California pursues greater transparency for corporate climate claims and businesses participating in voluntary carbon markets

Businesses participating in voluntary carbon market activities in California must now publicly disclose key information to provide an objective basis for stakeholders to assess claims related to those activities.

That is the effect of AB 1305, which California Governor Gavin Newsom signed into law along with two sweeping climate-disclosure bills this month, part of the state’s historic push to address climate change. AB 1305 also requires those making climate-based marketing claims – such as “net zero emissions” and “climate neutral” – to disclose the factual basis for the claims, even if unrelated to the use of offsets. These measures are intended to improve the transparency and accountability of corporate climate action.

Climate change is an increasingly important focus for regulators, businesses, and the public. Companies looking to further reduce their greenhouse gas emissions to mitigate their climate impacts are turning to voluntary carbon markets to buy and sell certified emission reductions, often referred to as “carbon credits” or “carbon offsets.” Each carbon credit represents the removal of one metric ton of carbon dioxide from the atmosphere.

However, some critics have called into question the integrity of the voluntary carbon market as a tool for mitigating climate change, stoking concerns about related green marketing claims. AB 1305 seeks to address these concerns through mandatory disclosures.

Under AB 1305, a business entity that sells or markets carbon offsets in California for the voluntary market must now disclose on its website certain details about the project that generated the credits, including:

1. The specific methodology or “protocol” for estimating the project’s climate effects.
2. Where the project site can be found.
3. The project timeline.
4. The project start date.
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 a breakdown of whether credits are derived from removed emissions or emissions avoided.
7. Whether the project meets public or private offset standards.
8. The promised duration of the reduction activity that generates the offset.
9. Details concerning third-party validation or verification of the project.
10. Annual project reductions.

These entities must also disclose accountability measures they take if the project falls short of its promises, including situations where a project is “reversed” or where advertised reductions fail to materialize. Critically, AB 1305 also requires these entities to disclose information sufficient for claims about the project benefits to be independently reproduced and verified.

Further, AB 1305 imposes new rules on the purchasers of carbon credits. Companies operating in California and buying or using carbon credits as a basis for substantial claims about the climate impact of their business activities or products must disclose similar details on their websites. The new law requires the following disclosures for any claim of “net zero” activities or products, as well as related phrases like “climate neutral” and other claims of significant emission reductions:

1. The name of the seller and the registry where the offset is registered.
2. The project ID number.
3. The official project name in the relevant registry.
4. The offset project type (including whether a removal or avoidance).
5. The specific protocol used for estimating the project’s climate effects.
6. Information about third-party verification.

Making such claims even without voluntary carbon market activities now also carries a requirement to disclose:

1. All information substantiating the climate claim, including third-party verifications, information about interim progress, and applicable methodologies.
2. Information related to third-party verification.

The new law enforces compliance with a $2,500 penalty for each day the required information is not disclosed, with a maximum penalty of $500,000. Covered businesses must update their mandatory disclosures under AB 1305 no less frequently than once annually. These businesses will be required to comply beginning January 1, 2024.

This and California’s other recent disclosure laws illustrate the state government’s focus on accelerating climate action and preventing businesses from misrepresenting actions taken in pursuit of their own climate commitments. Businesses that participate in the voluntary carbon market or that use broad claims to promote their climate efforts should review risks related to their current policies and practices to avoid potential liability and reputational harm. This includes conducting due diligence when transacting in carbon credits.

Find out more about this and other emerging climate laws by contacting any of the authors or your usual DLA Piper relationship attorney. To learn more about SB 253 and SB 261, California’s other new climate disclosure laws, read our recent alert, Governor Newsom enacts two California laws on disclosures of GHG emissions and climate-related financial risk.