The compliance deadline for the Voluntary Carbon Market Disclosures Act (VCMDA) is quickly approaching, but the statutory language of the VCMDA leaves open for interpretation several key issues, including threshold applicability questions that potentially impacted companies will need to grapple with.
As discussed in our October 24 blog post, the VCMDA will impose significant new disclosure obligations on businesses that market, sell, or purchase voluntary carbon offsets in California and businesses that make net-zero or carbon-neutral claims, effective on January 1, 2024. Discussed below are several key issues that remain unaddressed and are potentially ambiguous without guidance or explanation.
Which entities do the VCMDA disclosure obligations apply to?
One of the disclosure obligations imposed by the VCMDA applies to entities that make claims regarding the achievement of net-zero emissions or claims that the entity, a related or affiliated entity, or a product is “carbon neutral,” does not add net carbon dioxide or greenhouse gases to the climate, or made significant reductions to its emissions.
The VCMDA carves out certain entities from this disclosure obligation and provides that it does not apply to entities that “either do not operate within the state, or that do not make claims within the state.” However, the VCMDA does not elaborate on what it means to “operate” within California or to make net-zero or carbon-neutral claims within California.
Thus, if broadly interpreted, this requirement could apply to any business that transacts or does business in California and any business making net-zero or carbon-neutral claims through marketing, advertisement, or sales of product that involve such claims in California. The VCMDA also leaves open the scope and applicability of this disclosure obligation as it relates to affiliated entities.
Another VCMDA disclosure obligation applies to business entities that market or sell voluntary carbon offsets within California. The VCMDA leaves open what it means to market or sell offsets “within California” and whether this obligation is based on the location of the buyer, the location of the seller, the location of the registry that issues or retires the offset, or the location of the exchange on which the offset is transacted.
How often do disclosures need to be made?
Business entities subject to the disclosure obligations will be required to provide specified information on their websites and update that information no less than annually. Although the VCMDA requires the disclosures to be updated at least annually, companies may need to evaluate whether ongoing updates to their disclosures should be made to mitigate the risk of civil penalties and allegations of inaccurate or incomplete website disclosures.
How do the penalties apply?
The VCMDA provides that violations of the disclosure obligations will be subject to civil penalties of up to $2,500 per day for each day that information is not available or is inaccurate on the website and caps the total civil penalty for each violation to $500,000.
The VCMDA, however, does not specify how these penalties will be calculated and applied. For example, it is unclear whether an entity that fails to accurately disclose several categories of information would be subject to one civil penalty of $2,500 per day or several civil penalties of $2,500 per day for each inaccurate disclosure. The VCMDA also does not indicate whether a violation is specific to each offset transacted and potentially exposes an entity to substantial penalty exposure.
Conclusion
The VCMDA creates significant new disclosure requirements that are potentially applicable to numerous entities both within and outside of California. Entities will need to identify, inventory, and substantiate any existing or planned net-zero, carbon-neutral, or climate-related claims and will need to gather data on any existing or planned purchases, sales, marketing, or use of voluntary carbon offsets to update their websites with the required disclosures by the January 1, 2024 effective date.