California Assembly Bill 1305: Voluntary Carbon Offsets and Carbon Neutrality Claims
By Emily M. Berger, CFA, Director of Investment Risk Advisory
On October 7, 2023, Governor Newsom signed California Assembly Bill 1305 (AB 1305) into law which is focused on voluntary carbon offsets (VCOs) and related net zero claims. VCOs are a project-based system in areas such as reforestation or carbon removal, in which an investment represents a reduction of a specified quantity of emissions (typically measured in metric tons of carbon dioxide). This is an unregulated market, and AB 1305 seeks to provide additional transparency for the purchasers of VCOs in California by mandating disclosures from marketers and sellers of VCOs in the state. Notably AB 1305 also requires significant public disclosures for all entities operating in the state of California which make net zero, carbon neutrality, or emissions reduction claims.
The disclosures required by this legislation take effect on January 1, 2024, presenting an accelerated timeline for compliance by covered entities.
Unlike the well-publicized SB 253 and SB 261 climate legislation, AB 1305 applies to all domestic and international entities operating in California regardless of size or revenues.
Requisite Disclosures for VCO Marketers/Sellers
Required public disclosures for marketers and sellers of VCOs in the state include the following:
- Protocol used to estimate emissions reductions or removal benefits.
- Specifics of the project, such as the exact project location, timeline (including when the project started/will start), type of project (including whether offsets are derived from carbon removal, avoided emissions, or both).
- Dates and quantities of emissions removals and when they will start or started, and clarification of any reversals of these amounts.
- Durability period for any project greenhouse gas emissions reductions or removal benefits that the seller knows or should know, or any reduction in anticipated greenhouse gas reduction benefits which are less than the atmospheric lifetime of carbon dioxide emissions.
- Existence of an independent expert or third-party validation or verification of the project attributes.
- Emissions reduced or removed on an annual basis.
- Details on the accountability measures if a specific project is not completed or does meet the projected emissions reductions or removal benefits.
Requisite Disclosures for VCO Buyers
Required public disclosures for buyers of VCOs in California or for entities which use VCOs, operate in the state of California and make claims about achieving net zero emissions, carbon neutrality, or claims related to not adding to carbon dioxide emissions or greenhouse gas emissions to the climate or reducing emissions include the following:
- Name of the business entity selling the offset and the offset registry or program.
- Project name as listed in the registry or program (if applicable) and the project identification number (if applicable).
- Offset project type, including whether offsets purchased were derived from carbon removal, avoided emissions, or combination of both, and site location.
- Whether there is independent third-party verification of company data and claims listed.
Website Disclosures for California Entities with Respect to Carbon Emissions Claims
AB 1305 also requires that all entities that either operate in California or make claims related to carbon neutrality, net zero emissions, or carbon emission reductions within California disclose the following information on their public website:
- How, if at all, 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. This information may include disclosure of an independent third-party verification of all of the entity’s greenhouse gas emissions, identification of the entity’s science-based targets for its emissions reduction pathway and disclosure of the relevant sector methodology used for this determination.
- Whether there is a third-party verification of the company data and the stated claims.
Civil penalties for non-compliance with the requirements of this legislation are $2,500 per day (up to a maximum of $500,00) for the period during which the information is either not available or is inaccurate on the company’s website. Updated disclosures are required no less than annually.
Given the accelerated timeline for compliance with this legislation and the wide applicability of its terms to both foreign and domestic entities operating in California or those that make carbon emissions claims in the state, we have the following suggestions for covered entities:
- Purchasers of VCOs in California or entities that make net zero, carbon reduction, or carbon neutrality claims in the state should ensure that all due diligence conducted on projects is documented and records of past VCO purchases are well-organized and meet the minimum criteria stated in the legislation. Any future purchases of VCOs should be subject to enhanced due diligence and documentation requirements.
- Covered entities should ensure that they understand the full set of disclosure requirements across multiple jurisdictions to confirm consistency in emissions and voluntary carbon offset reporting.
- Given the requirement to post carbon emissions details on a publicly available company website, covered entities should ensure that they provide appropriate disclosures on their carbon calculation methodology and key assumptions. Consider seeking assistance from a knowledgeable external assurance firm to ensure disclosures meet the requirements of the governing standards, such as the Greenhouse Gas (GHG) Protocol.
Please reach out to us for advice as you’re assessing the readiness of your business to comply with this legislation. Our team of experts is here to help. For more information, please contact your PKF O’Connor Davies client engagement partner or: