The fifth largest economy in the world just passed a law to require any business with over $1 billion in revenues to report their carbon emissions. Yes, California is leading the way, again, in greenhouse gas (GHG) reduction efforts. In addition, this requirement sets an example for other states, the federal government, and the rest of the world that there is no need to hesitate about requiring disclosures from private companies on one of the invisible inputs and outputs of production.
A recent survey by Ameresco found that 70 percent of executives already were feeling the pressure to decarbonize, but less than half have a plan. California’s new law makes it clear: now is the time to count your carbon, establish carbon reduction goals, and develop a climate action plan.
Californication
California is a contradiction. Throughout history, the region was blessed with an incredible climate, lush resources, and wealth. Its glitz and glamour soon hid a dirty reality, especially in Los Angeles. The innovative design as a commuter city soon turned into traffic, congestion, and smog that could not escape the geographical barriers of the LA basin blocked by mountains to the east. As the population grew, so did the number of days when a thick layer of smog would settle in for days, causing scratchy throats, burning lungs, and stinging eyes.
The first episode of historical note happened in 1943 when visibility was only 3 blocks and residents were physically nauseous. When the gas plant blamed for the impact shut down and symptoms remained, it became clear that automobiles were to blame. It took almost 25 years before California’s leaders came together in 1967, led by Governor Ronald Reagan, to create the State Air Resources Board (CARB) to address air pollution in the state, enabled by the federal Air Quality Act of 1967.
I Love LA
California’s pioneering efforts, born of necessity, have since implemented some of the highest gasoline taxes in the country, the highest renewable fuel requirements, the highest adoption of electric vehicles, and the highest number of renewable energy jobs. As the first to announce and codify rules to achieve 100 percent of new vehicles being electric by 2035, combined with its economic heft that rivals all but three countries in the world other than the U.S. itself, California has a long history of setting the pace for government actions targeting the environment.
California has invested significant funding in promoting, subsidizing, and implementing renewable resources and energy storage solutions. The most recent legislation imposes tracking and reporting requirements on the largest businesses that operate in the state. Governor Newsom has signed two bills passed by the state legislature, imposing new carbon accounting requirements on companies operating in the state. SB 253, the Climate Corporate Data Accountability Act (CCDAA) and SB 261, the Climate-Related Financial Risk Act (CRFRA) are combined into the first-of-its-kind California Climate Accountability Package. This new set of rules significantly expands anything the federal government is proposing by applying to both public and private companies doing business in California above certain revenue thresholds. Companies with more than $1 billion in global annual revenues are required to report Scope 1, Scope 2 and Scope 3 emissions — their direct and indirect emissions (i.e., upstream and downstream emissions) – including independent third-party assurance that the values are accurate. In addition, companies doing business in California with more than $500 million in global annual revenues are required to assess and disclose their climate-related financial risks. CARB will be responsible for implementation, which will include more detailed reporting instructions.
Welcome to the Hotel California
Although California has faced its share of criticism, the state is simply too big to fail. California’s economy is the fifth largest in the world, behind the U.S., China, Japan, and Germany, with a gross domestic product (GDP) of $3.6 trillion in 2022.
A company considering leaving would have to weigh the costs of reporting (which may be required for a number of other reasons) versus giving up the California client base. Although California does not require or issue statewide business operating licenses, business licensing is controlled at the county or city level. This arrangement has not limited the state’s ability to enforce other environmental regulations and is not likely to limit implementation of the California Climate Accountability Package. As the famous song by the Eagles warns, “You can check out any time you like, but you can never leave.”
Fortunately, compliance, risk mitigation, and independent, third-party assurance is available for companies captured by the California regulations. Standard approaches to carbon accounting have been available since 2000. Creating a Climate Action Plan can be a very useful exercise in identifying cost reduction as well as carbon reduction opportunities. More technology exists today to achieve net zero goals than ever, and many of those investments pay for themselves. Both federal and state subsidies are designed to reduce the costs of implementing a compliance program. If you haven’t been focused on your carbon emissions before, now is the time to start.
