, does matter! The ESRS’ “justified sectoral variations in line with a recognized sectoral pathway” provides a potential avenue for addressing these adverse impacts of the policy agenda reflected in the Parliament’s proposal, and we hope to see this as a focus area going forward.
• Parliament has also proposed that the carbon credits used by traders for their residual claims must be Union issued credits - certified units issued in accordance with the recently agreed Carbon Removal Certification Framework Regulation (CRCF) (which will establish a Union certification framework for carbon removals, carbon farming and carbon storage products - for more details, see our previous blog post). Whilst the proposal does contemplate ‘other units’ being permitted for this purpose, this would only be “in duly justified cases” and “where those schemes are recognised by the Commission as part of the list of compliant schemes corresponding to at least equivalent requirements to those provided”. So this looks likely to be a narrow list. But that’s not all folks! Where the use of the carbon credits is for compensation of residual fossil emissions, only permanent removals as defined under the CRCF will be considered as adequate substantiation. The CRCF defines permanent carbon removal as any practice or process capturing and storing “atmospheric or biogenic carbon for several centuries” and which is not combined with enhanced hydrocarbon recovery. 
• In our view it is difficult to reconcile such prescriptive limitations on the use of carbon credits being imposed in the context of a consumer protection legislative instrument. In this regard it is questionable whether the average consumer would be misled by a corporate climate claim, where carbon credit used to compensate the fossil emission component of the 90 -95% residual emissions, was not a permanent removal unit issued under the CRCF.
• In connection with claims on ‘future environmental performance’ based on the use of carbon credits the MEPs have expressly linked such claims to the framework established by the ESRS, such that where a trader makes such a claim, it must comply with the relevant rules set out in the ESRS to substantiate the claim. The ESRS contains very detailed rules for disclosure around climate targets. Please see here and here for further details on the ESRS.
• The draft also expressly leaves the door open for a tightening of the rules related to carbon credits. Article 21 calls for a Commission report to be prepared within 5 years evaluating the Green Claims Directive ‘in light of its objectives’. They propose this include in particular ensuring that traders effectively prioritise emission reductions in their own operations and value chains, by assessing the adequacy of the provisions related to the use of carbon credits.  

Next steps

The draft Green Claims Directive will now be followed up by the new Parliament after the EU elections that will take place in June 2024. For the inter-institutional trilogue negotiations to start, the Council will have to adopt its first reading position taking the first reading position of the Parliament into consideration.