GHG Emissions Reporting Bill Signed into Law

GHG reporting requirements are the first in the nation and could have national impact.

Governor Gavin Newsom signed into law SB 253, known as the Climate Corporate Data Accountability Act, which requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain. The requirement is the first in the nation, and it will have national reach, as companies without a physical presence in California would have to determine whether they “do business” in the state.

More than 5,000 companies large companies, both public and private, will be required to report their emissions, but the cost of compliance will likely impact smaller suppliers as well. Notably, the final version of the bill eliminated penalties for any misstatements in Scope 3 emissions reporting until 2030. Penalties between 2027 and 2030, however, will be assessed up to $500,000 for failure to file the report.

Calculating and Reporting Emissions

The bill requires the California Air Resources Board (CARB) to develop and adopt regulations requiring U.S. partnerships, corporations, limited liability companies, and other business entities that do business in California and have total annual revenues of more than $1 billion to disclose their scope 1, 2, and 3 GHG emissions publicly. CARB must develop the regulations by January 1, 2025, and disclosure of scope 1 and 2 emissions will begin during 2026 and disclosure of scope 3 emissions will begin by 2027. The bill also requires CARB, on or before January 1, 2030, to review these deadlines, evaluate trends in scope 3 emissions reporting, and to consider changing the deadlines.

Reporting entities must disclose their GHG emissions in a manner that is easily understandable and accessible. They will have to measure and report their emissions using the Greenhouse Gas Protocol standards and guidance. This includes the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard that were developed by the World Resources Institute and the World Business Council for Sustainable Development. They will also have to use Scope 3 emissions calculations that detail an “acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its scope 3 emissions calculations.”

Third-Party Assurances

Reporting entities must also ensure that their public disclosures have been independently verified by the emissions registry or a third-party auditor that is approved by CARB. The third-party auditor must have “significant experience” in measuring, analyzing, reporting, or attesting to the emission of GHGs and sufficient competence and capabilities. Reporting entities must also pay an annual fee.

Companies will have to report Scope 1 and Scope 2 emissions with a “limited assurance level” beginning in 2026. They will then have to report with a “reasonable assurance level” beginning in 2030. Companies will have to report Scope 3 emissions at a “limited assurance” level beginning in 2030.

CARB Reporting

CARB must also contract with an emissions reporting organization to develop a reporting program to receive and make publicly available disclosures. CARB must then, on or before July 1, 2027, contract with the University of California, the California State University, a national laboratory, or another equivalent academic institution to prepare a report on the public disclosures made by reporting entities to the emissions reporting organization and the regulations. The report must then be submitted to the emissions reporting organization to be made publicly available on the digital platform required to be created by the emissions reporting organization.

Scope of Emissions

• Scope 1 emissions are all direct greenhouse gas emissions that stem from sources that a covered entity owns or directly controls, including, but not limited to, fuel combustion activities.

• Scope 2 emissions are indirect greenhouse gas emissions from electricity purchased and used by a covered entity.

• Scope 3 emissions are indirect greenhouse gas emissions, other than scope 2 emissions, from activities of a covered entity that stem from sources that the covered entity does not own or directly control and may include, but are not limited to, emissions associated with the covered entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage.

Doing Business in California

The law does not define what it means to “do business” in California, but the California Franchise Tax Board states that a company is doing business in California if it (1) engages in any transaction for the purpose of financial gain within California; (2) is organized or commercially domiciled in California; or (3) its California sales, property or payroll exceeds certain amounts. The California tax code under Regs. Tit. 18, § 23101 defines “doing business” for a corporation as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”

Criticism

Mary Nichols, former chair of CARB, issued a letter to legislative leaders in support of the bill and CARB’s ability to implement it. Several corporate leaders also registered support. The CalChamber and the Western States Petroleum Association, however, opposed it. They cited the impact on small and medium sized businesses, the “inherently inaccurate” data, and the likelihood of double counting in Scope 3 data. Others noted that spending time and resources on reporting will reduce emissions.

Additionally, there were concerns over the uncertainty over Scope 3 emissions. The calculations for Scope 3 are not accurate, as companies need information from third parties, including suppliers and customers, to assess their emissions. The third-party requirement also places additional costs on smaller companies that are part of a larger company’s supply chain. These companies would have to determine the impact of their emissions to the larger company’s Scope 3 emissions.