On October 7, 2023, California Governor Gavin Newsom signed the Climate Corporate Data Accountability Act (CCDAA or Act), which will impose greenhouse gas (GHG) emissions reporting obligations on California companies with annual revenues over $1 billion. Although the Act targets large companies doing business in California, its requirement for covered businesses to report scope 3 emissions will likely pull smaller suppliers into the fold. Suppliers should familiarize themselves with GHG emissions tracking and reporting methodologies to position their businesses effectively as the CCDAA and other expected climate-reporting legislation and regulations come online.
The CCDAA requires the California Air Resources Board (CARB) to adopt regulations before January 1, 2025. By that date, public and private companies that exceed $1 billion in annual revenue and do business in California will likely have to publicly disclose their GHG emissions.
The Act does not define what it means to “do business in California.” However, the CCDAA will likely apply to a large number of businesses if the CARB applies the California Franchise Tax Board’s expansive definition of “doing business” in California, which includes:
- engaging in any transaction for the purpose of financial gain within California;
- being organized or commercially domiciled in California; or
- having California sales, property, or payroll that exceed certain amounts found here.
Companies to which the Act applies (“Reporting Companies”) are required to report scopes 1 and 2 emissions annually, starting in 2026 for emissions in the prior fiscal year, and to report scope 3 emissions annually starting in 2027 for the prior fiscal year.
The CCDAA defines scope 1 emissions as “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.”
Scope 2 emissions are defined as “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”
Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.”
Under the CCDAA, emissions must be calculated using the GHG Protocol Corporate Accounting and Reporting Standard and the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
Reporting Companies will be subject to administrative penalties of up to $500,000 per reporting year if they fail to file their annual disclosures on time. However, administrative penalties will not be applied to late filings of scope 3 emissions prior to 2030 or to misstatements with regard to scope 3 emissions if made with a reasonable basis and disclosed in good faith.
The GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (the “Scope 3 Standard”)
The Scope 3 Standard provides requirements and guidance for companies and other organizations to prepare and report a GHG emissions inventory that includes indirect emissions that result from supply chain activities (i.e., scope 3 emissions).
Reporting Companies will have to account for all scope 3 emissions or disclose and justify any exclusions. This includes emissions of carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride if they are emitted in the company’s supply chain.
The Scope 3 Standard divides scope 3 emissions into upstream and downstream emissions and categorizes scope 3 emissions into 15 distinct categories. Reporting Companies will be required to disclose scope 3 emissions by scope 3 category. The listed scope 3 categories are as follows:
|Upstream or downstream||Scope 3 category|
|Upstream||1. Purchased goods and services
2. Capital goods
3. Fuel- and energy-related activities (not included in scopes 1 or 2)
4. Upstream transportation and distribution
5. Waste generated in operations
6. Business travel
7. Employee commuting
8. Upstream leased assets
|Downstream||9. Downstream transportation and distribution
10. Processing of sold products
11. Use of sold products
12. End-of-life treatment of sold products
13. Downstream leased assets
Under the Scope 3 Standard, Reporting Companies must account for minimum boundaries when they identify emissions in each scope 3 category.
- For some scope 3 categories (e.g., purchased goods and services, capital goods, fuel- and energy-related activities), the minimum boundary includes all upstream emissions of purchased products to ensure the inventory captures the GHG emissions of products wherever they occur in the life cycle.
- For other categories (e.g., transportation and distribution, waste generated in operations, business travel, employee commuting, leased assets, franchises, use of sold products, etc.), the minimum boundary includes the scope 1 and scope 2 emissions of the relevant value chain partner (e.g., the transportation provider, waste management company, transportation carrier, employee, lessor, franchisor, consumer, etc.).
For each scope 3 category, Reporting Companies are required to report the percentage of emissions calculated using data obtained from suppliers or other value chain partners. The Scope 3 Standard acknowledges the unlikelihood that all of a company’s relevant suppliers will be able to provide GHG inventory data to the company. In such cases, the Scope 3 Standard provides that companies should encourage suppliers to develop GHG inventories in the future and may communicate their efforts to encourage more suppliers to provide such data in the public report.
Next Steps for Suppliers
Some suppliers may not meet the definition of a Reporting Company under the CCDAA because their revenues do not exceed $1 billion, but they might do business with entities that will have to comply with the Act. Given that companies subject to the Act will have to begin reporting on the emissions of their suppliers starting in 2027, the suppliers may begin to see requirements that they provide information regarding their GHG emissions to their customers that are subject to the CCDAA. As a result, many companies not directly subject to the Act may have to begin tracking their GHG emissions to meet the demands of commerce subject to the legislation. It is expected that other laws and regulations, including the SEC’s proposed climate change disclosure rulemaking and proposed GHG reporting obligations for certain government contractors, will also include requirements that ultimately impose GHG data collection obligations on suppliers. To position themselves to respond to these new obligations, suppliers should familiarize themselves with the Scope 3 Standard and GHG tracking and reporting methodologies.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
 See Doing business in California | FTB.ca.gov.
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