California Climate Disclosure: CARB Moves from Guidance to Proposed Rules

On December 9, 2025, the California Air Resources Board (CARB) published a notice of public hearing to consider the proposed California Corporate Greenhouse Gas Reporting and Climate-Related Financial Risk Disclosure Initial Regulation, including a detailed staff report. The proposal formalizes definitions, fees, and a first-year reporting deadline for compliance with Senate Bill 253 (greenhouse gas (GHG) emissions) and Senate Bill 261 (climate-related financial risk) and is largely consistent with recent workshops and informal guidance. CARB scheduled a public hearing for February 26, 2026, and the public comment period on the proposed regulations will run from December 26, 2025, to February 9, 2026.

Importantly, the current proposal is subject to potential revisions: it is a notice of proposed action and not yet final. The proposed regulation must go through the formal comment period, potential responses to comment and revisions, and final adoption under the state’s administrative-procedure framework. Key elements remain open for further rulemaking, including data assurance requirements following the first reporting cycle, enforcement provisions, and reporting processes for subsequent years. Given recent legal developments—including the injunction on enforcement of SB 261 (covered in our November 21, 2025 LawFlash)—the timing and scope of climate-risk disclosures remain uncertain.

What the Proposed Regulation Covers

The proposed regulation sets forth for the first time in a formal proposed rule CARB’s comprehensive view of how it intends to operationalize SB 253 and SB 261 (beyond prior nonbinding guidance and workshops discussing what the eventual regulations might look like, which we covered in our September 17, October 20, and November 21, 2025 LawFlashes). The proposed regulation addresses a number of important topics, including who is covered, what must be reported, and how compliance will be funded.

Scope & Applicability

Covered Entities and Statutory Revenue Thresholds

Under the proposed regulation, the disclosure requirements apply to US-based entities that both exceed specified annual revenue thresholds and “do business in California.” The applicable revenue thresholds mirror those prescribed in the respective statutes—i.e., more than $1 billion in annual revenue under SB 253, and more than $500 million in annual revenue under SB 261.

Revenue Definition and Two-Year Measurement Approach

The proposed rule also includes guidance on how revenue is measured and comports with recent, informal guidance issued by CARB. The rule defines “revenue” as gross receipts under California Revenue & Taxation Code § 25120(f)(2), and the definitions of both “covered entity” and “reporting entity” provide that the applicable revenue amount is determined based on the lesser of the entity’s revenue in the two preceding fiscal years. According to the staff report, CARB adopted this two-year measurement approach to address potentially significant year-over-year revenue fluctuations, including those arising from one-time transactions, such as the sale of property or corporate assets. By requiring entities to meet the applicable revenue threshold for two consecutive fiscal years, CARB aims to reduce the likelihood that companies will move in and out of the reporting program due to temporary or anomalous revenue events and to promote greater stability and predictability in program applicability.

Rationale for Using Gross Receipts

The staff report further explains CARB’s rationale for defining revenue as gross receipts rather than as net income or revenue after operating expenses. CARB’s position is that gross receipts are a more appropriate metric for identifying companies with large-scale operations and potentially significant carbon footprints. In particular, they are more appropriate for companies operating on thin margins but with substantial sales volume—such as retailers—a revenue definition that deducted operating costs could understate the scale of business activity and inappropriately exclude large companies from regulation. CARB also notes that gross receipts are verifiable for both public and private companies through Franchise Tax Board tax filings and align with metrics commonly used by major data-tracking and reporting industries.

“Doing Business in California” Standard

For purposes of determining whether an entity is “doing business in California,” CARB proposes adopting the definition contained in the California tax code (Revenue & Taxation Code § 23101), which generally treats an entity as doing business in the state if it actively engages in transactions for financial gain or profit within California. More specifically, the staff report explains that CARB proposes to define “doing business in California” as meeting the general definition of “doing business” under section 23101(a) and satisfying one of the criteria in subsections 23101(b)(1) or (b)(2), which CARB characterizes as providing substantial indicators of meaningful business activity within the state.

Excluded Activities and Entities

The proposal also includes an express exemption for business entities whose only business activity in California consists of employee compensation or payroll expenses, including teleworking employees. In addition, the regulation explicitly excludes tax-exempt nonprofits and charities, governmental entities, majority-owned government subsidiaries, and certain wholesale-electricity-only businesses from coverage. The staff report further clarifies that CARB intentionally excluded the additional “doing business” criteria set forth in sections 23101(b)(3) and (b)(4), which relate to in-state property holdings and payroll, in order to ensure that regulated entities have a significant economic nexus to California. CARB also notes that aligning the definition with existing tax standards allows applicability to be verified using tax documentation already available to the Franchise Tax Board, reducing administrative burden and enhancing enforceability.

