California’s Combatting of Greenwashing in the Voluntary Carbon Market
Much of the attention on California of late has focused on the passing of two climate-related disclosure laws; namely, the Climate Corporate Data Accountability Act (“CCDAA”) (SB 253) and the Climate-Related Financial Risk Act (“CRFRA”) (SB 261). Those laws are broadly applicable to any sizeable company that does business in California. But on October 7, 2023, the same day that Governor Newsom signed both of these bills into law, he also signed into law the Voluntary Carbon Market Disclosures Act, or Assembly Bill 1305 (“AB 1305”), creating new reporting obligations related to voluntary carbon offsets.
Although AB 1305 may not have received as much media attention as the CCDAA and CRFRA, the law’s importance should not be understated; it once again signals that California is closely scrutinizing corporations’ responsibility for and commitments to address climate change. In the case of this law, a particular focus is placed on the fact that voluntary carbon offset regimes may be underpinned by questionable science and accounting and are being used by corporations to purportedly “greenwash” their corporate initiatives and not actually decarbonize their operations. AB 1305 is designed to reduce such greenwashing in the voluntary carbon offset market, further enhance transparency and accountability and, perhaps, cause companies to adjust their strategies around how they aim to decrease their greenhouse gas (“GHG”) emissions or achieve any other climate-related goals they may have.
What AB 1305 Requires
AB 1305 applies to business entities that: (1) market or sell voluntary carbon offsets in California1, (2) purchase or use voluntary carbon offsets sold in California that make emissions-related claims2, or (3) make claims that an entity or product has eliminated or made significant reductions to its carbon dioxide (“CO2”) or GHG emissions3. Violations of the law could potentially result in a civil penalty of not more than $2,500 per day, not to exceed a total amount of $500,000. Disclosures made pursuant to the law are to be updated at least annually.
The law defines “voluntary carbon offset” as “any product sold or marketed in the state that claims to be a ‘greenhouse gas emissions offset,’ a ‘voluntary emissions reduction,’ a ‘retail offset,’ or any like term, that connotes that the product represents or corresponds to a reduction in the amount of greenhouse gases present in the atmosphere or that prevents the emission of greenhouse gases into the atmosphere that would have otherwise been emitted.” AB 1305 does not apply to any voluntary carbon offset that corresponds to, or represents, legal or regulatory mandates for either the reduction of the amount of, or prevention of the emissions of, GHGs present in the atmosphere (for example, California’s Cap-and-Trade program).
(1) Businesses that market or sell voluntary carbon offsets
Under this first prong of AB 1305, a business entity that markets or sells voluntary carbon offsets within the state must disclose certain information on its website. Among these requirements, a business entity must provide details on:
- The applicable carbon offset project, to include its location, start date, timeline, type (e.g., carbon removal, avoided emissions, or both), and durability4 (for any project that the business entity knows or should know that such reductions or removal enhancements are less than the atmospheric lifetime of CO2 emissions);
- The specific protocol5 used to estimate emissions reductions or removal benefits, the dates and quantities when a specific quantity of removals or reductions will start (or are modified or reversed), and the emissions reduced or carbon removed on an annual basis; and
- Whether the project meets any standards of law or those established by a nonprofit entity, and whether the project attributes have been validated or verified by an independent expert or third party.
Additionally, a business entity must also disclose the accountability measures in place if a project is either not completed or fails to meet projected emissions reductions or removal benefits. Such accountability measures may include what actions that entity will take (directly or by contractual obligation) if carbon storage projects are reversed or if future emissions reductions fail to materialize. Finally, a business entity’s disclosures should also include “pertinent data and calculation methods” in order for someone to independently reproduce and/or verify the number of emissions reductions or removal credits issued.
(2) Businesses that purchase or use voluntary carbon offsets that make emissions-related claims
The second prong of AB 1305 applies to businesses that purchase or use voluntary carbon offsets that make emissions-related claims: specifically, the achievement of net zero emissions; that the entity, related entity, or a product is “carbon neutral”; or other claims that imply that the entity, related entity, or product does not add either GHGs or CO2 to the atmosphere or has made significant reductions to its GHG or CO2 emissions. This prong does not apply to business entities that do not operate within California or that do not purchase or use voluntary carbon offsets sold within California.
The business entity must again disclose on its website particular information on the project, such as the project identification number (as applicable), the name as listed on the registry (as applicable), and the project type (e.g., carbon removal, avoided emission, or both), and the location. Moreover, disclosures should also include the name of the business entity selling the voluntary carbon offset and the offset registry/program, the specific protocol used to estimate removal benefits or emissions reductions, and whether the company data and claims made have been verified by an independent third party.
