California’s unprecedented AB 1305 law purports to target “greenwashing” by mandating public disclosures about virtually any claim of “significant” carbon reductions, but its broad wording and uncertain effective date raise many questions for those doing business in the nation’s largest economy.

TAKEAWAYS

• AB 1305 is a first-of-its-kind statute requiring disclosure of information pertaining to voluntary carbon offset transactions.
• Companies may need to revise existing and prospective contracts to obtain the information that must be disclosed.
• AB 1305 covers not only voluntary carbon offsets, but also any entity or product that makes claims regarding the achievement of net-zero emissions, carbon neutrality or other claims implying significant greenhouse gas emission reductions.

On October 7, 2023, California Governor Gavin Newsom signed AB 1305 into law, requiring businesses marketing or selling voluntary carbon offsets (VCOs) or marketing products as having significantly reduced emissions within California to disclose on their website certain information concerning the projects that generated the VCOs and emission reductions. Additionally, AB 1305 requires the disclosure of certain information supporting any business activity or product purported to achieve net-zero emissions, carbon neutrality or a reduction in greenhouse gas (GHG) emissions. This law represents California’s latest attempt to reduce “greenwashing,” hold businesses accountable for claims concerning GHG emission reductions and intensify transparency within the VCO market. AB 1305 is effective January 1, 2024, and businesses are required to update their disclosures at least annually.

AB 1305 specifies that failure to comply with its disclosure requirements will result in civil penalties of up to $2,500 per day for each violation and up to a maximum civil penalty of $500,000. Additionally, AB 1305 provides that California’s Office of Attorney General, district attorneys, county attorneys and city attorneys may file suits against the statute’s violators to enforce these penalties. Perhaps even more significant, the information disclosed on businesses’ websites pursuant to this law could be used as the basis for third-party lawsuits alleging greenwashing claims as carbon offsets are increasingly criticized by environmental organizations. As a result, companies active in the offset and low-carbon energy markets should carefully review their business activities for compliance with the law and be mindful of what they disclose on their websites pursuant to the law.

Applicability to Various Environmental Credits and Products
AB 1305 defines VCOs as any product that connotes, represents or corresponds to a reduction in the amount of GHGs present in the atmosphere or that prevents the emission of GHGs into the atmosphere but does not include products that represent or correspond to legal or regulatory mandates. While the law clearly covers products traditionally thought of as carbon offsets, AB 1305’s definition could also be construed by an aggressive California attorney general or district, county or city attorney or third party to cover other voluntary credits and environmental attributes.

Businesses can take comfort in the fact that AB 1305 does not apply to credits generated pursuant to legal or regulatory mandates, including California carbon offsets, renewable identification numbers (RINs) or Low Carbon Fuel Standard (LCFS) credits.

Importantly, regardless of whether businesses use VCOs or other products, AB 1305 applies to claims regarding business activities and products achieving net-zero emissions, carbon neutrality and significantly reduced GHG emissions. As a result, if businesses make carbon neutrality claims associated with their activities or products they market or sell in California, such claims may be subject to the AB 1305 disclosure requirements.

Determining Whether Certain Business Activities Are Conducted inside California
AB 1305 establishes varying disclosure requirements for three categories of business activities conducted in California: (1) marketing or selling VCOs; (2) purchasing and using VCOs to claim products achieve net-zero emissions, carbon neutrality or significantly reduce GHG emissions; and (3) claiming business or business products achieve net-zero emissions, carbon neutrality or significantly reduce GHG emissions.

Whether a business or a particular transaction has sufficient connection to California such that the business or transaction is subject to AB 1305 is a fact-intensive inquiry. This inquiry may include evaluating the following non-exhaustive list of factors:

• The employment of staff in California involved in the marketing, sourcing, selling or generating of credits or other environmental products;
• The employment of a significant number of staff in California while simultaneously asserting climate-related business practices or using credits or other environmental products;
• Whether the volume of business activity conducted in or associated with California can be characterized as significant;
• Whether the business transaction uses a registry or platform based in California;
• Whether the business transaction is governed by California law (i.e., the purchase or sales agreement explicitly states the transaction is subject to the laws of California);
• Whether the credits or environmental products are generated in California;
• Whether the credits or environmental products are used to offset GHGs emitted in California; and
• Other relevant factors.

Disclosure Requirements for Certain Business Activities
Following a determination that AB 1305 applies to its VCOs and climate-related claims, a business must then develop the disclosures required by the law. The table below lists the AB 1305 disclosure requirements for the three types of business activities performed within California.

Confidentiality Concerns
AB 1305 requires businesses to disclose pertinent data and calculation methods to independently reproduce and verify the number of emissions reduction or removal credits issued using a particular protocol. However, notably absent from AB 1305 are confidentiality protections that allow businesses to withhold or limit information related to their offsets’ projects that they would ordinarily treat as confidential business information (CBI). Since the statute does not charge any California agency to regulate compliance and the law’s enforcement authorities have not published compliance guidance, determining the scope of disclosure will require careful consideration of complying with the text of the law while maintaining CBI.

Next Steps
AB 1305 represents California’s latest effort to combat businesses greenwashing their commodities and business practices within the state. Businesses must review the products they trade and market within California to ensure they correctly disclose information concerning the projects associated with the products and related emissions reductions and environmental benefits claims. The absence of guidance concerning how businesses should comply with AB 1305 while avoiding disclosing their CBI results is an ongoing quandary as the January 1, 2024, effective date nears. Pillsbury is available to advise businesses engaged in trading and marketing VCOs, carbon-neutral and low-carbon products in California on these various concerns to ensure effective compliance with AB 1305.

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