On September 13, 2023, the California Legislature passed Assembly Bill 1305 (AB 1305), which imposes wide-ranging disclosure requirements on (1) entities that market or sell voluntary carbon offsets and (2) entities that purchase and rely on these offsets to advertise their climate goals. The bill has been enrolled and is currently on Governor Newsom’s desk.
AB 1305 comes on the heels of escalating criticism of voluntary carbon offsets, including arguments that corporations use low-quality offsets to engage in greenwashing. AB 1305 is likely to prompt companies to engage in careful due diligence before making climate-related claims and to ensure that they rely on high-quality offsets that correspond to real emission reductions or removals.
I. Background on the Voluntary Carbon Market
The voluntary carbon market (“VCM”) is a rapidly evolving and decentralized market with little government oversight until recently. In it, individual project developers—often in developing nations—undertake projects that remove carbon from the atmosphere or oceans or avoid emitting carbon, and then sell an “offset” to an entity—often a large corporation—that wants to claim that emission reduction or removal toward its climate goals. Offsets are verified by one of a small handful of third-party nonprofit organizations that have established standards. To be verified, an offset must be real and quantifiable and it must have certain attributes:
- The carbon removal or avoided emission must be additional (i.e., it would not have occurred but for the sale of the offset);
- The carbon removal or avoided emission must be permanent (i.e., it will persist well into the future); and
- The carbon removal or avoided emission is not double counted (i.e., it cannot be claimed by any other entity).
The last year has seen mounting scrutiny and more vocal criticisms of carbon offsets, particularly with respect to the quality of many nature-based offsets and offsets resulting from “avoided emissions” projects. The Guardian made disturbing accusations this past January that 90% of certain carbon offsets issued as a result of avoided deforestation do not achieve their claimed carbon benefits. Similarly, a recent study of 26 avoided deforestation projects published in Science concluded that the projects had little effect on deforestation.
These developments have led to increased legal risk for companies that rely on carbon offsets. In June, the Commodity Futures Trading Commission announced that it was scrutinizing potential “fraud and manipulation” in the voluntary carbon market. Not surprisingly, it was recently reported that many companies, including Gucci and Nestle, have suspended plans to purchase and rely on voluntary carbon offsets.
The increased scrutiny of the VCM is accompanied by a number of voluntary initiatives to improve the integrity within the VCM.
- The Integrity Council for the Voluntary Carbon Market (“ICVCM”) released its Core Carbon Principles (“CCPs”) to “provide a credible and rigorous means of identifying high-integrity carbon credits that create real, verifiable climate impact, based on the latest science and best practice.” In July, the ICVCM published its CCPs Assessment Framework, which sets out the criteria ICVCM will use to assess whether carbon-crediting programs meet the CCPs. And just last week, ICVCM requested applications for individuals seeking to participate in Multi-Stakeholder Working Groups, which will assess in more detail those offset credit categories that have not been already been fast-tracked for a CCP label or determined as unlikely to meet the requirements. (Applications can be submitted through October 2.)
- A separate initiative, named the Voluntary Carbon Markets Integrity Initiative (“VCMI”), released its Claims Code of Practice this past June, setting forth requirements and recommendations for when companies and other non-state actors can credibly make voluntary use of carbon credits as part of their near- and long-term emissions reduction objectives, including those validated by the Science Based Targets initiative (“SBTi”), and the type of claims that can be made.
While ICVCM’s and VCMI’s names may sound confusingly similar, they can be distinguished as establishing principles and requirements for the “supply” and “demand” sides of the VCM, respectively.
II. Overview of AB 1305
In parallel to these voluntary initiatives, AB 1305 reflects an important effort from a leading jurisdiction to establish mandatory legal disclosure obligations for both the supply and demand sides of the VCM. These disclosures are required to be updated “no less than annually.”
A. Marketers and Sellers of Offsets
AB 1305 requires an entity “that is marketing or selling voluntary carbon offsets within the state” to disclose on its website all of the following details:
- The specific protocol used to estimate emissions reductions or removal benefits;
- The location of the offset project site;
- The project timeline;
- The date when the project started or will start;
- 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 greenhouse gas reductions or greenhouse gas removal enhancements is less than the atmospheric lifetime of carbon dioxide emissions;
- Whether there is independent expert or third-party validation or verification of the project attributes; and
- Emissions reduced or carbon removed on an annual basis.
Additionally, the entity must provide “[d]etails regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits,” including what actions the entity will take (1) if carbon storage projects are reversed, or (2) if future emissions reductions do not materialize. Finally, the entity must provide “pertinent data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits.”
B. Purchasers and Users of Offsets
Perhaps more notably, AB 1305 also includes disclosure requirements for entities that “operate within the state” and purchase or use voluntary carbon offsets that make claims regarding the achievement of net zero emissions, carbon neutrality, or related greenhouse gas (GHG) emission reduction claims. These provisions will require companies to disclose more granular information on their website and to provide more specificity on their net-zero or GHG emission reduction plans.
Such entities must disclose the following on their website as “to each project or program”:
- The name of the business 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 site location;
- The specific protocol used to estimate emissions reductions or removal benefits; and
- Whether there is independent third-party verification of company data and claims listed.
Additionally, AB 1305 requires these entities to include “[a]ll 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” and whether there is independent third-party verification of the data and claims listed.
In requiring more specificity as to “interim progress” toward climate goals, this provision will likely push companies to more carefully scrutinize their current carbon management plans and to describe concrete and achievable near- and medium-term goals.
AB 1305 provides that any entity that violates a disclosure requirement is subject to a civil penalty of not more than $2,500 per day, not to exceed $500,000. Importantly, the law provides many different entities with the ability to bring suit. The penalty can be recovered in a civil action brought in the name of the people by the California Attorney General, a district attorney, county counsel, or city attorney.
AB 1305 is likely to cause companies to examine the quality of their carbon offsets. As a disclosure requirement, AB 1305 also interacts with other consumer protection laws that allow consumers or agencies to sue over inaccurate or deceptive claims. Relevant laws may include California’s Unfair Competition Law and the Federal Trade Commission Act and the associated Green Guides (currently under review and which might include even more specific guidance on offset-related claims than in the existing version). And although consumer protection laws generally have less bite with respect to environmental claims that can be construed as aspirational in nature, they have considerably more application to the fact-based claims that AB 1305 requires, including information on measurement of “interim progress” toward a company’s goals and the accuracy of claims made in reliance upon offsets.
AB 1305 is just one of multiple climate disclosure laws passed by the California Legislature this session. (See our blog posts on SB 253, which requires large companies to report Scope 1, Scope 2, and Scope 3 emissions for each fiscal year, and SB 261, which requires large companies to prepare biennial report disclosing climate-related financial risk.)
The EU’s Corporate Sustainability Reporting Directive (“CSRD”) will also require companies to make detailed disclosures about carbon offsets, including on the quality standard they rely on, whether removals are from biogenic or technological sinks, and whether the offset projects are in the EU.
Multinational companies will have to monitor regulatory trends in various jurisdictions, ensure a globally consistent approach to carbon offsets, and align offset-related disclosures under different reporting regimes.
Covington’s Carbon Management and Climate Mitigation industry group has extensive experience and capabilities in analyzing carbon offsets and interacting with both compliance and voluntary carbon markets and is ready to assist entities in navigating this complex and evolving landscape.