(3) Businesses that claim an entity or product has eliminated or made significant reductions to its CO2 or GHG emissions
Under the final prong of AB 1305, disclosures are required for business entities that make emissions-related claims, namely: the achievement of net zero emissions; that the entity, related entity, or a product is “carbon neutral”; or other claims that imply that the entity, related entity, or product does not add either GHGs or CO2 to the atmosphere or has made “significant reductions” to its CO2 or GHG emissions. Similar to the second prong, this section is not applicable to business entities that do not operate within California or that do not make claims within California.
On its website, a business entity shall include information on how any claim, such as “carbon neutral” or “net zero emission” (or similar) has been determined to be accurate or actually accomplished and how interim goals progressing toward such goals have been measured. AB 1305 provides examples of information that could be included, such as, whether an independent third party has verified all of the business entity’s GHG emissions and identification of the business entity’s science-based targets for its emissions reduction pathway (which could include information on the relevant sector methodology and third-party verification, as applicable). A business entity must disclose whether company data and the claims made have been verified by an independent third party.
It should be noted that this final prong of AB 1305 is ambiguous, as it fails to tie the climate-related claims a corporation may make to the use of voluntary carbon offsets. Thus, as currently drafted, this provision potentially has an extremely broad scope, capturing nearly any corporate sustainability claim made by a company that indicates the achievement of net zero, carbon neutrality, or significant reductions in CO2 or GHG emissions by the entity and/or its products. The law also does not clarify whether it captures both historical statements and forward-looking goals, so coverage may be even more expansive. Although AB 1305 does not specify any regulatory agency that will promulgate the implementing regulations (unlike the CCDAA and the CRFRA, where the California Air Resources Board is tasked with carrying out the requirements of the two new laws), additional guidance on the interpretation of this language by the state attorney general or via another means prior to January 1, 2024, would prove helpful for clarification.6
Applicability of AB 1305
The law applies to public and private companies that undertake the above-specified activities within California. Unlike the CCDAA and the CRFRA, the law applies to companies irrespective of size (i.e., there is no annual revenue threshold requirement). AB 1305 does not specify or define what it means to operate in California or make claims within California, thus potentially the law has a very broad scope. This is potentially further broadened by the lack of clarity as to whether any such emissions-related claims a business entity makes include both historical achievements and forward-looking goals.
Companies subject to the rule will be required to publish the required disclosures on their websites and, as noted above, update such disclosures at least annually. The requirements of AB 1305 take effect on January 1, 2024.
California’s Rationale Behind AB 1305 – Combatting Greenwashing
As part of efforts to reduce or offset carbon emissions to meet net-zero goals or GHG reduction targets, many companies participate in the voluntary carbon market, supporting environmentally focused projects designed to reduce carbon as a way to neutralize the company’s own emissions or the emissions associated with a product or service that the company offers. However, as California Assembly member Jesse Gabriel (D), the author of AB 1305, noted, the voluntary market is a “wild west” with essentially no regulation and a “pressing need for increased accountability and transparency.” Participation in this market, according to its critics, provides a ripe opportunity for greenwashing as the audience for these corporate claims, such as consumers who are drawn to purchase goods and services they believe to be “better for the planet,”7 or other stakeholders, such as investors, are unable to evaluate the validity of the emissions reductions touted.
Greenwashing, by definition, is the claiming of products, services, or practices as more environmentally friendly than they actually are. Marketing claims are governed by a complex web of consumer protection and anti-fraud state and federal regulations. The Federal Trade Commission (“FTC”) is currently updating its Guides to the Use of Environmental Marketing Claims (also known as its “Green Guides”), which provide guidance to advertisers/marketers to help them avoid making environmental claims that are unfair or deceptive. The current Green Guides, published in 2012, include discussions of carbon offsets and advise that sellers should employ “competent and reliable scientific and accounting methods” to ensure they are properly quantifying the claimed emissions reductions. Additionally, the Green Guides provide that marketers should clearly disclose when a carbon offset will represent an emissions reduction if longer than two years to avoid deceptive or misrepresentative claims that a carbon offset has already resulted in an emissions reduction or will result in such a reduction in the immediate future. Finally, the Green Guides advise that it is misleading and deceptive to claim that a carbon offset represents an emissions reduction if that reduction was required by law.
The FTC’s Green Guides are referenced in the various floor analyses accompanying AB 1305 as it passed through the state legislature and demonstrate a clear concern to mitigate the relative opaqueness and lack of regulatory oversight of the voluntary carbon offset market. To combat the growing concern about the veracity of emissions reductions from projects sold and to avoid the potential for fraud, AB 1305 purports to provide a “meaningful tool” to aid consumers in determining which projects they should invest in to reduce their carbon emissions.
