California Climate Bill Targets Business, Utility Emissions
New climate legislation in California, known as the Climate Corporate Data Accountability Act (SB 253), was signed by Gov. Gavin Newsom on Oct. 7. The law—the first of its kind in the U.S.—requires the largest entities doing business in California to report all greenhouse gas (GHG) emissions associated with their products. Underlying SB 253 is the notion that a better understanding of the impact of both production and consumption will ultimately reduce GHG emissions by allowing for better, more-informed choices by the public.
SB 253 applies to all companies doing business in California that have in excess of $1 billion in revenue for a given fiscal year. Because of the size of the California marketplace, the legislation will reach far more than California-based companies, extending its impact to many mid- and large-sized groups by virtue of a sales or other business presence in the state.
COMMENTARY
Starting in 2026, companies subject to SB 253 are required to report annually their Scope 1 and Scope 2 emissions; Scope 3 reporting requirements are added in 2027. Scope 1 emissions are a company’s direct emissions from its own processes, such as emissions from a manufacturing plant’s operations (such as the combustion of fossil fuel to run a steam boiler). Scope 2 emissions are those generated by utility suppliers to the company, such as emissions from “electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.” Scope 3 emissions are also indirect, and include upstream and downstream emissions generated by suppliers, transportation (including supply delivery, business travel, and employee commuting), and users of a product. The reporting entity must determine and report its emissions “in conformance with the Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Corporate Value Chain (Scope 3) Accounting and Reporting Standard.”
The timeline to implement the law is aggressive, with the California Air Resources Board (CARB) having until the end of 2024 to adopt implementing regulations. Beyond its normal rulemaking process, the board must consult with parties such as government stakeholders, investors, consumer and environmental justice organizations, and reporting entities.
The new law requires disclosures of Scope 1 and 2 emissions to be independently verified by a third-party auditor on a phased schedule reflecting “limited assurance” and “reasonable assurance” levels by 2026 and 2030, respectively. In general terms, reasonable assurance is the highest level of assurance, and involves an affirmative finding by the auditor that the information is materially accurate. Limited assurance involves a finding that the audit did not reveal evidence that the information was not materially accurate.
CARB officials are required to contract with a nonprofit “emissions reporting organization” tasked with creating a reporting program and digital platform to receive and publicly disclose emissions reports. SB 253 also relies on the creation of a robust market for third-party auditors with experience in measuring, analyzing, reporting, or attesting to the emission of GHGs.
It’s important to note that SB 253 is a reporting and disclosure statute—it does not require emission reductions. The underlying premise is that the mere requirement to publicly report data will drive companies to reduce their emissions numbers. The information generated under SB 253 could also serve to inform and target future legislation and regulations.
How does SB 253 compare to the proposed Securities and Exchange Commission (SEC) federal reporting regulations? The SEC intends to finalize by year-end 2024 the agency’s proposed rule that requires all publicly traded companies to disclose at least Scope 1 and Scope 2 emissions, as well as the business and financial risks from climate change and how they are addressing those risks. Issues of alignment between the federal and California rules are anticipated. The SEC’s rule would apply only to publicly traded companies, while SB 253 applies to private as well. Private companies may constitute the lion’s share of businesses impacted by the California legislation that would not otherwise be subject to regulation by the SEC.
A flurry of regulatory action is likely given the short timeframe for CARB to issue regulations. The board is likely to begin with workshops to seek input on key issues from stakeholders, and after that process concludes, CARB will issue and seek comment on proposed regulatory text and key issues. Companies and their trade associations will want to participate in the workshops and formal rulemaking process to ensure their input is considered, and to preserve options to challenge any final regulatory program in court, if warranted.
Whether or not they participate in the rulemaking, companies will want to review the proposed regulations to prepare for implementation of the requirements. Given the short compliance deadlines set by SB 253, companies that get ahead of the curve by developing their internal tracking process based on the proposal will typically be in a better position to achieve compliance and be ready for the 2026–2027 rollout of the reporting program.
—Shannon S. Broome ([email protected]) is managing partner of Hunton Andrews Kurth LLP’s San Francisco office, and leads the firm’s California environmental practice. Elisabeth R. Gunther ([email protected]) is a senior attorney in the firm’s San Francisco office.