In October 2023, California enacted AB 1305, the Voluntary Carbon Market Disclosures Act, as part of a trio of climate laws aimed at advancing transparency and integrity in decarbonization efforts. As businesses prepare for AB 1305’s January 1 compliance deadline, this article discusses the specifics of the law, its implications for business entities, and the challenges and opportunities it presents.
Together with SB 253 and SB 261 (the Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act, respectively), AB 1305 reinforces California's commitment to addressing climate change by regulating disclosures related to carbon offsets and net-zero or carbon-neutral claims.
Reducing greenhouse gas (GHG) emissions is a strategic goal for businesses, often achieved through tools like sustainable aviation fuel, renewable energy, and energy-efficient technologies. When further reductions become unattainable, carbon offsets provide a critical solution by compensating for remaining emissions.
A carbon offset is a transferable certificate representing the removal or prevention of GHG emissions equivalent to one metric ton of carbon dioxide. Offsets can be generated from projects that either directly remove carbon dioxide, such as reforestation, or prevent emissions, such as carbon capture at industrial sites. These offsets can then be traded in two types of markets: compliance markets, which are regulated systems such as California’s cap-and-trade program or the EU’s Emissions Trading System (ETS), and voluntary markets, which are predominantly unregulated and driven by corporate commitments to sustainability.
The key characteristics of carbon offsets include permanence, additionality, independent verification, avoidance of double counting, and adherence to standardized criteria.
AB 1305 applies to businesses that market or sell voluntary carbon offsets (VCOs) in California, entities that purchase or use such offsets within the state, and those making net-zero or carbon-neutral claims. Unlike SB 253 and SB 261, AB 1305 does not include a revenue threshold, significantly broadening its applicability across industries and company sizes. By emphasizing transparency in the voluntary carbon market, the law seeks to promote the transparency and integrity of public claims regarding emissions reductions and carbon neutrality.
Entities That Purchase/Use VCOs
Entities that purchase or use VCOs in California must disclose specific details about their transactions on their websites. This includes the seller’s information and the offset registry or program, promoting the transparency about the source of the offsets. Additionally, project identification details, such as project names or identification numbers, must be included for clarity. The type of offset—whether it involves carbon removal or avoided emissions, or both—also requires disclosure. Entities must further provide the site location of the offset project and identify the protocol used to estimate emissions reductions or removals. Finally, companies must disclose whether their claims are verified by an independent third party.
Businesses That Market/Sell VCOs
Businesses that market or sell VCOs must provide more extensive disclosures. These businesses need to disclose information about the offset project site, including its type, timeline, and project-specific details such as start dates, annual quantities of emissions reductions or removals, and any modifications or reversals.
Additionally, they must disclose whether the project meets any legal standards or nonprofit-developed requirements. Durability periods, which reflect the project’s ability to sustain GHG reductions, must also be disclosed. Companies are further obligated to detail accountability measures that outline what actions will be taken if a project fails to meet expected emissions reductions. Whether the project attributes were independently validated or verified must also be disclosed.
Entities Making Net-Zero/Carbon-Neutral Claims
Entities making net-zero or carbon-neutral claims must provide information documenting the basis for their assertions and supporting their accuracy. These entities are required to disclose how their claims were determined to be accurate or were actually accomplished, including the methods and data used to measure progress. This may include interim progress metrics, which track advancements toward net-zero goals over time, as well as science-based targets or specific sector methodologies. Companies must also indicate whether their emissions data and claims have been independently verified by third parties, furthering transparency and reliability.
The first disclosures must be posted by January 1, 2025, and reporting entities must update their disclosures at least annually. Noncompliance may result in civil penalties of $2,500 per day, up to a maximum of $500,000 per violation. Enforcement authority lies with the California Attorney General and other legal entities, with potential for private rights of action.
Threshold Assessments
Businesses should determine if they fall into any of the regulated categories by evaluating carbon offset transactions within California, net-zero or carbon-neutral claims made in California, and related activities of affiliates or subsidiaries. Understanding these thresholds is essential for assessing the scope of disclosure obligations and planning compliance strategies.
Preparing Disclosures
Entities should inventory and verify carbon offset purchases, sales, and uses to determine the level of detail required for disclosures. Documentation of the basis for net-zero or carbon-neutral claims is critical, as regulators and stakeholders will scrutinize these assertions. Engaging independent third-party verifiers can support a demonstration of accuracy and integrity and build credibility with investors, regulators, and customers.
Anticipating Future Regulations
Given the growing scrutiny of carbon markets and claims, businesses should monitor potential legislative developments in California and other jurisdictions. Aligning practices with emerging global standards, such as those adopted at COP29, can enhance credibility and reduce compliance risks. Companies that adopt proactive strategies now will be better positioned to adapt to future regulatory changes.
AB 1305 marks a pivotal step in promoting the transparency and integrity of VCOs transacted in the voluntary carbon markets, but it poses challenges such as navigating ambiguous statutory language, gathering and verifying detailed project and transaction data, and adapting operations to comply with broad and evolving standards. These challenges require businesses to invest in robust systems and processes to manage compliance effectively.
Conversely, the law presents opportunities for businesses to build trust through transparent sustainability practices. By showcasing robust decarbonization strategies and aligning with emerging standards, companies can differentiate themselves in competitive markets. Additionally, businesses can contribute to the development of standardized practices in the voluntary carbon markets, enhancing long-term market integrity.
California’s AB 1305 represents a significant evolution in climate legislation, underscoring the state’s commitment to transparency and integrity in achieving net-zero goals. As the January 1, 2025 deadline approaches, businesses must proactively assess their compliance obligations, refine their decarbonization strategies, and prepare for a future where accountability in sustainability is paramount. Businesses should prioritize reviewing and enhancing their compliance practices and procedures to ensure compliance with AB 1305.