Recent developments could impact implementation timing and compliance obligations under California’s landmark climate emissions disclosure and financial risk reporting laws that were enacted last year:

1. SB 253 and SB 261 Amendments Proposed by Newsom Administration

On June 28, 2024, the California Department of Finance posted the text of a trailer bill that, if passed and signed by California Governor Newsom, would make key changes to SB 253 (the “Climate Corporate Data Accountability Act”) and SB 261 (“Climate-Related Financial Risk”), both of which are detailed in our previous post. The trailer bill reflects the following potential changes:

• Two-Year Delay of CARB Rulemaking and Compliance Deadlines.

The trailer bill would push all SB 253 and SB 261 implementation and compliance deadlines back by two years.

SB 253

Under SB 253, the California Air Resources Board (CARB) is currently required to develop and adopt regulations to implement the new emissions disclosure requirements by January 1, 2025. Entities subject to SB 253 would be required to report their Scope 1 and Scope 2 emissions starting in 2026 and Scope 3 emissions starting in 2027.

If the trailer bill were enacted, CARB would instead have until January 1, 2027 to develop and adopt implementing regulations. Reporting entities would not have to disclose Scope 1 and 2 emissions until 2028, and Scope 3 emissions reporting would not begin until 2029.

The deadlines for various assurance engagement levels (limited assurance for Scope 1 and Scope 2 emissions would also be delayed by two years, beginning in 2028 instead of 2026, and reasonable assurance for these scopes would begin in 2032 instead of 2030).

SB 261

Under SB 261, covered entities are required to report climate-related financial risks on their public website by January 1, 2026 and biennially thereafter.

If the trailer bill were enacted, the initial report publication deadline would be pushed back to January 1, 2028.

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This proposal to extend SB 253 and 261 implementation and compliance timeframes is not entirely unexpected, given the concerns articulated by Governor Newsom when he signed the bill. In signing SB 253, Governor Newsom issued a statement indicating his concerns with the infeasibility of its implementation deadlines as well as the overall financial impact on businesses. He issued a similar statement for SB 261, expressing concerns about the timing for CARB to carry out the bill’s requirements and its overall financial impact.

• Consolidated SB 253 Reporting at Parent Company Level. The trailer bill would amend California Health & Safety Code section 38532 to allow emissions disclosure reports to be consolidated at the parent company level, and to specify that if a subsidiary of a parent company qualifies as a reporting entity under SB 253, it is not required to prepare a separate report.
• Potential Phased Approach to Scope 3 Emissions Reporting. The trailer bill would amend SB 253 to substitute a requirement that Scope 3 emissions be reported “on a schedule specified by [CARB],” rather than the current requirement that Scope 3 emissions be reported 180 days after the reporting of Scope 1 and 2 emissions. Arguably this change would give CARB the latitude to enact regulations requiring phased reporting of different Scope 3 emission categories.

Optional Use of Nonprofit Emissions Reporting Organization. SB 253 requires CARB to contract with a nonprofit “emissions reporting organization” (ERO) to receive emissions disclosures and to make them public on a digital platform, among other things. SB 261 requires CARB to contract with the ERO to biennially prepare a public report that assimilates reported climate-related financial risk data. The trailer bill would amend these provisions to authorize rather than require CARB to contract with the ERO to perform these functions. If CARB does not contract with an ERO, it would be directly responsible for creating the digital platform and preparing the biennial report.

1. SB 253 and SB 261 Litigation

SB 253 and 261 are also being challenged in litigation filed by various industry groups in the U.S. District Court for the Central District of California. See U.S. Chamber of Commerce et al. v. CARB et al., Case No. 2:24-cv-00801 (C.D. Cal.). Plaintiffs assert in this case that the legislation is unconstitutional because it violates First Amendment prohibitions on government-compelled speech, among other things. The parties have filed and briefed dispositive motions in the case (specifically, CARB’s motion to dismiss two of the Plaintiffs’ constitutional claims and Plaintiffs’ motion for summary judgment on their First Amendment claim), but no rulings have been issued.

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SB 1306 – Voluntary Carbon Offsets

In addition to the potential amendments to SB 253 and 261, we are tracking another legislative proposal that reflects California legislators’ heightened interest in the integrity of Voluntary Carbon Offsets (VCOs). SB 1036 (introduced in February 2024 and amended in May 2024) would impose new requirements on entities that issue and market/sell VCOs, as well as anyone who verifies offset projects for purposes of issuing VCOs.

Specifically, SB 1036 would add a new chapter to the California Business and Professions Code to specifically address VCOs, intended to reduce the risk of these types of offsets being used to make misleading environmental claims. The proposed new provisions would make it unlawful to verify an offset project, certify or issue VCOs, maintain a VCO on a registry, or market or sell VCOs if the person knows or should know that the GHG reductions related to the project or offset are unlikely to be quantifiable, real, and additional. They would also prohibit marketing or selling VCOs as being physically equivalent to the climate impact of CO2 emissions: (1) if the marketer or seller knows or should know that the atmospheric lifetime of the non-CO2 GHGs associated with the VCO’s GHG reductions or GHG removal enhancements is less than 1,000 years; or (2) there is more than a negligible risk of reversal of the VCO’s GHG impact over a period of at least 1,000 years at the end of the durability commitment related to the VCO.

If passed by the legislature and signed into law, these new requirements would have the overall effect of raising the bar for the generation, registration, marketing, and selling of VCO, potentially reducing their availability in California.

SB 1036 passed the State Senate in May and was referred to the State Assembly’s committee on Natural Resources last month, but the July 1 hearing on the bill was cancelled at the request of its author. We will continue monitoring progress of this bill if it is picked back up in the legislature.