California Enacts AB 1305 to Strengthen the Voluntary Carbon Market and Continues to Lead on Climate Regulation

On October 7, 2023, California took a significant step toward promoting transparency and integrity of voluntary carbon markets (VCMs) and climate-related claims by enacting Assembly Bill 1305: the Voluntary Carbon Market Disclosures Business Regulation Act (VCMDA).[1] Effective on January 1, 2024, the VCMDA will apply to a range of entities operating in California that market or sell voluntary carbon offsets, or make claims regarding the achievement of net zero emissions, carbon neutral status, or significant carbon emissions reductions. Each of these activities carries specific public disclosure requirements under the VCMDA, discussed below. To prepare to comply with the new law, any company making climate claims or transacting in the voluntary carbon markets should start gathering the data and methodologies that substantiate their claims and offset project benefits. 

Businesses Making Emissions-Related Claims

A business entity operating in California and making net-zero, carbon neutral, or significant emissions reductions claims about the company, or a product must:

Disclose on its website—

• All information documenting how a “carbon neutral,” “net zero emission,” or other similar claim was determined to be accurate or accomplished, and how interim progress toward that goal is being measured, which may include information such as sector methodology and science-based targets for emissions reductions; and
• Whether company data and claims listed have been verified by an independent third‑party, such as a specialized auditing or assurance firm that analyzes greenhouse gas emissions measurements.

If purchasing carbon offsets in conjunction with the claim, the entity must also:

Disclose on its website the following pertaining to each carbon offset project or program—

• The name of the offset seller and registry, and project name or identification number on the registry;
• The offset project type and site location, including whether the offsets purchased were derived from a carbon removal, an avoided emission, or a combination of both;
• The specific protocol used to estimate emissions reductions or removal benefits; and
• Whether company data and claims have been verified by an independent third party.

Offset Marketers and Sellers

A business entity that markets or sells voluntary carbon offsets in California must:

Disclose on its website information about the applicable carbon offset project, including—

• The specific protocol used to estimate project benefits;
• Dates when emissions reductions or removals started, or will start, and calculated quantities of emissions, including any information about project reversals or modifications to quantities or start dates;
• The type and location 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 such as the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles, The International Carbon Reduction & Offsetting Accreditation (ICROA) Code of Best Practice, and Gold Standard’s Principles and Requirements;
• Durability period for any project that the seller knows or should know that the durability of the project’s benefits is less than the atmospheric lifetime of carbon dioxide emissions—that is, the project must be long lasting and survive changes such as geologic changes, management, human interference and shifts in nature;
• Whether project attributes have been independently verified; and
• Emissions reduced or carbon removed on an annual basis.

If a project is not completed or does not generate the projected offsets, then the seller/marketer is required to report what “accountability measures” it will take—although the VCMDA does not clarify what is meant by an “accountability measure.”

All Entities Within Scope

Required disclosures must be updated annually. VCMDA’s violations carry civil penalties of $2,500 per day up to a maximum of $500,000, recoverable in a civil action by the state Attorney General, a district or city attorney, or county counsel.

The VCMDA applies to California and foreign entities organized outside California, and there is no minimum activity threshold for a business to come within its reach. However, the legislation does not define what it means to “operate” or “make claims” within California or define what qualifies as a “claim.” Likewise, it articulates no temporal limitation and therefore potentially applies to a company’s current claims about past offset and reductions accomplishments.

Read the full text of the VCMDA.

The VCMDA in Context

Companies face increasing stakeholder and regulatory pressure around climate, and many have purchased carbon offsets to support their corporate climate goals, especially where operational changes to reduce emissions are infeasible. Generally, carbon offsets can promote forest, soil, and wetland conservation, and participating in VCMs may ultimately lead to other benefits such as an increase in climate-related jobs in areas where projects are located.

Despite successes and expansion on VCMs, critics of the markets contend that carbon offset claims can be inaccurate and misleading. According to a recent publication by the Yale School of Environment, although carbon markets have great potential, they have often failed to show that they lead to a net reduction in CO2 emissions,[2]suggesting that a significant portion of forest-project offsets may represent far less than the claimed reductions, removals, or avoided emissions. Likewise, a recent investigation by the Guardian and researchers from Corporate Accountability analyzed 50 emission offset projects and found that 78% of the projects had deficiencies that undermined promised emission cuts.[3] Companies claiming carbon-related benefits that are difficult to substantiate or based on unverified assets increasingly risk private litigation or Federal Trade Commission (FTC) enforcement. With the growth of VCMs and claims of companies’ successes around carbon offsets alike, we can expect more regulations like AB 1305 focused on bolstering accuracy, transparency and accountability around such markets. California’s adoption of the VCMDA is part of intensifying regulator scrutiny of corporate climate impacts, VCMs and climate-related claims.

The VCMDA comes on the heels of SB 253 and SB 261, California’s first-in-the-nation greenhouse gas and climate-related financial risk disclosure bills signed into law earlier this month. For analysis of these important regulations covering the largest companies doing business in the state, please see our earlier discussion.

