California Adopts Bill Regulating Net Zero, Carbon Offset Disclosures

California Adopts Bill Regulating Net Zero, Carbon Offset Disclosures

On October 7, 2023, California adopted new requirements that will impact the voluntary carbon offset market and companies making certain emissions claims. The bill, Assembly Bill 1305 (AB 1305), requires companies operating in California and making claims about the achievement of carbon neutrality, net zero emissions or similar claims or which do so through voluntary carbon offset programs in California to provide specified disclosure on their websites. AB 1305 also requires business entities marketing or selling voluntary carbon offsets within California and entities purchasing voluntary carbon offsets to disclose specified information on their websites. The required disclosures may expose companies to greater scrutiny and heightened litigation risk. Failure to comply with AB 1305 could result in a civil penalty of up to $2,500 per day for each violation, not to exceed $500,000.

Highlights

Although the bill primarily addresses claims by voluntary carbon offset sellers and purchasers, it includes a provision that may impact any company operating and making net zero, carbon neutrality or similar emissions claims in California. 

Affected companies will need to monitor their public emissions claims and may have to include additional details on their websites. In addition, companies may want to put in place robust diligence procedures and disclosure controls, or enhance such controls and procedures, to ensure that their claims can be substantiated in light of increasing scrutiny on emissions claims and carbon offsets.

AB 1305 will require sellers of voluntary carbon offsets to make additional information regarding such offsets available, which may assist companies in deciding whether to use carbon offsets to achieve their emissions reduction goals.    

Background

AB 1305 defines a voluntary carbon offset as “any product sold or marketed in the state that claims to be a ‘greenhouse gas emissions offset,’ a ‘voluntary emissions reduction,’ a ‘retail offset,’ or any like term, that connotes that the product represents or corresponds to a reduction in the amount of greenhouse gases present in the atmosphere or that prevents the emission of greenhouse gases into the atmosphere that would have otherwise been emitted.” The definition excludes products that represent or correspond to legally mandated reductions or prevention of the amount of greenhouse gas (GHG) in the atmosphere.

AB 1305 references the California Health & Safety Code Section 38505 to define GHGs, which include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride and nitrogen trifluoride.

AB 1305 does not define “net zero emissions,” but it is commonly understood to mean the state where emissions released from an entity’s operations equal the emissions that it removes from the atmosphere. According to the World Economic Forum, “[t]he term net zero applies to a situation where global greenhouse gas emissions from human activity are in balance with emissions reductions. At net zero, carbon dioxide emissions are still generated, but an equal amount of carbon dioxide is removed from the atmosphere as it is released into it, resulting in zero increase in net emissions.” Similarly, “carbon neutral,” which is also not defined in AB 1305, expresses a similar concept but is focused on balancing the release of carbon dioxide into the atmosphere with its removal from the atmosphere.

Companies may purchase rights or interests in carbon offsets, which are projects that reduce or remove emissions from the atmosphere. Some have criticized carbon offset programs for being difficult to verify, lacking transparency and, in some cases, being fraudulent. Others have argued they may weaken efforts to reduce emissions through the use of cleaner energy sources or the achievement of more efficient processes. 

Makers of Emissions Claims

AB 1305 provides that any entity operating within California that makes claims within the state regarding the achievement of net zero emissions, or makes claims or implies that it (or a related or affiliated entity) or a product is “carbon neutral” or does not add or has made significant reductions to net carbon dioxide or GHGs, must provide the following information regarding all GHGs associated with its claims:

• How a “carbon neutral,” “net zero emission” or similar claim was determined to be accurate or actually accomplished and how interim progress is being measured. In providing such information, a company may include disclosure of independent third-party verification of GHG emissions, science-based targets for emissions reductions pathways, and relevant sector methodology and any related third-party verification. 
• Whether there is independent third-party verification of the company’s data and claims.

These disclosures must be disclosed on the company’s website and must be updated at least annually.

AB 1305 excludes entities that either do not operate within California or that do not make claims within the state. The bill does not define what it means to “operate” in the state or what qualifies as a “claim.” Similarly, the bill does not define what it means to “mak[e] claims within the state,” but, presumably, a relevant public statement, including on a company’s website or in an SEC filing or ESG/sustainability report, or in a sales or marketing context, would be sufficient to make a company operating in California subject to this provision. AB 1305 also does not define what may be “significant” emission reduction claims.

Voluntary Carbon Offset Purchasers

A company that purchases or uses voluntary carbon offsets that makes claims regarding the achievement of net zero emissions, makes claims or implies that it (or a related entity) or a product is “carbon neutral” or does not add net carbon dioxide or GHG to the climate or has made significant reductions to the same shall disclose on its website information for each such project or program:

• The name of the entity selling the offset and the offset registry or program
• The project identification number
• The project name
• The offset project type, including whether derived from carbon removal, avoided emissions or both, and site location
• The specific protocol to estimate emissions reductions or removal benefit
• Existence of independent third-party verification of company data and claims listed

As with the requirements for makers of emissions claims, these disclosure requirements do not apply to companies that do not do business within California or do not purchase voluntary carbon offsets sold within California.

