The WRI/WBCSD1 have invited stakeholders to have a say on potential updates to the GHG Protocol standards – which are the foundation of corporate carbon accounting. As an asset manager with clients that have set climate objectives, we are strong advocates for this consultation and believe there are areas of improvements that can meaningfully improve GHG data quality.
The consultation concerns the following standards:
|Standard & Consultations
|Corporate Accounting and Reporting Standard
|Used by companies and other organisations preparing a GHG emissions inventory.
|Scope 2 Guidance
|Relevant to the methodologies and guidance to calculate emissions associated with the use of purchased electricity and heat.
|Corporate Value Chain (Scope 3) Standard and Scope 3 Calculation Guidance
|Relevant to the methodologies and guidance to calculate supply-chain emissions.
|Market-based accounting approaches
|Represents a range of methodologies that consider the use of market instruments such as Renewable Energy Certificates and offsets.
These standards have been the critical foundations for stakeholders to measure and manage GHG emissions. As consumers of corporate emissions data, we seek to measure and manage emissions exposure in our investments. abrdn also directly calculates emissions in its real asset portfolios and calculates and reports on its own corporate operational emissions2.
While the GHG Protocol has been fundamental to improving GHG data, there remain weaknesses which leave too much room for manipulation and inconsistencies:
1. Addressing Concerns Regarding Consistency
Before calculating emissions, a corporate must first define the ‘organisational boundary’. Effectively drawing up the boundary within which carbon data will be measured, which it will collect data from. Currently corporates are given the choice between three methods:
- Equity Share approach: a company accounts for GHG emissions from operations according to its share of equity in the operation.
- Financial Control approach: The corporate has financial control if it can direct the financial and operating policies of the asset with a view to gaining economic benefits.
- Operational Control approach: A company has operational control over an operation if it has the full authority to implement its operating policies.
This can result in significantly different outcomes. For example, under the operational control approach, a company accounts for 100% of emissions associated with any asset it operates, regardless of ownership of the asset. Another company may own 80% of the assets equity and take an equity share approach, this company would then account for 80% of the assets emissions. We can see here emissions have been double counted. The same can happen in reverse, whereby emissions are not accounted for because of varying methodologies.
Having multiple approaches introduces numerous problems for investors seeking to use carbon data.
- Financial Risk: As investors we are concerned with carbon as a financial risk (e.g. through a carbon tax or carbon market), therefore, it is crucial the accounting methodology reflects the potential for financial risk. For example, under the EU Emissions Trading Scheme, it is the operator of a regulated installation that must surrender carbon allowances3.
- Comparability: It is not possible to accurately compare the emissions of two companies using different approaches.
- Double Counting & No Counting: When two or more companies hold interests in the same asset but use different methods, emissions from that asset may be double counted or not counted at all.
While the standard does not explicitly favour a single approach, we call for the GHG Protocol to strive for a single consistent method. We suggest that engaging with regulators would be appropriate to best align climate policy and accounting methodologies.
2. Concerns around market-based methods
Currently, the GHG Protocol standard on Scope 2 allows for market-based and location-based methods. To capture real-world atmospheric emissions the location-based method is clearly superior. In contrast, market-based methods open up the door to creative accounting.
The pitfalls of market-based methods are well documented in academic literature4, 5, 6. When abused, the method enables corporates to artificially deflate emissions, often at the detriment to real-world decarbonisation. Often this is achieved with the use of renewable energy certificates (RECs). There are several issues with the use of RECs, the most relevant being the concept of additionality. For RECs to be additional, the certificate must trigger investment in renewable energy generation that would not have occurred otherwise. This is more likely to be achieved with power purchase agreements (PPAs) instead of RECs7.
Regardless of whether a corporate buys a REC or PPA, there is no actual change as to how electricity is physically delivered to the corporate. While a corporate does not have control over the source of the electricity physically delivered, they do have control over energy efficiency measures which have a real-world impact and would only show up in the location-based method.
We strongly advocate that the GHG Protocol should make location-based methods mandatory with market-based methods being optional.
We strongly welcome and commend the efforts of the WRI/WBCSD to consult stakeholders on updates to the GHG Protocol. While the standard has been extremely important to date, further improvements are important. We want to stress the importance of transparency and simplification where possible to ensure the standards produce the most credible methodologies for both the producers and users of GHG data.
- World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD)
- https://www.abrdn.com/docs?editionId=afb53552-b713-47a1-888b-ef5edb35b776Opens in new window
- Greenhouse gas emission allowance trading system (europa.eu)Opens in new window
- Creative accounting: A critical perspective on the market-based method for reporting purchased electricity (scope 2) emissions - ScienceDirectOpens in new window
- Renewable energy certificates allow companies to overstate their emission reductions | Nature Climate ChangeOpens in new window
- Renewable energy certificates threaten the integrity of corporate science-based targets | Nature Climate ChangeOpens in new window
- Renewable energy projects will often require PPAs in place to receive financing from investors, making them important for renewable projects to come online