On May 29, the California Air Resources Board (“CARB”) held a virtual public workshop to discuss forthcoming regulations to implement SB 253 and SB 261, landmark California laws that require many corporate entities to disclose their greenhouse gas (“GHG”) emissions and climate-related financial risk. CARB affirmed the existing statutory deadlines and stated that it plans to issue regulations by the end of 2025.

SB 253, the Climate Corporate Data Accountability Act, requires U.S.-based entities with more than $1 billion in annual revenue doing business in California to annually report greenhouse gas emissions, beginning with Scope 1 and 2 emissions in 2026, and Scope 1, 2, and 3 emissions in 2027. SB 261, the Climate Related Financial Risk Act, requires that by January 1, 2026, and biennially thereafter, U.S.-based entities with more than $500 million in annual revenue doing business in California must make publicly available a report on climate-related financial risks and any measures they have adopted to reduce and adapt to those risks. For background on these laws, please refer to our previous posts on the 2024 minor amendments to the laws and preparing for compliance.

Timelines and Enforcement

CARB confirmed that the SB 261 statutory deadline of January 1, 2026, is firm. It also reiterated that entities will be required to report Scope 1 and 2 emissions in 2026 and Scopes 1 through 3 emissions in 2027. But CARB did not provide details on when, precisely, in 2026 the first emission reports will be due.

While SB 253, as amended by SB 219, calls for CARB to adopt implementing regulations by July 1, 2025, CARB stated that it expects to release regulations by the end of the year, but did not clarify whether that was a target for draft or final regulations. CARB also indicated that it plans to work proactively with stakeholders throughout the year. CARB also stated that it has not yet determined whether it will issue regulations for SB 261 implementation, or simply guidance.

CARB highlighted its statements in a December 2024 Enforcement Notice that no SB 253 penalties would be imposed in 2026, as long as companies show a “good faith effort” in preparing their disclosure reports.  

Meaning of “Doing Business in California”

As an initial concept, CARB suggested that entities “do business in California” for purposes of both laws if they meet the requirements in Section 23101(a) and 23101(b) of the California Revenue and Tax Code. Those requirements would require that an entity must be actively engaging in any transaction for the purpose of financial or pecuniary gain or profit and must either (1) be organized or commercially domiciled in this state, (2) have sales in California that exceed $735,019 or 25 percent of total sales, (3) own personal or real property in California exceeding $73,502 in value or 25 percent of the taxpayer’s personal and real property assets, or (4) pay more than $73,502 in compensation or over 25 percent of the total compensation paid by the taxpayer. CARB also suggested it would incorporate Section 23101.5, which provides narrow exceptions for certain entities that otherwise meet one of the above thresholds (for example, entities that purchase property or services solely for their own use and that satisfy other requirements).

CARB said it is seeking public input to shape future regulatory development, including whether this concept is overly broad, whether CARB should create exemptions for particular business sectors (and if so, why), and what additional clarification is needed.

“Total Annual Revenues”

To define “total annual revenues,” CARB’s initial proposal draws from the definition in Section 25120(f)(2) of the Revenue and Taxation Code of “gross receipts.” That definition appears most akin to gross worldwide revenue:

“Gross receipts” means the gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code, as applicable for purposes of this part. Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold.

CARB highlighted several questions on which it welcomes additional public input, including whether this definition is consistent with best business practices and how to address revenue of a parent company if its subsidiary does business in California.

Corporate Relationships

To address how “doing business in California” and “total annual revenues” will apply to parent and subsidiary entities, CARB proposed to draw on its framework for corporate associations its Cap-and-Trade regulations. Under those regulations, when a parent organization exerts a 50 percent or greater level of control or ownership over a subsidiary entity, then the subsidiary entity must be disclosed as a corporate association. Although CARB did not articulate how it is currently planning to apply this framework to SB 253 and SB 261, one possibility is that, if a subsidiary meets this standard, CARB may attribute a subsidiary’s revenue and/or business activity in California to the parent.

CARB asked whether other thresholds or considerations should be included or whether it should employ an alternate approach altogether.

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Although CARB provided initial concepts to help assess applicability, it did not provide many concrete details. Given that CARB must comply with California’s Administrative Procedure Act, CARB is essentially certain to miss the July 1, 2025, statutory deadline for finalizing the regulations. Still, the workshop confirmed that the agency is on its way to release a proposal this year. CARB and California Senators Weiner and Stern also noted that they are closely following developments outside of California, including in the EU and other jurisdictions, with an eye to promoting information sharing and refinement. CARB stated that it plans to hold additional workshops or stakeholder sessions this year.  

Covington will continue to closely engage with CARB as its rulemaking proceeds and assist clients in assessing applicability and preparing for compliance. Covington’s Carbon Management and Climate Mitigation practice has extensive experience and capabilities advising on climate mitigation strategies, regulatory frameworks, and agency engagement. Our global team is ready to assist clients as they engage with regulatory agencies and prepare to comply with climate reporting rules in California, the EU, and other jurisdictions.

Kevyn Hadley, Summer Associate, contributed to this blog post.