On October 7, 2023, California Governor Gavin Newsom signed Assembly Bill 1305 into law, also known as the "Voluntary Market Disclosures Business Regulation Act," or AB 1305. This law marks the first of its kind in the nation, aimed at regulating participants in the voluntary carbon offset market. This market is decentralized and currently operates largely without regulation. Participants are typically motivated by the profits to be made from the sale of carbon offsets or the benefits they may realize by utilizing purchased carbon offsets to meet regulatory or investor-motivated carbon reduction goals. For instance, Tesla emerged as one of the major sellers of carbon credit offsets, generating approximately $1.79 billion in additional revenue in 2023 and some of the largest purchasers of carbon credit offsets have been car manufacturers and fossil fuel companies.

AB 1305 continues California's effort to regulate corporate sustainability claims and programs by imposing new disclosure obligations on business entities selling or marketing carbon offsets and by entities that make public claims regarding their carbon emissions, whether or not those companies utilize carbon offsets. While the new law is effective January 1, 2024, the timing of the initial disclosures is unclear and is not specified. However, in a letter dated December 6, 2023 to the Chief Clerk of the California Assembly, Assemblymember Jesse Gabriel, the author of AB 1305, stated that the intention of the law was to have the initial disclosures to be posted by January 1, 2025. This statute has largely flown under the radar, but market participants should begin taking steps now to prepare to comply.

AB 1305 introduces new sections in the California Health and Safety Code, covering three disclosure categories:

  1. Requirements for business entities selling or marketing voluntary carbon offsets (Section 44475).
  2. Mandates for entities purchasing or using offsets and making claims about carbon-neutrality goals and achievements (Section 44475.1).
  3. Regulations for entities making claims about carbon neutrality without using carbon offsets (Section 44475.2).

Business entities selling or marketing voluntary carbon offsets. Section 44475 captures a business entity that "is marketing or selling voluntary carbon offsets within the state." Though the term business entity is not defined in the statute, the term is innocuously defined in the California Code of Regulations as a "domestic corporation, foreign corporation, limited liability company, foreign limited liability company, limited partnership or foreign limited partnership."

Section 44475 disclosure requirements target information necessary for a reader to make an independent assessment of the efficacy of carbon offset projects. Section 44475(a) requires the following information to be posted on the business entity's website:

  1. The specific protocol used to estimate emissions reductions or removal benefits.
  2. The location of the offset project site.
  3. The project timeline.
  4. The date when the project started or will start.
  5. The dates and quantities when a specified quantity of emissions reductions or removals started or will start or was modified or reversed.
  6. 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.
  7. Whether the project meets any standards established by law or by a nonprofit entity.
  8. 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.
  9. Whether there is independent expert or third-party validation or verification of the project attributes.
  10. Emissions reduced or carbon removed on an annual basis.

Section 44475(b) requires details of the accountability measures if such project is not completed or otherwise fails to meet the projected emissions reductions or removal benefits. This includes what consequences exist, contractually or otherwise, if carbon storage projects are reversed, and future emissions reductions do not materialize. Section 44475(c) requires the business entity to disclose the pertinent data and calculation methods necessary to reproduce the results of the project.

Entities purchasing or using offsets and making carbon neutrality claims. In comparison, 44475.1 and 44475.2 are arguably wider in scope by applying to any entity. 44475.1 applies to any entity that (a) purchases or uses voluntary carbon offsets and (b) that makes certain carbon emission related claims, provided that in order to be subject to AB 1305, that the entity in question must operate within California or purchase or use voluntary carbon offsets sold within California. Section 44475.2 simply applies to any entity that makes certain carbon emission related claims within California (but does not use carbon offsets to achieve those claims Carbon emission claims include making "claims regarding the achievement of net zero emissions, claims that the entity, related entity, or a product is "carbon neutral," or other 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..."

Section 4475.1 requires the entity subject to it to disclose the following information for each of its projects or programs, if applicable:

  1. The name of the business entity selling the offset and the offset registry or program.
  2. The project identification number.
  3. The project name as listed in the registry or program.
  4. 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.
  5. The specific protocol used to estimate emissions reductions or removal benefits.
  6. Whether there is independent third-party verification of company data and claims listed.

Entities making carbon neutrality claims. In addition to disclosing whether there is independent third-party verification of the data claims listed by an entity, Section 44475.2 also requires an entity to provide information on the method by which the entity determined its claims of being or becoming "carbon neutral," having "net zero emissions" or other similar claims, are accurate and how progress is measured.

While AB 1305 has some ambiguities and does not empower any state regulatory body to issue clarifying rule, its intention is clear: comprehensive regulation of the carbon offset market and to ensure that businesses with ties to California are held accountable for their sustainability claims. Noncompliance with AB 1305 could have significant financial repercussions for businesses, with penalties up to $2,500 per day per violation, up to an aggregate of $500,000. Entities should begin taking steps now to determine whether they are subject to AB 1305 and, if so, prepare to comply with the law, including requiring increased documentation when purchasing market offsets, collecting data of offset projects and having department heads document the data and methods of offset projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.