CLIMATE ACCOUNTABILITY OR REGULATORY OVERREACH: CARB’S CLIMATE DISCLOSURE RULES AND THE LEGAL PUSHBACK
Author: Catherine Prell, Senior Editor
In October of 2023, California Governor Gavin Newsom signed Senate Bill 253, the Climate Corporate Accountability Act[i], and California Senate Bill 261, the Climate-Related Financial Risk Act.[ii] Together, these bills are referred to as the “Climate Accountability Package.”[iii] The Climate Accountability Package put into motion the first climate-related disclosure requirements for U.S. companies doing business within the state of California.[iv] The statutes require numerous businesses within the state to disclose their Greenhouse Gas (“GHG”) emissions and climate-related financial risk information.[v] Even though the regulations are still under development, compliance with these statutes is due to begin in January 2026.[vi] The California Air Resources Board (“CARB”) has framed this as a soft launch, requiring companies to make a good faith effort to meet the initial legal obligations.[vii]
Several factors determine whether a company is subject to the disclosures and regulations required by SB 253 and SB 261.[viii] First is whether the company is doing business within the state of California.[ix] While “doing business” has not been defined yet, CARB is considering using the definition in Revenue and Tax Code § 23191(a), (b).[x] Second is whether a company’s annual revenue exceeds a threshold amount.[xi] Companies with more than $500 million in annual revenue must comply with SB 261, the Climate-Related Financial Risk Act, while companies with more than $1 billion in annual revenue must comply with both SB 261 and SB 253, the Climate Corporate Data Accountability Act.[xii] To determine which revenue threshold a company falls under, CARB will consider all of a company’s revenue, not just the amount derived from business within California, and the determination will be based on the company’s revenue from the prior fiscal year.[xiii]
SB 253 requires all covered entities to disclose their GHG emissions across three categories: [xiv] Scope 1, Scope 2, and Scope 3.[xv] Scope 1 emissions include direct GHG emissions from company owned and controlled assets.[xvi] Scope 2 emissions encompass indirect GHG emissions, such as electricity used by the business.[xvii] Scope 3 emissions are the most comprehensive category, covering all indirect upstream and downstream GHG emissions from sources that the business does not own or directly control.[xviii] These include purchased goods and services, business travel, employee commutes, product processing, and use of sold products.[xix]
The extremely broad definition of Scope 3 reporting requirements has the potential to impact businesses that would not otherwise qualify to report their GHG emissions.[xx] This is because their operations could be indirect upstream or downstream emissions for a covered business.[xxi] Since the covered business must report, all of their suppliers, customers, and distributors, must also report to CARB, leading to a wide range of companies not initially covered having to put forth these reports. As a result, even if a company does not fall under SB 253 because its revenue is under $1 billion, it will be required to produce certain emissions data in a form that its customers can use to comply with their obligations.
SB 261 requires covered entities to compile and submit reports disclosing their climate-related financial risks.[xxii] In addition to identifying these risks, businesses must also disclose any measures they have taken to mitigate them.[xxiii] These reports are due to CARB by January 2026 and must be posted on the business’ website. However, significant uncertainty remains regarding the specific reporting requirements and implementation details.
Due to concerns about the scope of these requirements, many businesses that operate in California have challenged CARB’s implementation of the laws.[xxiv] In January of 2024, the California Chamber of Commerce and other business groups sued the State of California and CARB, challenging the constitutionality of SB 253 and SB 261.[xxv] Plaintiffs claim the two laws violate the First Amendment,[xxvi] the Supremacy Clause,[xxvii] and the Dormant Commerce Clause.[xxviii]
Plaintiffs argue that both laws unconstitutionally compel speech in violation of the First Amendment. They contend that the statutes represent an attempt to regulate GHG emissions, which fall exclusively within federal jurisdiction pursuant to the Clean Air Act––a concept supported by federalism principles embodied within the US Constitution.[xxix] In their complaint, plaintiffs stated:
“Senate Bills 253, and 261 impermissibly compel thousands of businesses to make costly, burdensome, and politically fraught statements about ‘their operations, not just in California, but around the world,’ Assembly Comm. On Nat’l Res., Analysis of SB 261 (2023-2024 Reg. Sess.) July 7, 2023, at 6, in order to stigmatize those companies and change their behavior.”[xxx]
The plaintiffs further contend that the laws conflict with already existing federal law and impermissibly intrude upon Congress’ constitutional authority to regulate interstate commerce.[xxxi]
The Court dismissed both the Supremacy Clause and Dormant Commerce Clause challenges to SBs 253 and 261.[xxxii] The Dormant Commerce Clause is a legal doctrine that is inferred from the Commerce Clause of the U.S. Constitution that prohibits states from enacting laws that unduly burden or discriminate against interstate commerce. The Supremacy Clause establishes that federal law preempts any conflicting state law, preventing state from interfering with federal authority.
