There have been dozens – and probably hundreds – of client alerts, briefs, white papers and other thought leadership pieces on the California bills awaiting signature that will require greenhouse gas emissions (SB 253) and climate risk (SB 261) disclosures. Those bills are described in our September 18 post.

In contrast, there has been surprisingly little focus in the media and elsewhere on California Assembly Bill 1305. AB 1305 addresses voluntary carbon market disclosures. That bill also was approved – by substantial majorities in both the Assembly and Senate – before the 2023 session of the California State Legislature adjourned. AB 1305 is now sitting with California Governor Gavin Newsom for his signature.

The bill author characterized the current voluntary carbon offset (VCO) industry as a “wild west.” AB 1305 is intended to combat greenwashing relating to VCOs and provide their purchasers with a meaningful tool to decide which projects are worth investing in to reduce their carbon footprint.

Disclosure requirements

If adopted, AB 1305 would require an entity that purchases or uses VCOs that makes claims (1) regarding the achievement of net zero emissions, (2) that the entity, a related entity or a product is “carbon neutral” or (3) implying the entity, a related entity or a product does not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions, to disclose the following on its website for each applicable project or program:

• The name of the entity selling the offset and the offset registry or program.
• The project identification number, if applicable.
• The project name as listed in the registry or program, if applicable.
• The offset project type, including whether the offsets purchased were derived from a carbon removal, an avoided emission or a combination of both, and the site location.
• The specific protocol used to estimate emissions reductions or removal benefits.
• Whether there is independent third-party verification of company data and claims listed.

In addition, an entity that makes claims (1) regarding the achievement of net zero emissions, (2) that the entity, a related or affiliated entity or a product is “carbon neutral” or (3) implying the entity, a related or affiliated entity or a product does not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions would be required to disclose on its website the following information pertaining to the greenhouse gas emissions associated with the claims:

• All information documenting how, if at all, a “carbon neutral,” “net zero emission” or other similar claim was determined to be accurate or actually accomplished and how interim progress toward that goal is being measured.

This information may include, but is not limited to, (1) disclosure of independent third-party verification of the entity’s greenhouse gas emissions, (2) identification of its science-based targets for its emissions reduction pathway and (3) disclosure of the relevant sector methodology and third-party verification used for the science-based targets and emissions reduction pathway.

• Whether there is independent third-party verification of the company data and claims listed.

Disclosure updates 

Disclosures would be required to be updated at least annually.

Excluded entities

The foregoing disclosure requirements would not apply to an entity that does not operate within California, that does not purchase or use VCOs sold within the state and/or that does not make claims within the state.

Penalties

An entity that violates the foregoing disclosure requirements would be subject to a civil penalty of not more than $2,500 per day, for each day that information is not available or is inaccurate on its website, for each violation. The maximum penalty would be capped at $500,000.

Civil actions could be brought by the California Attorney General or by a California district attorney, county counsel or city attorney.

Marketers and sellers of carbon offsets

AB 1305 also would require businesses that market or sell voluntary carbon offsets within California to make specified disclosures on their website regarding (1) the applicable carbon offset project, (2) accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits and (3) the data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issued. Those requirements are not discussed in this post.

Five take-aways

• Assess whether your company will have a disclosure obligation under AB 1305. AB 1305 will have broad applicability. It has no turnover threshold or de minimis exceptions. It also is not limited to U.S.-organized entities. AB 1305 therefore will apply to many companies that will not have to make disclosures under California’s pending GHG emissions and climate risk disclosure legislation (see our post regarding those bills.)
• AB 1305 will result in more scrutiny of VCOs. This will put more pressure on front-end due diligence by purchasers.
• It is fair to say that AB 1305 is not a model of clarity. On its face, it raises numerous interpretative questions that will need to be navigated (for brevity, those are not discussed in this post).
• Purchasers and users of VCOs will need to ensure they have adequate controls in place concerning AB 1305 disclosures. The civil penalties under AB 1305 are not inconsequential and there may in particular be attempts at vigorous enforcement by California city and county officials.
• Entities that are subject to multiple carbon offsets disclosure requirements will need to ensure that their disclosures are consistent across requirements and otherwise aligned. For example, the SEC’s proposed climate risk disclosure rules contemplate carbon offsets disclosures (see our Alert). In addition, European Sustainability Reporting Standard E1, which deals with climate change, contains disclosure requirements relating to carbon offsets. The ESRS specify the disclosures that will be required under the pending EU Corporate Sustainability Reporting Directive. (The adoption of the ESRS are discussed in this post and further discussed in this series.)

This post comes to us from Ropes & Gray LLP. It is based on the firm’s memorandum, “The California climate disclosure bill almost no one is talking about – net zero and voluntary carbon offsets disclosures soon to be required?” dated October 2, 2023, and available here.