December 2013 Letter

Greenhouse gas (GHG) reporting is an important corporate tool for documenting both GHG emissions and emissions reduction efforts. Corporate GHG reporting allows consumers, investors, and other stakeholders to evaluate corporate performance against climate change targets and other commitments. Such reporting has become a key component of corporate climate and sustainability strategies since the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) published the Greenhouse Gas Protocol Corporate Standard in 2001.

Over the last two years WRI has been engaged in a stakeholder-driven process to provide additional guidance regarding the reporting of Scope 2 emissions (i.e., emissions associated with purchased energy, primarily electricity). It is an important effort because Scope 2 emissions constitute the bulk of GHG emissions for many companies.

Unfortunately, WRI’s stakeholder driven process appears likely to deliver final Scope 2 guidance that contradicts the very purpose of corporate GHG reporting. At issue is the use of “contractual” emissions factors in calculating Scope 2 emissions, allowing reporting entities to “choose” the origin of their electricity, irrespective of the physical and economic realities governing the electricity grid. Contractual emissions factors result in fundamentally misleading Scope 2 emissions being reported to internal and external stakeholders; they simultaneously work against the promotion of corporate emissions reduction initiatives.1

The Problem in Brief

As noted in WRI’s 2004 Protocol guidance, “Users of GHG information will want to track and compare GHG emissions information over time in order to identify trends and to assess the performance of the reporting company” (WBCSD/WRI 2004, p.8). To fulfill that purpose, and to inform company decision making on energy matters, any Scope 2 reporting framework must provide a “true and fair” representation of corporate actions and emissions (WBCSD/WRI 2004, p.3).

Scope 2 emissions are a significant component of the GHG footprint for many companies. At the same time, options for controlling or reducing Scope 2 emissions may seem limited; companies cannot simply switch equipment or suppliers for grid electricity as they can for other goods they consume. The use of contractual Scope 2 emission factors appears to offer an appealing alternative: rather than merely reduce their grid electricity consumption, the idea is that companies can use emission factors based on contractual arrangements with specific generators (e.g., wind power projects), or based on purchasing Renewable Energy Certificates (RECs).

The problem with this approach is that emission factors based on contractual arrangements or REC purchases do not reflect the emissions actually caused by the reporting company’s activities. For all other reporting under the GHG Protocol, a physical relationship is presumed between a company’s activities and the emissions that result from those activities. This physical relationship is the basis for establishing a “true and fair” account of a company’s GHG emissions. A contractual approach to Scope 2 accounting breaks that fundamental relationship. It allows a company to lower its reported Scope 2 emissions without changing how it physically obtains electricity and without altering how electricity is delivered and sold into the grid. There is no evidence of any causal link between the vast majority of REC or green power purchases and the quantity of renewable energy produced.2

The result is a Scope 2 emissions report that has little evaluative or decision-making relevance to the company itself or to the company’s stakeholders. If a company purchases RECs and reports zero Scope 2 emissions, for example, the company no longer has an incentive to evaluate more concrete options for reducing Scope 2 emissions, such as energy efficiency improvements, and stakeholders end up being misled about important aspects of the company’s GHG performance.

The current draft Scope 2 GHG Protocol guidance (October 2013), in response to ongoing disagreement among stakeholders on the topic of contractual reporting, requires “dual reporting” of Scope 2 emissions using both contractual and grid-average emissions factors. Since the Scope 2 calculation based on the grid-average emissions factor can be deemphasized by the reporting company, including by presenting it only in a footnote, this “dual reporting” approach does not solve the problem of contractual reporting, and impedes rather than advances reporting transparency.

Closing

To be clear, the signatories to this letter are strong supporters of policies and voluntary initiatives that expand the production of renewable energy. However, it is critical to the legitimacy of corporate GHG reporting that Scope 2 emissions be calculated and reported on the basis of credible assumptions and sound logic (see Technical Annex and Q and A sections). Contractual approaches to Scope 2 reporting are not credible and should not be included in the final guidance under the GHG Protocol. In addition, such guidance where it already exists (e.g., CDP and USEPA) should be rescinded. To fail to do so endangers the legitimacy of the entire voluntary GHG emissions reporting process, and creates business and brand risk for companies reporting their emissions in good faith.

1. Other programs including the Carbon Disclosure Project (Carbon Disclosure Project 2013) and USEPA Green Power Program (USEPA 2010) have also issued guidance that roughly parallels the WRI draft guidance to allow “contractual reporting” of Scope 2 emissions.
2. A key question underlying the potential use of contractual arrangements like RECs in Scope 2 reporting is whether such contractual arrangements result in greater generation from, and investments in, zero-emissions electricity. Promoters of RECs and green power contracts argue they do (or alternatively that they eventually will, or that they at least theoretically could). There has never been empirical support for such a claim. To the contrary, recently published quantitative analyses conclusively demonstrate that there has been no relationship between REC markets in the United States and zero-emissions electricity generation (Gillenwater et al. 2013, Gillenwater 2014).


Signed (in alphabetical order),

Matthew Brander, Senior Research Fellow, University of Edinburgh Business School
Derik Broekhoff, Vice President, Climate Action Reserve (and former GHG Protocol team member)
Dr. Michael Gillenwater, Executive Director and Dean, GHG Management Institute (and core advisor to the revised edition of the GHG Protocol corporate standard)
Dr. Mark C. Trexler, Director, The Climatographers (and former President of Trexler Climate + Energy Services, which authored many early corporate GHG inventories)

We welcome serious discussion of this issue. To participate and share your insights, please leave your comments as a “reply” to this letter below.

If you would like to add your name, and thereby endorse, this letter, please email your full name, title, affiliation, and email address to Scope2openletter@gmail.com.

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