Carbon Insetting vs Carbon Offsetting: What Each Means, How They Differ Under SBTi, and What the EU Anti-Greenwashing Rules Require From September 2026

A manufacturer labels its product "climate neutral." The claim is based on carbon offsets purchased from a reforestation project in another country. The product's actual emissions — from raw material extraction, manufacturing, and logistics — have not been reduced at all.

From 27 September 2026, offset-backed ‘climate neutral’ product claims become prohibited in the European Union.

The Empowering Consumers for the Green Transition Directive (ECGT, Directive 2024/825) explicitly prohibits claiming that a product has a neutral, reduced, or positive impact on the environment in terms of greenhouse gas emissions when that claim is based on carbon offsetting outside the product's value chain. This covers "climate neutral," "CO2 neutral," "carbon neutral," "climate positive," and similar terms at the product level. The rules apply from 27 September 2026. The European Commission published a Questions and Answers document on the directive on 27 November 2025. Question 18 of that document addresses existing products directly, confirming that from 27 September 2026, traders must ensure that their environmental claims and sustainability labels comply with the new rules, including for products already in the distribution chain. The Commission notes that where traders identify non-compliant claims on existing packaging, they have practical options to ensure compliance, such as covering or correcting claims by stickers or adding supplementary information at the point of sale. The Commission also notes that national enforcement authorities will normally investigate, prioritise, and sequence enforcement actions according to the gravity of infringements and the specific circumstances of each case.

This is not a proposal under consideration. It is law. EU Member States were required to transpose it into national legislation by 27 March 2026, and it takes binding effect on 27 September 2026. The manufacturer who built a climate neutral claim on top of an offset portfolio — without reducing the emissions in its own value chain — now faces a legal problem, not just a reputational one.

The distinction between insetting and offsetting is at the centre of that legal problem. This post explains what each approach is, how they interact with SBTi target-setting including the evolving V2 framework, what claims each supports, and what manufacturers need to do before making any carbon claim in a market where the EU directive and German courts are already active.

Carbon offsetting is the process of compensating for greenhouse gas emissions by funding projects that reduce or remove emissions somewhere else — outside the company's own operations and supply chain.

These external projects can include forestry and avoided deforestation schemes, clean cookstoves, renewable energy installations, and methane capture from landfill or agriculture. Each carbon credit typically represents the avoidance or removal of one tonne of CO2 equivalent. A company that purchases credits equivalent to its annual emissions can describe its net position as carbon neutral on paper — or could, until the legal landscape changed.

Unlike insetting, offsetting allows a company to purchase carbon credits from a project it does not own or operate. Offsetting provides flexibility and can be implemented relatively quickly, but its credibility depends on rigorous verification of additionality, permanence, and measurability, as well as transparent claims about what is being compensated and how.

Offsetting has been the dominant instrument in corporate net-zero marketing for the past decade. It enabled companies to achieve a claimed neutral position without altering any part of their actual production process. The EU regulatory framework now treats offset-backed product neutrality claims as prohibited consumer practices.

Carbon insetting is the practice of funding or implementing emissions reductions or removals within a company's own value chain — including its supply chain, its suppliers' operations, and the agricultural, forestry, or land-use activities connected to its sourcing.

As described by the International Platform for Insetting, insetting involves the implementation of nature-based solutions such as reforestation, agroforestry, renewable energy, and regenerative agriculture within a company's own supply chain. In practice, insetting is most commonly applied to Scope 3 Category 1 (purchased goods and services) and upstream supply chain emissions — the parts of a company's footprint that come from what it buys, rather than what it directly operates. Direct operational improvements to a company's own facilities address Scope 1 and 2 emissions, but these are typically described as operational decarbonisation rather than insetting.

The defining characteristic of insetting is that the emission reduction occurs within the company's own GHG inventory boundary. A manufacturer that funds its Tier 1 steel supplier to switch from coal-powered to green hydrogen-powered production is insetting. That reduction appears in the manufacturer's Scope 3 Category 1 inventory as a genuine reduction in the emissions of goods it purchased. A manufacturer that purchases forest credits from Brazil to compensate for the same steel emissions is offsetting. The steel emissions remain in the inventory — they are compensated externally, not reduced at source.

Because insetting reductions sit within the company’s value chain, they can contribute toward scope-specific reduction targets where properly accounted for within the company’s inventory. Offsetting, by contrast, sits outside the inventory and cannot substitute for those reductions.

One concept requires careful introduction here because it is frequently confused with offsetting and insetting, and because the framework governing it changed significantly in 2025.

Under the SBTi Corporate Net-Zero Standard Version 1.x, voluntary climate investments made outside a company's own value chain were referred to as Beyond Value Chain Mitigation (BVCM). These were described as voluntary contributions to the broader global climate effort — funding ecosystem restoration, carbon removal technologies, or community-level renewable energy — and were encouraged alongside, but not as a substitute for, actual value chain emissions reductions. Under V1.3, BVCM could not be counted toward a validated science-based target.

The SBTi has substantially restructured this framework in the draft Corporate Net-Zero Standard Version 2 (second public consultation released 6 November 2025, final standard expected 2026). The V2 draft replaces BVCM with a formal Ongoing Emissions Responsibility (OER) framework, which introduces structured recognition for companies that take responsibility for their ongoing emissions — emissions not yet abated on the path to net zero — through the purchase of carbon credits or through applying an internal carbon price.

The second consultation draft of the OER framework proposes two recognition tiers. The first is "Recognised," for companies that either address at least 1% of their ongoing Scope 1, 2, and 3 emissions via high-integrity, verified carbon credits, or apply an internal carbon price of at least $20 per tonne of CO2 equivalent to at least 1% of their ongoing emissions and direct that budget toward eligible climate actions. The second is "Leadership," for companies that apply an internal carbon price of at least $80 per tonne of CO2 equivalent to 100% of their ongoing Scope 1, 2, and 3 emissions to generate a defined budget, and direct at least 40% of that resulting budget toward verified carbon credits, with the remaining 60% available for other eligible climate actions such as research and innovation, ex-ante mitigation finance, or adaptation.

Critically, OER credit purchases are kept entirely separate from SBTi scope-specific reduction targets and cannot be used to meet them. However, Under the current V2 draft, participation in OER would become mandatory for Category A companies from 2035. Under the V2 draft, Category A is defined as: large companies with a net worldwide turnover above 450 million euros and/or more than 1,000 employees; and medium-sized companies in high-income countries that meet two of the following three thresholds — a balance sheet total of 25 million euros or more, a net worldwide turnover of between 50 million and 450 million euros, and between 250 and 1,000 employees. Category B covers medium-sized companies in below-high-income countries, and small and micro companies regardless of geography.

Under the current V2 draft, carbon credits used for mandatory OER from 2035 would need to be removals, with the share of durable long-lived removals required to increase progressively, scaling toward full coverage of residual emissions by the company's net-zero target year, which for most companies means 2050.

The V2 standard is expected to be finalised and published in 2026. Voluntary adoption will be possible upon release, and the standard becomes mandatory for all companies setting new science-based targets from 1 January 2028. Companies may continue setting targets under V1.3 until 31 December 2027.

Understanding the three-way distinction — insetting within the value chain, offsetting as external compensation, and OER as a structured contribution framework for ongoing emissions beyond the value chain — is important because different claims, different accounting treatments, and different legal rules apply to each.

The legal change that makes this distinction commercially urgent is the Empowering Consumers for the Green Transition Directive, adopted on 28 February 2024 (Directive 2024/825), entering into force on 26 March 2024, and applying from 27 September 2026.

The ECGT works on a blacklist principle. Certain practices are prohibited outright — no case-by-case assessment is needed. Among the blacklisted practices from 27 September 2026:

The crucial scope limitation: this ban applies at the product level and to business-to-consumer (B2C) communications, not to corporate-level climate communication. The Commission's Q&A (Question 1) confirms explicitly that the directive is strictly limited to B2C practices. Corporate sustainability reporting — such as annual sustainability reports or disclosures required under the Corporate Sustainability Reporting Directive (CSRD) — is typically not in scope, because these reports are often mandatory and addressed to investors rather than consumers.

However, if a company uses information from its sustainability report in voluntary advertising or marketing directed at consumers, that communication falls under the UCPD and ECGT Directive. The product-level claim is what triggers the blacklist, not the document it originated in.

The directive applies to all businesses selling to EU consumers, regardless of where the business is headquartered. Certain provisions within the framework include exemptions or lighter treatment for microenterprises, generally defined as companies with fewer than 10 employees and annual turnover and/or balance sheet totals below 2 million euros.

For a product-level carbon claim to be legally defensible from 27 September 2026, it will generally require substantiation through lifecycle emissions accounting — calculated through a product carbon footprint (PCF) under ISO 14067 or the GHG Protocol Product Standard — and any claim of neutrality or reduction must be substantiated by demonstrated reductions within the product's lifecycle, not external offset purchases.

Environmental claims must be precise, evidence-based, and defensible. Forward-looking claims — such as "net zero by 2040" — are permitted only if backed by a detailed, realistic implementation plan with measurable, time-bound targets and independently verified by a qualified third party.

Claims suggesting a neutral, reduced, or positive environmental impact — such as "carbon neutral" or "net zero" — are prohibited if they rely on offsetting outside the value chain. Companies are expected to strengthen lifecycle assessments, supplier due diligence, and internal review processes to ensure that all product-level marketing and communications can withstand regulatory scrutiny.

