In addition to signing two significant new laws requiring large companies doing business in California to disclose their greenhouse gas emissions (GHG), Governor Newsom on October 7 signed AB 1305, which creates new disclosure requirements for voluntary carbon offset (VCO) market participants and other business entities that operate within the state and make certain specified climate-related claims (e.g., “net zero,” “carbon neutral”). AB 1305 enters into effect on January 1, 2024. Businesses failing to meet these requirements may be subject to substantial civil penalties. Accordingly, businesses that market, buy, or sell VCOs in California or that make any of the specified climate-related claims, either with respect to the business entity or an affiliate or in connection with the sale of products, should pay careful attention to the new law and begin preparing for the required disclosures.

Context and Key Takeaways

In the wake of recent media and NGO coverage calling into question the integrity and credibility of the voluntary carbon offset markets, along with increased regulatory scrutiny of corporate “net zero” and “carbon neutral” claims in jurisdictions around the world, the AB 1305 sponsors have sought to increase transparency and accountability in this largely unregulated context. The new law will require, for example, that VCO sellers disclose details regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits and that entities using VCOs to make climate-related claims disclose a host of information relating to each carbon offset project. Even entities that do not participate in the VCO markets will be required to disclose certain information regarding how they have determined the accuracy of certain climate-related claims they make in California.

AB 1305 imposes new disclosure requirements on three categories of entities: (1) sellers and marketers of VCOs in California; (2) buyers of VCOs that operate within the state and use VCOs to make certain climate-related claims in California; and, (3) other business entities that operate within the state and make certain climate-related claims about themselves or their products in California. The specified climate-related claims include: claims regarding the achievement of net zero emissions; claims that the entity, a related or affiliated entity, or a product is “carbon neutral”; and claims implying the entity, a related or affiliated entity, or a product does not add net carbon dioxide or GHGs to the atmosphere or has made significant reductions to its carbon dioxide or GHG emissions.

AB 1305 authorizes California’s Attorney General to seek civil penalties of up to $2,500 per day per violation, up to a limit of $500,000, for information that is not posted or inaccurate. Covered business entities, therefore, should exercise great care to ensure that they are making all disclosures required by AB 1305 and that the disclosures are accurate and complete.

Summary of AB 1305 Disclosure Requirements

Required Disclosures for Marketers and Sellers of VCOs:  AB 1305 requires marketers and sellers of VCOs in California to disclose on their public websites and annually update the following information:

1. The protocol used to estimate emissions reductions or removal benefits from the project (e.g., Verra) and whether the project meets requirements established by non-profit entities or by law;
2. The project location and timeline;
3. The quantities of GHG emissions reductions associated with the project, which parties must report on an annual basis;
4. The type of project, that is, whether the emissions reductions result from carbon removal, avoided emissions, or a combination of the two;
5. The durability of GHG reductions;
6. Whether the project is subject to third-party verification or validation;
7. Details regarding the actions that will be taken if GHG emissions reductions do not materialize or if stored carbon is released; and,
8. The “pertinent data and calculation methods” needed to “independently reproduce and verify the number of emissions reduction or removal credits issued using the protocol.”

Required Disclosures for Purchasers and Users of VCOs: AB 1305 requires businesses making climate-related claims (e.g., carbon emissions neutrality or significant GHG reduction) based on the purchase of VCOs to disclose on their public websites and annually update the following information:

1. The name of the entity selling the offset and the offset registry or program;
2. The project name and identification number;
3. The site location;
4. Whether the project is based on carbon removal, avoided emissions, or a combination of the two;
5. The protocol used to estimate emissions reductions or removal benefits; and
6. Whether an independent third party verifies the data and claims listed.

These requirements do not apply to business entities that do not operate in the state or do not purchase or use VCOs sold in California.

Required Disclosures for Businesses Making Climate-Related Claims in California: Entities that make any of the specified climate-related claims in California with respect to the entity itself, its affiliates, or its products must post on their public websites and annually update the following information:

1. All information documenting how, if at all, the “carbon neutral” or similar claim was determined to be accurate or accomplished and how interim progress is measured.  The disclosure may include an independent third party’s verification of the claims, its science-based targets for emissions reductions and pathway for achieving reductions, or disclosure of the relevant sector methodology that supports the claim.
2. Whether the company data and claims listed have been verified by an independent third party.

These provisions do not apply to businesses that do not operate in California or that do not make the specified claims in California.

No application to mandatory GHG reductions: AB 1305 specifically excludes “products that represent or correspond to legal or regulatory mandates,” such as California’s mandatory cap-and-trade GHG reduction program.

Conclusion

AB 1305 is an important new disclosure requirement for the many participants in the VCO markets who do business in California and other business entities that make climate-related claims in the state. It builds upon similar recent initiatives in California, such as SB 343, which will prohibit the use of the chasing arrows symbol on products and packaging that do not meet the state’s forthcoming criteria for “recyclable” and require businesses making “recyclable” claims or using the chasing arrows symbol to maintain – and provide to any member of the public upon request – written documentation substantiating the validity of such claims. Meanwhile, the U.S. Securities and Exchange Commission is expected to soon release its final rules for climate-related disclosures, the U.S. Federal Trade Commission is drafting revisions to its Green Guides, and the European Union is poised to finalize the Green Claims Directive. In this rapidly evolving landscape, businesses must understand and navigate the legal implications of various disclosure mandates, marketing claims, and corporate communications.