Enforcement and Inspection

California Poised to Adopt Stricter GHG Reporting Regulations

The California Senate passed the Climate Corporate Accountability Act (SB 260) on January 26, 2022, which, if passed into law, will require corporations with more than $1 billion in annual revenue to report all scopes of their greenhouse gas (GHG) emissions to the California secretary of state.

Reporting entities. The bill would require businesses with total annual revenues in excess of $1 billion and that do business in California to:

  • Disclose their GHG emissions in a manner that is easily understandable and accessible to residents of the state.
  • Disclose scope 1, 2, and 3 GHG emissions following the implementation of regulations by the California Air Resources Board (CARB). Scope 1 GHG emissions are all direct GHG emissions from sources the reporting entity owns or controls. Scope 2 emissions are indirect GHG emissions from electricity purchased and used by the reporting entity. Scope 3 emissions are indirect GHG emissions (other than scope 2 emissions) from sources that the reporting entity does not own or directly control (e.g., emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, and use and disposal of the reporting entity’s products).
  • Ensure that their public disclosures have been independently verified by a third-party auditor, approved by CARB, with expertise in GHG emissions accounting.

CARB. The bill would require CARB to develop regulations governing the public disclosure of scope 1, 2, and 3 GHG emissions to the secretary of state by January 1, 2024. In developing these regulations, CARB must consult with the secretary of state, other government stakeholders, stakeholders representing consumer and environmental justice interests, and reporting entities that have demonstrated leadership in collecting information and reporting on and setting targets for the reduction of their own carbon footprint.

In addition, on or before July 1, 2026, CARB must prepare a report on the public disclosures made by reporting entities to the secretary of state that includes, among other specified information and analyses, a best reasonable estimate of the required annual aggregated GHG emissions levels of reporting entities that would be necessary to maintain global temperatures within 1.5 degrees Celsius of preindustrial levels.

Secretary of state. The bill would require the secretary of state to create a digital platform to provide access to all public disclosures submitted by reporting entities, as well as the aforementioned CARB report. The platform must be publicly accessible.

In addition, the secretary of state would be required to adopt regulations relating to the enforcement of these requirements, including the imposition of civil penalties for violations of these requirements, which would be assessed and recovered in a civil action brought by the attorney general in the name of the people of the state of California.

Next steps. The bill has been sent to the lower legislative body, the California State Assembly, “for committee work before a final version is produced and forwarded to Democratic Gov. Gavin Newsom for a signature,” says S&P Global

Once the bill reaches Newsom’s desk, he would have until September 30, 2022, to sign or veto bills passed by the legislature.

Mandatory scope 3 emissions reporting

If passed into law, the bill would create the first mandatory scope 3 emissions reporting requirements.  

Although the bill will require scope 3 reporting for regulated industry, it does not provide guidance for this difficult type of emissions reporting. “This leaves room for CARB, one of the world’s most influential air regulators, to interpret, clarify, and mandate how some of the US’ largest companies should account for their Scope 3 emissions, which may well influence how non-US-based companies measure such emissions for consistency purposes,” says a Lexology article by Latham & Watkins LLP. “In the absence of other mandatory Scope 3 emissions reporting frameworks (with the specific exception under Mandatory Reporting of Greenhouse Gas Emissions Regulation for fuels suppliers), the rules promulgated by CARB could become the de facto standard applicable to a large percentage of the world’s emissions.”

Far-reaching impacts

According to a press release issued by California State Senator Scott Wiener, one of the authors of the bill, “The bill will impact the vast majority of the country’s largest corporations, who almost all conduct business in California.”

According to the Latham & Watkins article, “These rules may also have effects beyond the entities directly regulated under SB 260. For example, while the bill would limit the reporting burden to ‘massive corporations’ with revenues exceeding $1 billion, these corporations may require smaller businesses that act as their third-party providers to align with any new GHG accounting practices to facilitate compliance with SB 260.”

And, because California often leads the way for other states, industry should anticipate and prepare for similar legislation in other states in the future.

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