California’s New Law To Prevent Greenwashing In Environmental Marketing For Voluntary Carbon Offsets

As part of a package of new climate change legislation, on October 7, 2023, California Governor Gavin Newsom signed into law the Voluntary Carbon Market Disclosures Act (“VCMDA” or “AB 1305”).  Intended as an effort to reduce “greenwashing” in the unregulated voluntary carbon credit markets, AB 1305 is a far-reaching law that requires businesses that make “carbon neutral,” “net zero emissions,” or other eco-friendly emissions claims to provide annual disclosures supporting their claims.  The law brings extra scrutiny and regulatory burdens to businesses that purchase and use voluntary carbon offsets to support their claims, as well as those businesses that market and sell the offsets. 

Companies have little time to prepare for AB 1305, which will become effective on January 1, 2024.  The law was enacted along with the California Climate Accountability Package, a novel climate disclosure mandate expected to take effect in 2026.  See our previous Client Alert here. 

This Client Alert provides an overview of the disclosure requirements of AB 1305, the steps companies doing business in California can take to prepare for their new obligations, and the potential liability for failure to comply with the new law.

DISCLOSURE REQUIREMENTS UNDER AB 1305 FOR BUSINESSES MAKING EMISSIONS CLAIMS

Beginning January 1, 2024, all businesses operating in California making “carbon neutral,” “net zero emissions” or other eco-friendly emissions claims, must disclose on its website:

• All information documenting how the claim was determined to be accurate or actually accomplished, or how interim progress toward the goal is being measured, including both the underlying data and methodology used to support the claim; and
• Whether an independent third party has verified the underlying data and claim.

Those businesses operating in California who purchase or use voluntary carbon offsets to make such claims, as well as businesses operating outside of California who purchase offsets sold within the state, must also disclose:

• The business entity selling the offset and the offset registry or program;
• The project name and project identification number, if applicable;
• The offset project type, including whether the offsets were derived from carbon removal, avoided emissions, or a combination of both;
• The project site location;
• The specific protocol used to estimate removal benefits and/or emission reductions; and
• Whether an independent third party has verified the underlying data and claim.

Notably, AB 1305 fails to define what it means for a company to “operate” in California.  As such, any company doing business in California and making emissions-related claims should, as best practice, comply with the disclosure requirements of AB 1305. 

DISCLOSURE REQUIREMENTS FOR CALIFORNIA MARKETERS AND SELLERS OF VOLUNTARY CARBON OFFSETS

AB 1305 further requires that all businesses marketing or selling voluntary carbon offsets within the state must disclose the details of their carbon offset project, including:

• The project type, including whether the project’s offsets are derived from carbon removal, avoided emissions, or a combination of both (including the breakdown of offsets from each);
• The specific protocol used to estimate removal benefits and/or emissions’ reductions;
• The project site location;
• The project start date and timeline, including the dates and quantities when a specified quantity of emission removals and/or reductions started or will start, or were modified or reversed;
• Carbon removed or emissions reduced on an annual basis;
• The durability period for any project if the seller knows or should know that the durability of the project’s greenhouse gas removal and/or reductions is less than the atmospheric lifetime of CO2 emissions;
• Whether the project meets any standards established by law or by a nonprofit entity; and
• Whether an independent third party has validated or verified the project attributes.

Marketers and sellers of voluntary carbon offsets must also provide the data and calculation methods necessary to reproduce and verify the number of credits issued using the project’s protocol.  If a project is not completed or does not meet its projected emissions benefits, marketers and sellers must also disclose details of the actions taken as a result, described as “accountability measures.”

PENALTIES FOR NONCOMPLIANCE

A business that violates AB 1305 can be held subject to a civil penalty of up to $2,500 for every day of violation, capped at $500,000.  AB 1305 will be enforced through civil action brought by California Attorney General, a district attorney, county counsel, or city attorney.  AB 1305 does not provide for a “citizen suit” or for a private right of action.

ACTIONABLE STEPS TO COMPLIANCE WITH AB 1305

Business making environmental claims should be familiar with the Federal Trade Commission's Green Guides, which provide useful guidance as to the scope of permissible claims and the requirement for proper substantiation.  With that federal guidance expected to be revised in the near future, California has jumped ahead to impose its own disclosure and substantiation requirements.  And with AB 1305 becoming effective on January 1, 2024, time is of the essence for companies seeking to come into compliance with the new disclosure requirements. 

To best prepare, a business should first determine whether it is making any emissions-related claims affected by AB 1305 and therefore is a regulated party under the statute.  If so, the company should:

• Ensure these claims can be substantiated by reliable data and methodologies. Unsubstantiated claims should immediately be removed from all marketing.
• Prepare all documentation supporting each emissions’ claim, and consider hiring an independent third party to verify all data and claims.
• If using voluntary carbon offsets, request pertinent information regarding the carbon project from the seller.
• Strategize regarding how best to present the required disclosures on the business website.

As corporate emissions and carbon offsets purchasing receive more scrutiny in California and beyond, businesses should be mindful of the use of offsets, conducting due diligence of offset sellers and requiring stringent documentation regarding offset projects before purchasing offsets.  All businesses that purchase, use, market, or sell voluntary carbon offsets should develop internal recordkeeping systems to ensure retention of all data necessary to substantiate required disclosures.  California may also adopt regulations or publish additional guidance on AB 1305, which should be closely tracked for compliance purposes.

King & Spalding LLP has one of the nation’s largest environmental and corporate governance groups dedicated to assisting clients with all aspects of their environment and social governance requirements, including their transactions in the voluntary and regulated carbon offset markets.  With three offices in California, the firm is closely involved in the state’s regulatory and agency rulemaking proceedings.  If you have any questions about this Client Alert, please contact any of the authors listed above.