At a Glance

• Assembly Bill 1305, the Voluntary Carbon Market Disclosures Business Regulation Act, became law on January 1, 2024. The date for conforming disclosures is January 1, 2025, or later, as further developments are expected in 2024. 
• The main purpose of Assembly Bill 1305 is to compel entities doing business in California to support their statements regarding greenhouse gas emissions and carbon neutrality. Such entities should consider reviewing their public-facing statements relating to greenhouse gas emissions, carbon neutrality, or similar topics and evaluate those statements in light of AB 1305. 

In early October 2023, California Gov. Gavin Newsom signed three related climate disclosure bills into law. Together, the three laws require various entities, as defined under each law, to disclose:

1. Scope 1, 2 and 3 greenhouse gas emissions (Senate Bill 253)
2. Climate-related financial risks (Senate Bill 261)
3. Information relating to voluntary carbon credits, also known as carbon offsets, as well as support for any claims regarding net-zero or carbon neutrality made by a company subject to the law (Assembly Bill 1305)

In this update we focus on Assembly Bill 1305. AB 1305 can be understood as consisting of three parts. 

Part I concerns “business entit[ies] that [are] marketing or selling voluntary carbon offsets within the state.” Assembly Bill 1305 requires these entities to disclose details relating to the project producing the carbon offsets, 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.” It similarly requires disclosure of response actions that entities plan to take if “carbon storage projects are reversed” or future emissions reductions “do not materialize.” AB 1305 requires that “data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issued using the protocol” be available to support the statements made about carbon offsets.

Part II of Assembly Bill 1305 governs entities that purchase or use voluntary carbon offsets and make claims about achieving net-zero emissions, “carbon neutrality” or related claims “implying the entity, 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.” Entities in this category are required to disclose information on their website related to their purchase or use of the voluntary carbon offsets and the related offset project or projects. 

Part III of Assembly Bill 1305 governs “[a]n entity that makes claims regarding the achievement of net zero emissions, claims that the entity, a related or affiliated entity, or a product is ‘carbon neutral,’ or makes other claims implying the entity, 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.” Entities in this category must disclose on their website information supporting the “carbon neutral,” “net zero emission” or similar claims, including how the claims were determined to be accurate or actually accomplished, as well as how the entity is measuring progress towards its goals. Entities must also disclose whether any third party has verified their claims or statements. This category is likely applicable to thousands of entities and a broad range of statements, including publicly traded companies, nonpublic entities, corporations, nonprofits, and many other organizations.

Analysis

AB 1305 became effective January 1, 2024. In a letter to the chief clerk of the Assembly late last year, AB 1305’s author clarified his intent that the first annual disclosures be posted by January 1, 2025. That does not leave a great deal of time for entities with complex disclosures or who have years of projects and data that may need to be verified, emissions calculated or recalculated, or to conduct due diligence on specific projects and the status of emissions reductions. Entities making disclosures may struggle to secure timely and complete responses from third parties who need to supply information supporting calculations or the emissions reductions associated with a specific project. Moreover, the full scope of application of AB 1305 is not clear. For one, it is not settled just when or how an entity “make[s] claims within the state” or “operate[s] within the state,” two triggers for application. AB 1305 uses broader, more ambiguous language as to the obligated entities than do Senate Bills 253 and 261. Similarly, under AB 1305 an entity is required to disclose certain information if it makes claims regarding “significant reductions to its carbon dioxide or greenhouse gas emissions,” but the law does not quantify what constitutes a “significant reduction.” Without additional guidance, it can be difficult for entities to confirm whether the law applies to them or a specific statement they are making. 

Finally, AB 1305 requires disclosure of whether an independent third-party has verified an entity’s data or statements. Entities might evaluate whether incurring the costs of third-party verification are worthwhile, given such entities may help respond to enforcement inquiries, if any, and may help harmonize disclosures and methodologies across multiple regulatory programs, such as the Securities and Exchange Commission’s (currently stayed) climate disclosure rules or the European Union’s climate disclosure regime. 

Importantly, AB 1305 does not require adoption of implementing regulations (unlike Senate Bill 253 requiring disclosure of scope 1, scope 2 and scope 3 emissions). Prosecutors have authority to bring civil actions to enforce the law, and eventually prosecutions will provide insight into how California intends to administer the law. That said, informal statements by regulators and others suggest that guidance or more detailed regulations or laws will be adopted to better define application of AB 1305. It thus is important to monitor ongoing regulatory developments.