Regulators, investors, consumers, and analysts, alike, are increasingly making climate-centric demands on companies. This has led to an array of efforts on the sustainability – and broader ESG – front, including a rise in demand among companies (from fashion brands to food manufacturers) for carbon offsets in order to be able to market themselves as “net zero.” While offsets have been increasingly relied upon as companies worldwide scramble to meet their climate goals, issues have come to light, with analyses from researchers and watchdogs finding that the vast majority of the environmental projects most frequently used to offset GHG emissions come with fundamental failings.
California is looking to address problems in the market for carbon offsets by way of AB 1305. Signed into law alongside a number of other bills, including a right-to-repair bill and two pieces of climate disclosure legislation (one that centers on greenhouse gas (“GHG”) emissions and another on climate risk), AB 1305 will establish new regulations for voluntary carbon offsets, according to Assemblymember Jesse Gabriel, who drafted the bill. And in doing so, it will “crack down on bogus offsets by imposing new disclosure requirements for buyers and sellers, thereby helping to improve transparency and accountability and providing consumers with greater confidence that offsets will result in meaningful emissions reductions.”
Hardly a hypothetical issue, Assemblymember Gabriel states that the market for carbon offsets – which are touted as capable of reducing the amount of carbon in the atmosphere by funding forest preservation and mangrove restoration projects, wind energy technology advancements, etc. – has “been beset by concerns about corporate ‘greenwashing’ and investigations suggesting that up to 90 percent of claimed offsets do not represent meaningful carbon reductions.” At the same time, the voluntary carbon offset market – which is currently valued at upwards of $2 billion – is growing quickly, with a Reuters report projecting that the market will increase in value to between $10 and $40 billion by 2030.
Against this background, AB 1305 aims to ensure that sellers *and buyers* (such as retail brands) of voluntary offset credits – which are defined 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” – disclose the details of the offset projects. At a high level, this includes methodology for determining the number of credits issued, the data and calculation methods needed to allow for independent recreation of emissions reduction estimates, and details regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits.
“This information will allow researchers and the public to better assess the legitimacy and efficacy of credits, as well as spotlight misleading claims by corporate polluters,” Gabriel says.
Specifically, AB 1305 will require business entities that are marketing or selling voluntary carbon offsets within the state to disclose on their website …
(1) The specific protocol used to estimate emissions reductions or removal benefits;
(2) The location of the offset project site;
(3) The project timeline;
(4) The date when the project started or will start;
(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 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;
(7) Whether the project meets any standards established by law or by a nonprofit entity;
(8) The durability period for any project that the seller knows or should know that the durability of the project’s greenhouse gas reductions or greenhouse gas removal enhancements is less than the atmospheric lifetime of carbon dioxide emissions;
(9) Whether there is independent expert or third-party validation or verification of the project attributes; and
(10) Emissions reduced or carbon removed on an annual basis.
As for buyers or users of voluntary carbon offsets that make claims “regarding the achievement of net zero emissions or other, similar claims,” including, “carbon neutral,” AB 1305 mandates that for “each project or program,” they must disclose the following on their website …
(1) The name of the business entity selling the offset and the offset registry or program;
(2) The project identification number, if applicable;
(3) The project name as listed in the registry or program, if applicable;
(4) The offset project type, including whether the offsets purchased were derived from a carbon removal, an avoided emission, or a combination of both, and site location;
(5) The specific protocol used to estimate emissions reductions or removal benefits; and
(6) Whether there is independent third-party verification of company data and claims listed.
The law will make individuals/entities that violate these provisions “subject to a civil penalty of not more than $2,500 per day, as specified, for each violation, not to exceed a total amount of $500,000, which would be assessed and recovered in a civil action brought in the name of the people of the State of California by the Attorney General or by a district attorney, county counsel, or city attorney in a court of competent jurisdiction.” Additionally, it requires that disclosures be updated “no less than annually.”
THE IMPACT: Reflecting on the impact of AB 1305, Covington & Burlington’s Kevin Poloncarz, Laura Kim, Jayni Hein, Paul Mertenskötter, and Tim Duncheon state in a note that it is “likely to cause companies to examine the quality of their carbon offsets.” Ropes & Gray’s Michael Littenberg agreed in a note of his own, stating that AB 1305 “will result in more scrutiny of VCOs,” which will “put more pressure on front-end due diligence by purchasers.” Littenberg further contends that not only will purchasers and users of carbon offsets “need to ensure they have adequate controls in place concerning AB 1305 disclosures,” multinational corporations that make use of offsets – which are likely subject to multiple carbon offsets disclosure requirements – “will need to ensure that their disclosures are consistent across requirements and otherwise aligned.”
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