California’s Voluntary Carbon Market Disclosures Act Effective January 1, 2024

Introduction and Background

On October 7, 2023, California Governor Gavin Newsom signed into law the Voluntary Carbon Market Disclosures Act (VCMDA) establishing reporting and disclosure requirements for voluntary carbon offset (VCO) market participants that do business in California and other business entities that make certain climate-related claims about themselves or their products in California.

Climate change is an increasingly important focus for regulators, businesses and the public. A growing number of companies are pledging to cut their greenhouse gas (GHG) emissions and achieve net-zero emissions by 2050 as part of global efforts to tackle climate change. Companies are turning to VCOs to meet their GHG reduction targets.

Voluntary carbon markets provide a mechanism that allows businesses, nongovernmental organizations, governments and individuals to voluntarily offset GHG emissions by investing in environmental projects targeted at removing or reducing GHG from the atmosphere. VCOs are generated by projects that reduce, remove or capture emissions from the atmosphere such as reforestation, renewable energy or energy efficiency. A VCO typically represents the reduction of one metric ton of carbon dioxide or GHG emissions.

The voluntary carbon markets are often regulated by independent certification organizations. This lack of governmental regulation or oversight creates risk that credits will be created via offset projects that do not result in real GHG emission reductions. The VCMDA seeks to address this issue through mandatory disclosures.

In addition to imposing new obligations on companies that purchase or sell VCOs, the VCMDA will require companies operating in California that make claims about achieving net-zero emissions or being carbon neutral to make and periodically update certain disclosures on their corporate websites.

These requirements take effect on January 1, 2024, but see the additional implementation discussion below. Disclosures must be updated annually. VCO market participants and covered entities that make climate-related claims should act quickly to comply with the VCMDA disclosure and reporting requirements.

Applicability

The VCMDA imposes new disclosure requirements on three categories of entities:

• Sellers and marketers of VCOs in California;
• buyers of VCOs that operate within the state and use VCOs to make certain climate-related claims in California; and
• other business entities that operate within the state and make certain climate-related claims about themselves or their products in California.

The VCMDA’s disclosure requirements do not apply to businesses that do not operate in California or that do not make the specified claims in California. Under the VCMDA, VCOs do not include products that represent or correspond to legal or regulatory mandates related to the reduction or prevention of GHGs.

The VCMDA does not define what it means for a company to “operate in California.” Whether a business has sufficient connection to California and is subject to the VCMDA is a fact-intensive inquiry likely to be determined by the courts. California has historically taken an expansive approach that leans towards requiring companies with even relatively low amounts of business to comply with state regulations. As best practice, any company doing business in California and making emissions-related claims should consider identifying and disclosing all information supporting the company’s emissions reduction or carbon neutrality claims.

Disclosures

Required Disclosures for Marketers and Sellers of VCOs:

The VCMDA requires marketers and sellers of VCOs in California to disclose on their public websites and annually update the following information:

• Details regarding the applicable carbon offset project, including:
  • The specific protocol used to estimate emissions reductions or removal benefits.
  • The location of the offset project site.
  • The project timeline.
  • The date when the project started or will start.
  • The dates and quantities when a specified quantity of emissions reductions or removals started or will start or was modified or reversed.
  • 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.
  • Whether the project meets any standards established by law or by a nonprofit entity.
  • 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.
  • Whether there is independent expert or third-party validation or verification of the project attributes.
  • Emissions reduced or carbon removed on an annual basis.
• Details regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits, including details regarding what actions the entity shall take under the following circumstances:
  • If carbon storage projects are reversed.
  • If future emissions reductions do not materialize.
• The pertinent data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issued using the protocol.

Required Disclosures for Purchasers and Users of VCOs:

The VCMDA requires businesses making climate-related claims based on the purchase of VCOs to disclose on their public websites and annually update the following information:

• The name of the business entity selling the offset and the offset registry or program.
• The project identification number, if applicable.
• The project name as listed in the registry or program, if applicable.
• 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.
• The specific protocol used to estimate emissions reductions or removal benefits.
• Whether there is independent third-party verification of company data and claims listed.

Required Disclosures for Businesses Making Climate-Related Claims in California:

The VCMDA requires entities that make certain climate-related claims about themselves or their products in California to disclose on their public websites and annually update the following information pertaining to all GHG emissions associated with its claims:

• All information documenting how, if at all, a “carbon neutral,” “net-zero emission,” or other similar claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured; and
• Whether there is independent third-party verification of the company data and claims listed.

Penalties

Businesses failing to meet these requirements may be subject to substantial civil penalties. The VCMDA authorizes California’s Attorney General to seek civil penalties of up to $2,500 per day per violation, up to a limit of $500,000.

Implementation

Businesses that market, buy, or sell VCOs in California or that make any of the specified climate-related claims, either with respect to the business entity or an affiliate or in connection with the sale of products, should pay careful attention to the new law and begin preparing for the required disclosures.

Although the VCMDA will take effect on January 1, 2024, entities subject to the VCMDA may have extra time to comply with disclosure requirements and avoid civil penalties. On November 30, 2023, Jesse Gabriel, California assembly member and author of the VCMDA, issued a letter to the chief clerk of the California Assembly clarifying the intent of the VCMDA to impose a compliance deadline of January 1, 2025. Assembly member Gabriel also noted his intent to submit a formal letter to the Assembly Daily Journal when the California Assembly reconvenes on January 3, 2024. Based on the legislative intent regarding the disclosure deadline, it is possible the VCMDA may not be enforced in practice until January 1, 2025.