At the same time, the California legislature passed the VCMDA it also passed another law targeting VCMs, Senate Bill 390: The Voluntary Carbon Offsets Business Regulation Act (VCOBRA),[4] aimed to ensure carbon credits and related projects are accurate, quantifiable, and durable. California Governor Gavin Newsom ultimately vetoed the VCOBRA because it potentially imposed civil liability on well-meaning actors for unintentional mistakes. But in his veto letter, Newsom reiterated his commitment to transparency in the VCMs and to addressing so-called “junk offsets.”[5] We expect California to remain active on this front, to see additional regulation in the future given the state of uncertainty in carbon markets.

Earlier this year, we analyzed this uncertainty and highlighted that the proliferation of climate claims and misleading statements have culminated in novel litigation around the issue.[6]

Federally, the Securities and Exchange Commission is finalizing rules proposed last year that would require public companies to make disclosures regarding the use of carbon offsets, the role of carbon offsets in an entity’s climate-related business strategy, and the associated costs and risks of adopting carbon offsets, including regulatory and market-based risks. At the same time, the FTC is in the process of revising its Green Guides to provide more robust guidance on what qualifies as deceptive advertising for climate-related claims. And the Commodity Futures Trading Commission (CFTC), which has antifraud jurisdiction over spot carbon credit markets, in June 2023, announced an Environmental Task Force to promote integrity of the markets. Following the approach it adopted for digital assets, CFTC is considering robust enforcement in spot carbon credit markets with government-wide and international coordination, along with the adoption of a heightened review framework for self-certified environmental products listed on the exchanges.

Abroad, as we have previously discussed, the European Council’s Corporate Sustainability Reporting Directive will impose sustainability reporting requirements on some companies starting in 2025. In September, 2023, the EU Parliament and Council announced a provisional agreement to ban (among other claims) generic environmental claims such as “climate neutral” without proof of “recognised excellent environmental performance relevant to the claim,” and claims based on emissions offsetting schemes that a product has neutral, reduced or positive impact on the environment. Members of the European Parliament are expected to vote on a directive in November 2023.

Although there is still a great deal of uncertainty within the evolving patchwork of regulation, one thing is clear: companies transacting in carbon offsets or making climate-related claims should begin preparing for increased substantiation and reporting requirements, even if they do not fall within the scope of current legal requirements.

Compliance with the VCMDA and Beyond

Businesses conducting any of the regulated activities under the VCMDA should, at a minimum, ensure the following when selling, marketing, or using offsets to make climate-related claims:

• Prepare to disclose methodologies, data, and measurements that substantiate any company- or product-climate claims. If not in place already, develop a robust accounting and record-keeping program to facilitate disclosures and to position the company to withstand any regulatory or litigant’s scrutiny of the disclosures;
• Conduct thorough diligence on carbon registries and offset projects before transacting in VCMs;
• Ensure statements regarding climate benefits are quantifiable, accurate, and supported by widely accepted methodology;
• Conduct internal audits regarding existing climate-related claims, including claims about past emissions offsets and reductions, and create a plan to address inadequate substantiation or discontinue making claims that cannot be substantiated; and
• Consider engaging third parties to independently verify claims and substantiate data.

As a starting point, companies may look to the Core Carbon Principles (CCPs) developed by the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent governance body for VCMs. The CCPs are comprised of ten principles that should underly any credible carbon credit. The requirements under the VCMDA largely mirror the CCPs; therefore, the CCPs may be consulted for an understanding of what compliance would look like and how to best verify, select and apply carbon offsets in a comparable and credible manner.

The Voluntary Carbon Markets Integrity Initiative (VCMI) Claims Code of Practice also provides clear guidance for companies on how to credibly use carbon offsets as well as scope associated claims. The code provides information that can be used as a starting point to carefully identify credible offsets in products, services, or operations. Given the lack of clarity under the VCMDA about the scope of the legislation with respect to operations within the state and communications that qualify as claims, companies should take a proactive, conservative approach to compliance. Companies with a connection to California, even if seemingly remote, should carefully evaluate whether they may be subject to the new law. While an increased risk of private enforcement is often an unfortunate byproduct of new regulation, careful accounting and substantiation data maintained under the VCMDA may curtail litigation around “greenwashing” claims. 

Companies relying on offsets to meet climate-related goals should also:

• Prioritize decarbonizing operations. Regulations increasingly look to ensure offsets are not utilized as safe havens to avoid emissions mitigations in operations.

Our lawyers remain well positioned to continue advising clients on compliance with the flurry of recent California climate bills and future regulations at the state, federal, and international level.

[1] See Bill Text - AB-1305 Voluntary carbon market disclosures.

[2] See How to Repair the World’s Broken Carbon Offset Markets - Yale E360

[3] See Revealed: top carbon offset projects may not cut planet-heating emissions | Carbon offsetting | The Guardian.

[4] See Bill Text - SB-390 Voluntary carbon offsets: business regulation.

[5] See SFresno_Biz23100709400 (ca.gov)

[6] See, e.g., Berrin v. Delta Airlines, Inc., Case No. 2:23-cv-04150 (CD. Cal.) at pp. 20–21.