Companies should be advised that both international regulators8 and domestic legislatures — like that of California — are likely to continue to focus on what they see to be material risks to the planet from climate change. This will likely include the continued targeting of companies that they believe to be making false and misleading statements to their stakeholders and that are not actually decarbonizing their operations, but merely trying to give the impression that they are doing so. This regulatory scrutiny is likely to continue to ramp up, and companies that have premised a significant portion of their climate goals on purchasing voluntary carbon offsets would be well advised that these instruments are subject to heightened scrutiny and will require additional disclosures from the companies that sell, market or use them in their business.
Given the effective date, companies will need to act now to prepare their disclosures. The first step in these preparations should be an immediate inventory of any emissions reduction goals, net-zero targets, or other climate-related claims a company has made and, where applicable, where the achievement of, or progress towards, these goals includes the use of, or reliance upon, voluntary carbon offsets. Following this, a company should then hone in on any voluntary carbon offsets it uses and begin to gather the necessary information and data in order to meet the disclosure requirements of the law. Once this data has been compiled, it will need to be disclosed on the company’s website. Such disclosure may require information regarding the scope, durability, verification and other specific attributes of the voluntary carbon offsets in question, which may require companies to request relevant details from the voluntary carbon offset providers or markets from which they purchase these instruments.
More broadly, companies should consider expanding their climate-related governance to incorporate voluntary carbon offsets. This may also include extended oversight by the legal department over a company’s marketing and advertising of their “green” bona fides — whether in product marketing or in corporate sustainability reports — to ensure that any potential for greenwashing allegations is mitigated. Oversight of this may necessitate the need for independent third-party verification and validation not just of the claims made but also of the company’s data, which will become increasingly fundamental as evidence and back-up for any climate-related statements, targets and goals.
1 Section 44475.
2 Section 44475.1
3 Section 44475.2
4 “Durability” is one of the four terms AB 1305 defines. Here, per the law, it means “the duration of time over which an offset project operator commits to maintain its greenhouse gas reductions and greenhouse gas removal enhancements, as applicable, exclusive of any aspirational outcomes that exceed or extend beyond the mandatory outcomes required of the offset project pursuant to its offset protocol.”
5 AB 1305 defines “protocol” as “a documented set of procedures and requirements to quantify ongoing greenhouse gas reductions or greenhouse gas removal enhancements achieved by an offset project and to calculate the project baseline, including specification of relevant data collection and monitoring procedures, emission factors, and methodologies used to conservatively account for uncertainty and activity-shifting and market-shifting leakage risks associated with an offset project.”
6 The law’s intent suggests that this provision of AB 1305 was not intended to be as sweeping as this interpretation. First, the scope of the law, including the very title, is focused on the unregulated voluntary carbon offset market; the claims of the sort potentially captured here would not need to be predicated on voluntary carbon offsets, but rather on any climate-related claims relating to net zero emissions, carbon neutrality, or “significant reductions” in CO2 and GHG emissions. Second, this provision of AB 1305 and the preceding one (44475.1) are both limited to any such claims being made “within the state,” thus it would be an unprecedented leap of extraterritoriality to subject any claims made “beyond the state” (i.e., claims found in a sustainability report or on a website that are accessible around the world) to the ambit of this law. Third, the legislative history of AB 1305 fails to indicate any debate on the potential interpretation of the law being applied to companies making any sort of carbon reduction claim, which would indicate that this was a broad catch-all provision. Finally, on the same day that he signed AB 1305, Governor Newsom vetoed another law — SB 390 — citing his concern that the breadth of that law would inadvertently capture well-intentioned parties and potentially even those beyond California’s borders.
7 See, e.g., NYU Stern Sustainable Market Share Index, April 2023. According to NYU Stern, products marketed as sustainable grew ~2x faster than products not marketed as sustainable and achieved a 5-year compounded annual growth rate of 9.43% vs. 4.98% for its conventional counterparts. According to the study, products labeled as lower carbon or carbon neutral account for $3.4 billion in sales, up from $1.7 billion in 2020 — a 2x growth in only three years.
8 See, e.g., European Parliament Press Release 20230918IPR05412, EU to ban greenwashing and improve consumer information on product durability (Sept. 19, 2023), https://www.europarl.europa.eu/news/en/press-room/20230918IPR05412/eu-to-ban-greenwashing-and-improve-consumer-information-on-product-durability.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.