The Court dismissed these constitutional challenges to SB 253 without prejudice due to lack of standing and ripeness.[xxxiii] The Court found that until CARB implements regulations, SB 253 does not mandate any emissions disclosures and therefore poses no actual threat of prosecution.[xxxiv] Once CARB implements the regulations, plaintiffs may reassert these claims.[xxxv]
The Court dismissed the Supremacy Clause claim against SB 261 with prejudice, holding that no federal law preempts SB 261’s compelled disclosure of climate-related financial risks.[xxxvi] The Court reasoned that SB 261 does not directly regulate GHG emissions but instead mandates the disclosure of climate-related financial risks.[xxxvii] Furthermore, the Court concluded that SB 261 does not compete with the Clean Air Act because SB 261 does not compete with the Clean Air Act because it does not set emission limits, which is the exclusive authority of the Environmental Protection Agency.[xxxviii]
The Court also dismissed the Dormant Commerce Clause claim with prejudice for two reasons. First, SB 261 does not discriminate against interstate commerce because the statute applies equally to both in-state and out-of-state businesses. Second, the plaintiffs failed to allege a significant burden on interstate commerce.[xxxix]
On August 13, 2025, the Court denied Plaintiffs’ Motion for Preliminary Injunction.[xl] Plaintiffs sought to preliminarily enjoin enforcement of SB 253 and SB 261 based on a First Amendment challenge.[xli] Both laws compel commercial speech, which triggers First Amendment scrutiny.[xlii]
The Court found that SB 253 compels purely factual and uncontroversial information, leading it to apply rational basis review, the lowest level of scrutiny.[xliii] Regarding SB 261, the Court found that it compels subjective, predictive assessments of climate-related financial risk, which are not purely factual, therefore subjecting it to a higher level of review, intermediate scrutiny.[xliv] The Court concluded that plaintiffs are unlikely to succeed on their First Amendment challenge to SB 253 because the disclosures are factual, non-misleading, and advance a legitimate state interest. held that SB 253 will likely be found.[xlv] The Court further held that SB 261 survives intermediate scrutiny because the state interest in climate-risk transparency is substantial and the law was found to have been reasonably tailored to that interest.[xlvi]
While CARB continues to finalize the requirements and definitions for SBs 253 and 261, the laws remain on track for implementation in January 2026. Absent successful judicial intervention, covered entities must prepare to comply with these disclosure requirements despite ongoing legal challenges and concerns from affected businesses.
[i] Cal. Sen. Bill No. 253 (2025), ch. 405 (Cal. 2025).
[ii] Cal. Sen. Bill No. 261, ch. 383, 2023 Stat. (Cal. 2023)
[iii]Purdue Global Law School, California Climate Accountability Package (blog), https://www.purduegloballawschool.edu/blog/news/california-climate-accountability-package (last visited Oct. 13, 2025).
[iv] Id.
[v] Id.
[vi] Montoya, California’s Climate Disclosure Rulemaking Enters a New Phase, Frost Brown Todd (Jul. 1, 2025), https://frostbrowntodd.com/californias-climate-disclosure-rulemaking-enters-a-new-phase/ (last visited Oct. 13, 2025).
[vii] Persefoni, CARB FAQs Confirm: Good Faith Efforts Matter for SB 261 Compliance (July 21, 2025), https://www.persefoni.com/de/blog/carb-faqs-sb-261-compliance (last visited Oct. 13, 2025).
[viii] California Air Resources Board, Resources | California Corporate Greenhouse Gas (GHG) Reporting and Climate-Related Financial Risk Disclosure Programs, (Oct. 28, 2025), https://ww2.arb.ca.gov/our-work/programs/corporate-ghg-reporting/resources.
[ix] Deloitte Development LLC, California Air Resources Board Hosts Second Workshop to Discuss Corporate Greenhouse Gas Disclosures and Climate-Related Financial Risk Reporting (Aug. 26, 2025), https://dart.deloitte.com/USDART/home/news/all-news/2025/aug/california-air-resources-board-hosts-second-workshop-corporate-greenhouse-gas-disclosures-climate-re.
[x] Id.
[xi] Id.
[xii] Id.
[xiii] California Air Resources Board, California Corporate Greenhouse Gas Reporting and Climate-Related Financial Risk Disclosure Programs: Frequently Asked Questions Related to Regulatory Development and Initial Reports (July 9, 2025), https://ww2.arb.ca.gov/sites/default/files/2025-07/FAQs%20Regarding%20California%20Climate%20Disclosure%20Requirements.pdf.
[xiv] Id.
[xv] Id.
[xvi] Id.
[xvii] Id.
[xviii] Cal. Air Res. Bd., FAQs Regarding California Climate Disclosure Requirements (July 9, 2025), https://ww2.arb.ca.gov/sites/default/files/2025-07/FAQs%20Regarding%20California%20Climate%20Disclosure%20Requirements.pdf.
[xix] Id.
[xx] Id.
[xxi] Id.
[xxii] California Air Resources Board, Climate-Related Financial Risk Disclosures: Draft Checklist (Sept. 2, 2025), https://ww2.arb.ca.gov/sites/default/files/2025-09/Climate%20Related%20Financial%20Risk%20Report%20Checklist.pdf.
[xxiii] Id.
[xxiv] Chamber of Commerce of the United States of America v. Cal. Air Res. Bd., No. 2:24-cv-00801 (C.D. Cal. Jan. 30, 2024)
[xxv] Id.
[xxvi] Id.
[xxvii] Id.
[xxviii] Id.
[xxix] Chamber of Commerce v. CARB. (Jan. 30, 2024).
[xxx] Id.
[xxxi] Id.
[xxxii] Joshua Bledsoe et al., Court Dismisses Portions of Lawsuit Against California Climate Disclosure Laws, Environment, Land & Resources (Feb. 2025), https://www.globalelr.com/2025/02/court-dismisses-portions-of-lawsuit-against-california-climate-disclosure-laws/.
[xxxiii] Id.
[xxxiv] Id.
[xxxv] Id.
[xxxvi] Id.
[xxxvii] Bledsoe et al., Court Dismisses Portions of Lawsuit, supra xxxii.
[xxxviii] Id.
[xxxix] Id.
[xl] Bledsoe et al., Federal Court Rejects Preliminary Injunction Against California Climate Disclosure Laws, JDSupra (Aug. 19, 2025), https://www.jdsupra.com/legalnews/federal-court-rejects-preliminary-1669436/ (last visited Oct. 13, 2025).
[xli] Id.
[xlii] Id.
[xliii] Id.
[xliv] Id.
[xlv] Id.
[xlvi] Id.