Parent-Subsidiary Relationships and Corporate Structure

The staff report also addresses corporate structures by proposing definitions of “parent” and “subsidiary,” which are not expressly defined in the underlying statutes but are necessary to establish the scope of reporting and fee obligations. CARB proposes defining a subsidiary as a business entity over which another entity has ownership or control through a direct corporate association, consistent with definitions used in CARB’s Cap-and-Invest program and informal guidance previously issued by CARB. A parent entity is defined as one that holds such ownership or control and is able to influence a subsidiary’s operations, management, or financial decisions, even where the subsidiary operates as a separate legal entity.

Reporting Obligations & Timeline

Scope of Emissions Reporting

With respect to GHG emissions reporting under SB 253, the proposed regulation confirms that covered entities must report Scope 1 and Scope 2 emissions annually, with Scope 3 reporting beginning in 2027, as required by statute. The proposed regulation sets August 10, 2026, as the deadline for the first Scope 1 and Scope 2 emissions report. This deadline is consistent with CARB’s most recent guidance at its November 2025 public workshop but represents an extension of the June 30 reporting deadline that CARB had suggested in its earlier guidance.

First-Year Reporting Expectations and Enforcement Discretion

The proposed rule also is consistent with CARB’s more recent guidance regarding first-year reporting expectations. In the proposed regulations, CARB confirms that Scope 1 and Scope 2 emissions for this first reporting cycle may be based on “best-available data.” Accordingly, if a company has not obtained limited assurance, it need not obtain such assurance for this first reporting cycle. The staff report explains that this approach reflects CARB’s decision to exercise enforcement discretion for the first reporting cycle, consistent with an Enforcement Notice issued in December 2024.

Entities Not Collecting Data as of the Enforcement Notice

The staff report further clarifies that entities that were not collecting, and were not planning to collect, Scope 1 and Scope 2 emissions data at the time the Enforcement Notice was issued are not required to submit such data for the first reporting cycle. CARB describes this approach as intended to reduce uncertainty and support companies as they transition into compliance with the new reporting regime.

In addition, the staff report proposes a February 1, 2026 cutoff date to determine which fiscal year’s emissions data must be reported for the first reporting cycle. Under this approach, companies with a fiscal year ending on or before February 1, 2026 would report data for the fiscal year ending in the current calendar year, while companies with fiscal years ending after February 1, 2026 would report data for the fiscal year ending in the prior calendar year, with the option to report more recent data if available. CARB explains that this framework is intended to ensure at least six months between the end of the relevant fiscal year and the reporting deadline, providing additional flexibility and accommodating a wide range of fiscal year structures.

Future Rulemaking and Assurance Requirements

We expect CARB to provide additional details regarding the required assurance level, enforcement, and requirements for future reporting cycles in its subsequent rulemaking.

Status of SB 261 Climate-Risk Reporting

CARB acknowledges in its proposed rules that enforcement of SB 261 has been paused and, therefore, CARB “will not enforce SB 261 until the injunction is lifted.” Nonetheless, the proposed rules note that “CARB will continue this rulemaking to consider the Proposed Regulation for adoption.” The staff report references a SB 261 checklist released in September 2025 that offers additional guidance for potentially regulated entities.

Fees and Funding

To fund the administration of the disclosure programs, the proposed regulation establishes two new funds: (1) a Climate Accountability & Emissions Disclosure Fund for SB 253; and (2) a Climate-Related Financial Risk Disclosure Fund for SB 261. The proposal also establishes a detailed fee-assessment framework, under which fees are linked to revenue and apply only to entities that meet the applicable revenue threshold in two consecutive fiscal years.

What Companies Should Do Now

Although the regulation is not yet final and certain obligations remain subject to ongoing litigation and future rulemaking, companies that may be in scope should begin evaluating near-term compliance readiness and strategic planning considerations. Companies should consider doing the following:

1. Evaluating whether SB 253 and 261 applies to their business or businesses, in light of CARB’s updated, proposed definitions of “doing business in California” and “revenue.”
2. Ensuring their GHG data-collection infrastructure is operational, including Scope 1 and 2 data flows, to enable compliance with the August 10, 2026, reporting deadline under SB 253.
3. For companies subject to SB 261, evaluating whether to finalize preparation of their reports, or do so only if and when the temporary injunction is lifted.
4. Initiating preparation of comments on the proposed regulation, if desired. The public comment period opens on December 26, 2025, and ends on February 9, 2026.
5. Budgeting for program fees. Once fee methodology is finalized, companies will need to plan for CARB’s administrative costs, which will be assessed annually (or as specified).

How We Can Help

Morgan Lewis lawyers are closely tracking CARB’s rulemaking and related litigation and can assist companies in evaluating applicability under the proposed regulations, preparing for SB 253 emissions reporting, monitoring developments related to SB 261 climate-risk disclosures, and assessing governance, disclosure, and compliance strategies as California’s climate-disclosure framework continues to evolve. Please reach out to your Morgan Lewis contact or any of the authors of this LawFlash if you would like to discuss how these developments may affect your organization.