On penalties: the ECGT directive requires member states to set penalties that are "effective, proportionate, and dissuasive." As a benchmark, the directive references penalties that may include fines of at least 4% of annual turnover in the relevant member state or states where the violation occurred, but individual member states set their own penalty levels in their national transposing legislation. Additional enforcement powers include the confiscation of revenues gained from transactions related to misleading claims, exclusion from public procurement processes, and mandatory corrective advertising. The directive also empowers interested parties — including competitors — to take legal action. A company that uses offset-backed neutrality claims while a competitor has invested in genuine value chain reductions may face unfair competition litigation from that competitor.

The enforcement risk is not theoretical. German courts are already striking down vague climate-neutral marketing under existing consumer protection law — the Unfair Competition Act (UWG) — without waiting for the September 2026 ECGT deadline. The German Federal Court of Justice (Bundesgerichtshof) issued a landmark ruling on 27 June 2024 (I ZR 98/23), finding that advertising products as "klimaneutral" without a clear explanation within the advertisement itself of whether neutrality is achieved through reduction or compensation is inherently misleading. The case was brought by the Wettbewerbszentrale (Germany's Centre for Protection against Unfair Competition) against confectionery manufacturer Katjes, which had advertised in a food trade journal that it had been producing all products in a climate-neutral manner since 2021. The production process was in fact not CO2-neutral — the company was compensating its emissions through a partner climate action firm. The Wettbewerbszentrale was unsuccessful in both the Regional Court of Kleve (first instance) and the Düsseldorf Higher Regional Court (appeal), each of which found the advertising permissible. The Federal Court of Justice reversed the appellate ruling and ordered Katjes to cease and desist from the advertising and to reimburse pre-trial warning costs.

Multiple other proceedings brought by Deutsche Umwelthilfe against companies including TotalEnergies and Adidas have followed the same legal logic under the UWG. By September 2024, Deutsche Umwelthilfe had successfully conducted 92 proceedings against companies making klimaneutral or equivalent claims, and the organisation publicly stated it had not lost a single proceeding. Subsequent reporting confirms the total has since exceeded 100 cases. For companies operating in Germany, the rules are effectively already in force.

The Science Based Targets initiative, which governs the most widely adopted corporate net-zero standard globally, draws the same fundamental line between insetting and offsetting — and the V2 framework reinforces it while adding new structure around carbon credits.

From 2035, OER participation becomes mandatory for Category A companies as defined above. From 2035, credits used for mandatory OER must be removals, and the share of durable long-lived removals within the portfolio must increase progressively, scaling toward full coverage of residual emissions by the company's net-zero target year.

The V2 standard is expected to be finalised in 2026, and elements of the current draft framework may still change before publication, with voluntary adoption possible upon release, and mandatory adoption for new targets from 1 January 2028.

The practical implication for manufacturers with SBTi-validated Scope 3 targets: reducing Category 1 emissions through supplier insetting — funding a steel supplier's transition to lower-carbon production, switching to a supplier using green hydrogen, or increasing recycled content to reduce virgin material use — counts directly toward the validated target. Purchasing an equivalent volume of forest carbon credits does not reduce the Category 1 number and cannot substitute for those reductions in the SBTi validation framework, under either V1.3 or V2.

For manufacturers, insetting takes different forms depending on where the Scope 3 hotspot sits.

Each of these approaches reduces actual lifecycle emissions within the value chain. Each counts toward SBTi Scope 3 targets. None relies on an external project to compensate for emissions that remain unchanged.

The shift from an offset-based claim to an insetting-supported claim requires a different foundation of data and evidence.

Carbon offsetting and carbon insetting are not two versions of the same thing. They operate through different mechanisms, they produce different outcomes in a GHG inventory, they are treated differently under the SBTi framework, and from 27 September 2026 they carry different legal consequences when used to support product-level carbon claims in the EU.

Offsetting compensates for emissions that remain unchanged in a company's value chain. Insetting reduces the emissions themselves. The EU legal framework has drawn that line explicitly, and enforcement is already active in Germany without waiting for the September 2026 deadline.

The SBTi's evolving framework under V2 reinforces the same line: carbon credits — whether used for legacy BVCM purposes or the new OER framework — sit in a separate accounting bucket from scope-specific reduction targets and cannot substitute for required reductions. For Category A companies, OER participation becomes mandatory from 2035, with removal credits required from that point and durable long-lived removals becoming an increasing share of the portfolio through to the company's net-zero target year.

For manufacturers with current carbon claims on products, the question is not whether the ECGT applies — it does, from 27 September 2026, with penalties referenced at up to 4% of annual turnover in affected member states, revenue confiscation rights, and the ability of competitors to bring litigation. The question is whether those claims rest on a foundation that survives the new standard: a documented PCF, demonstrated lifecycle reductions, and evidence that any neutrality claim reflects actual emissions reductions, not external compensation.

That foundation starts with measuring what is actually in the product's lifecycle. Everything that follows — insetting investments, supplier engagement, reduction targets, and ultimately the claim itself — is only as credible as the data underneath it.