Voluntary Carbon Offset Sellers

Under AB 1305, a business marketing or providing voluntary carbon offsets in California (a carbon offset seller) must provide the following information regarding a carbon offset project:

• The specific protocol used to estimate emissions reductions or removal benefits
• The location of the offset project
• The project timeline
• The project start date
• The dates and quantities when a specified quantity of emissions reductions or removals started or will start, or was modified or reversed
• The type of project, including whether the offsets from the project are derived from a carbon removal, an avoided emission or, in the case of a project with both carbon removals and avoided emissions, the breakdown of offsets from each
• Whether the project meets any standards established by law or by a nonprofit entity
• The durability period for any project that the seller knows or should know that the durability of the project’s GHG reductions or removal enhancements is less than the atmospheric lifetime of carbon dioxide emissions
• Existence of independent expert or third-party validation or verification of the project attributes
• Annual emissions reductions or carbon removal

A carbon offset seller must also provide information regarding accountability measures if a project is not completed or fails to meet projected emissions reductions or removal benefits, including remedial actions if carbon storage projects are reversed or future emissions reductions do not materialize. The data and calculation methods necessary to independently reproduce and verify the number of emissions reduction or removal credits using the protocol must also be provided.

AB 1305 defines “’durability” as the duration of time over which an offset project operator commits to maintain its greenhouse gas reductions and greenhouse gas removal enhancements, as applicable, exclusive of any aspirational outcomes that exceed or extend beyond the mandatory outcomes required of the offset project pursuant to its offset protocol.

Penalties

AB 1305 provides that a person who violates these provisions will be subject to a civil penalty of not more than $2,500 per day for each day the information is unavailable or inaccurate on the person’s website, for each violation, subject to a cap of $500,000. Fines will be assessed and recovered through civil actions brought by the California attorney general or by the district attorney, county counsel or city attorney in a court of competent jurisdiction.

Effectiveness

AB 1305 is effective beginning January 1, 2024, and subject entities must provide and update their disclosures at least annually.

Key Takeaways

• No Minimum Revenue Threshold. Unlike SB 253 and SB 261 (two of the climate-related bills that were also approved in October), AB 1305 does not provide for a minimum amount of revenue to be subject to its provisions. Accordingly, even small companies operating in California will have to comply with AB 1305’s disclosure requirements if they purchase voluntary carbon offsets and/or make certain emissions claims. AB 1305 also does not define what it means to “operate” within the state of California or whether it is synonymous with “doing business” in California, which is the term used in SB 253 and SB 261, which will require companies meeting specified revenue thresholds that also do business in California to annually disclose their Scopes 1 and 2 GHG emissions beginning in 2026 and Scope 3 emissions in 2027 and biannually disclose climate-related financial risks and mitigation measures. For more information on both bills, see our alert. 
• Need to Monitor Emissions Claims. As a result of AB 1305, companies operating in California may need to more carefully monitor their net zero and other emissions claims and establish controls and procedures for making such claims and to capture the new information required for disclosure, including offset project identification information, protocols used for emissions reduction estimates, support for net zero or carbon reduction claims or claims regarding interim progress on climate goals. Many companies may already be collecting and reporting on this information internally but must now be prepared to publicly provide the backup for their claims if they are not already doing so.
  • Under the climate-related risk disclosure rules proposed by the U.S. Securities and Exchange Commission (SEC) (see our alert), companies would only have to disclose climate-related goals or targets, including carbon offsets used in connection with such goals, in their SEC filings if they have publicly disclosed them. While AB 1305 seems to only apply to claims regarding the achievement of emissions targets and goals and claims of significant emissions reductions, if the SEC’s rules are adopted, the same controls and procedures established to support reporting under AB 1305 could also be employed in connection with similar goals or targets on which a company may have to report in its SEC filings. 
  • Beyond California, the EU is also moving toward a directive on green claims. In September 2023, the European Parliament and Council reached a provisional agreement on this directive, which will ban, among others, “claims based on emissions offsetting schemes that a product has neutral, reduced or positive impact on the environment,” as reported by the European Parliament.

• Due Diligence of Carbon Offset Purchases. Companies that operate in California and that purchase voluntary carbon offsets in support of their carbon reduction goals must be prepared to provide more specific information regarding their voluntary carbon offset programs. Such companies must assess whether they have the required information or will need to procure it from their carbon offset sellers. In addition, companies should assess whether the methodology used is credible. AB 1305 may also force companies to perform greater due diligence of the voluntary carbon offset providers and programs that they select. The reporting obligations for carbon offset sellers should also facilitate a company’s ability to meet its reporting obligation and to identify suitable carbon offset sellers and projects. 
• Compliance Timelines Are Short. Companies should consult with legal counsel to determine whether they are required to make the disclosures under AB 1305 as soon as possible given the proximity of its effectiveness date (January 1, 2024). Public companies that fail to comply with AB 1305’s requirements will not only be subject to potential fines discussed above but could also face securities law violations under Section 10(b) of the Securities Exchange Act of 1934, if the information that they disclose on their website in response to AB 1305 is false or misleading.
• Potential for Increased Scrutiny and Heightened Litigation Risks. The additional disclosures, as well as the various backup information, that have to be published on the website is likely to invite increased scrutiny from a range of stakeholders—be they customers, employees, communities, investors or others—regarding the emissions claims being made or that were previously made by companies and the level of support for those claims. Companies should carefully consider their overall ESG/climate-related communications strategy with these audiences and their interests in mind. Even prior to this statute and others requiring various climate and other ESG disclosures, enterprising plaintiffs, activists and regulatory authorities have been pursuing litigation based on claims that companies have made in these areas. The additional disclosures required by AB 1305 may draw in further greenwashing, fiduciary duty, securities or other litigation from regulators, investors, customers and other activists. For example, the required disclosures from carbon offset vendors will aid tracing and inspection of the offsets and carbon impact claimed by companies, raising questions about the substance of those claims, the due diligence exercised by the company in making them and the oversight of the process around them.

AB 1305 serves as a reminder to companies that there continues to be an increasing need for robust governance structures around ESG programs, as well as related disclosures and data. For further information, see our alert discussing best practices for establishing disclosure controls and oversight.