Navigating the Voluntary Carbon Market Disclosures Act: All You Need to KnowAn overview of the Voluntary Carbon Market Disclosures Act and its significance

Over the past decade, the pressure on companies to reduce their carbon emissions has significantly increased. In their pursuit of achieving net zero targets, many businesses have increasingly relied on carbon offsets, leading to the rapid growth of the voluntary carbon market (VCM).

By 2022, this market had reached approximately $2 billion in trades. Despite this growth, the VCM has faced criticism that its carbon credits are frequently unreliable and ineffective. Critics also claim that the lack of regulation within the market facilitates greenwashing and hinders genuine climate progress.

In response, California has introduced new legislation aimed at enhancing transparency in the carbon offset market.

This law, which was signed at the end of 2023, requires entities that market, sell, or purchase voluntary carbon offsets to adhere to specific disclosure requirements. As the first legislation of its kind in the United States, AB 1305 aims to bring greater transparency to the voluntary carbon market.

Below, we’ll delve into the specifics of the Voluntary Carbon Market Disclosures Act and its implications for businesses.

What is the Voluntary Carbon Market Disclosures Act

The Voluntary Carbon Market Disclosures Act (AB 1305) is a new law in California that mandates companies to provide detailed information about their carbon offset projects.

AB 1305 requires that companies disclose specific information about these offset projects. The penalties for non-compliance are as follows:

• Up to $2,500 per day for each instance of non-compliance
• A maximum of $500,000 in total penalties

The legislation became effective on January 1, 2024. However, the initial compliance deadline was somewhat unclear. The first annual disclosure is likely required by January 1, 2025. This timeline allows companies sufficient time to align their practices with the objectives of AB 1305 before facing potential fines. Thus, while AB 1305 became effective in 2024, companies have until January 1, 2025, to make their first carbon disclosure.

What Led to the Creation of the Voluntary Carbon Market Disclosures Act

AB 1305 was enacted in response to growing concerns over the reliability and transparency of carbon offset claims. This law emerged from the need to address several critical issues within the voluntary carbon market (VCM):

• Greenwashing Concerns: Critics argued that the unregulated nature of the VCM allowed for greenwashing, where companies made misleading claims about their carbon neutrality or emissions reductions without adequate verification or transparency.‍
• Inconsistency and Lack of Verification: There were significant concerns about the credibility and effectiveness of carbon offsets. Investigations and studies found that many offset projects did not deliver the promised environmental benefits, undermining genuine efforts to combat climate change​.‍
• Regulatory and Stakeholder Pressure: Companies faced increasing pressure from regulators and stakeholders to substantiate their climate-related claims. The growing demand for transparency and accountability in environmental reporting pushed for more stringent disclosure requirements​.‍
• Need for Uniform Standards: The Act aims to establish clearer standards and protocols for carbon offset projects, ensuring that entities disclose detailed information about their offset purchases and the methodology used to verify these claims. This move is intended to enhance market integrity and build trust among stakeholders​.

Requirements for Businesses Marketing or Selling Carbon Offsets

Under AB 1305, companies that market or sell voluntary carbon offsets in California must disclose comprehensive details about each carbon offset project on their websites. These requirements include:

• Emissions Reduction Protocol: The specific protocol used to estimate emissions reductions or removal benefits for each offset project, including the methodology for calculating emissions reduction or removal credits and any standards met.‍
• Project Details: Information about the location, timeline (including start date), type of project, whether it involves carbon removals or avoided emissions, annual reduction or removal amounts, and the underlying data and calculation methods.‍
• Project Durability: Details on the project's durability, especially if it is less than the atmospheric lifetime of the emissions.‍
• Corrective Actions: Plans for addressing projects that fail to complete or do not meet the expected emissions reduction or removal outcomes.‍
• Third-Party Validation: Whether there is independent expert or third-party validation or verification of each project's attributes.

Requirements for Businesses Purchasing or Using Carbon Offsets

Entities operating in California that purchase or use voluntary carbon offsets and make claims about achieving net zero emissions, carbon neutrality, or similar statements must disclose the following on their websites:

• Seller and Project Information: The name of the seller, the offset registry, project name, and ID number (if applicable), along with the site location and project type, indicating whether it involves carbon removal or avoided emissions.‍
• Emissions Reduction Protocol: The protocol used to estimate emissions reductions or removal benefits.‍
• Third-Party Verification: Information on whether each project is verified by a third party.

Requirements for Businesses Making Net Zero or Carbon Neutral Claims

Any business making claims in California about achieving net zero emissions, "carbon neutral" products, or similar climate-related assertions must provide the following disclosures on their websites:

• Documentation of Claims: Detailed information on how a “carbon neutral,” “net zero emission,” or similar claim was determined to be accurate or accomplished.‍
• Progress Measurement: Information on how interim progress towards these goals is measured and updated, including independent verification of GHG emissions, identification of science-based targets, and relevant sector methodologies.‍
• Third-Party Verification: Whether the company data, including GHG emissions and related claims, have been independently verified by a third party.

How Can Companies Prepare for Carbon Disclosure?

To comply with AB 1305, companies should begin by conducting a thorough review of their carbon offset practices and climate-related claims. Here are several steps to help ensure readiness for carbon disclosure:

• Understand the Legislation: Begin by carefully reviewing the text of AB 1305 to understand its specific requirements and how they apply to your business. Knowledge of the law's nuances is essential for compliance.‍
• Monitor Reporting Deadlines: Although the bill's author has suggested a reporting deadline of January 2025, the law is already in effect. Stay updated on official timelines by consulting the California Assembly Clerk’s office regularly.‍
• Educate Your Team: Ensure that your team and stakeholders are informed about the requirements of AB 1305. This helps in achieving accurate and efficient disclosures.‍
• Assess Carbon Offsets: Assess the carbon offset projects your business is involved in, whether selling, marketing, or purchasing. Collect and document detailed information about each project as required by the law.‍
• Verify Climate Claims: If your company makes claims about net zero goals or carbon neutrality, ensure that you have robust documentation to support these claims. This includes measuring, verifying, and tracking progress on relevant projects.‍
• Prepare for Public Disclosure: AB 1305 requires companies to publicly disclose details about their climate claims and carbon offsets on their websites. Be ready to provide transparent and accurate information.‍
• Establish an Update Process: Since AB 1305 mandates annual reporting, create a sustainable process for gathering and updating the necessary data. Form a dedicated team to manage ongoing compliance and ensure your disclosures are current.‍
• Engage with Third-Party Validators: Where possible, seek independent verification of your carbon offset projects and/or climate claims to enhance credibility and meet legal requirements.‍
• Integrate Compliance into Business Strategy: Align your business strategy with AB 1305’s requirements by integrating compliance into your overall sustainability plans. This ensures that your climate actions are both effective and legally compliant.

Final Thoughts

The Voluntary Carbon Market Disclosures Act is a crucial step toward enhancing transparency and accountability in the voluntary carbon market. Enacted to combat greenwashing and ensure the reliability of carbon offset claims, this legislation requires businesses to disclose detailed information about their carbon offset projects and climate-related claims.

By mandating comprehensive carbon disclosure, the Act aims to build trust, support genuine climate progress, and align corporate practices with stringent environmental standards. Compliance with AB 1305 not only fulfills legal requirements but also reinforces a company's commitment to sustainability and transparency.

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