Q and A

Questions and Answers Regarding Scope 2 Reporting

There are a number of arguments that have been used to support the use of contractual emission factors for Scope 2 reporting, and the following identifies the problems inherent in each:

1.  Contractual emission factors should not be rejected on the grounds that they do not reflect actual emissions as attributional accounting does not always show actual changes in emissions either. For example, if a company does not take a flight the number of flights scheduled may not change, and actual emissions will not change.

The confusion in this argument is that attributional accounting is primarily concerned with allocating emissions (based on a physical-causal relationship), and is not concerned with quantifying changes in total emissions. In the case of the flight example, the company is justified in not receiving an allocation of emissions as it did not physically use the flight. This difference from the case with grid electricity is critical to understand, as REC-purchasers and those using other contractual approaches are still physically consuming grid electricity – which is equivalent to still being on the flight while claiming that they are not.

2.  It does not matter if scope 2 accounts do not reflect the emissions caused by the reporting company’s activities as companies can use either energy data or financial accounts to guide their decision-making. The problem here is that if a company purchases RECs and reports zero emissions, then the information in their greenhouse gas accounts no longer helps it make informed decisions about emission reduction opportunities (i.e., the accounts do not fulfil the core principle of relevance to decision-making). The company’s greenhouse gas accounts now indicate that reducing electricity consumption has no effect on its emissions.

This argument for contractual factors essentially admits that greenhouse gas accounts will not be useful or relevant to decision-making, and that alternative accounts (e.g., energy consumption data) are needed instead. The argument proves the point that contractual factors undermine the integrity of greenhouse gas accounting.

3.  There may not be a causal relationship between RECs and renewable generation at the moment, but if enough people buy RECs there may be an incremental effect in the future – and this justifies the use of contractual factors now. There are three problems with this argument: Firstly, there will be a misalignment between the amount of renewable generation “claimed” through contractual factors and the amount with which there is a causal link (this means that there will be a very large number of misleading GHG accounts in order to achieve potentially very small changes in the amount of renewable generation). Secondly, there is no precedent in attributional accounting for allocating emissions based on future “hoped for outcomes” that would occur after the reporting period. Thirdly, the future effect may never materialise. Further, this future effect has been shown to be highly unlikely to materialise through scenario modeling of the voluntary REC market (Gillenwater, 2013).

4.  Some companies are making long-term commitments in renewable energy projects through PPAs and other means with the expectation of claiming renewable energy attributes. Such commitments can lead to new, additional renewable energy capacity. Disallowing a contractual approach to Scope 2 may discourage such commitments.  

Although there are some cases where contractual arrangements could result in additional renewable energy generation (e.g., some long-term solar energy power purchase agreements), such cases are currently rare. Furthermore, no mechanism currently exists in the Scope 2 contractual approach to systematically differentiate this class of voluntary green power market activities from the dominant short-term REC contracts. Such a differentiation would be best achieved through the application of project-level accounting rules, such as those contained in the GHG Protocol for Project Accounting, not under Scope 2 accounting.

A more sensible and transparent approach would be to reserve Scope 2 accounting exclusively for reporting of GHG emissions actually caused by company activities, and allow emission reductions acquired through contractual arrangements (e.g., through carbon offset credit purchases, allowance purchases, equity investments in emission-reducing projects, or other contractual arrangements) to be reported separately. The GHG Protocol Corporate Standard already specifies that acquired emission reductions are to be reported as “optional information” and guidelines for doing so could be expanded. Applying a project-level accounting approach would be more effective at incentivizing renewable energy investments that lead to additional capacity and environmental benefits beyond what would have happened “anyway” (in the absence of the contractual arrangement). To be additional such arrangements are likely to require legally-binding long-term contractual agreements made at the time of project investment decision-making, where the price paid for emission reductions is a significant fraction of overall project costs.

5.  The letter seems to suggest there is nothing we can do to promote renewable energy.  What we are saying is that the empirical evidence clearly shows that the small and short-term subsidy created by the voluntary green power market through RECs has no effect on the vast majority of renewable energy investments. But this conclusion does not mean that nothing can be done to promote more renewable energy. First, advocating for cost-effective government policies such as a carbon tax, cap and trade, Renewable Portfolio Standards (RPS), feed-in tariffs, as well as investment or production tax credits and grants are all important. Individuals and individual companies can install their own RE capacity, thereby reducing how much electricity they purchase (and thereby reduce their Scope 2 emissions). They can also purchase credible carbon offset credits from renewable energy projects. The difference between buying a REC in the voluntary green power market, and a credible offset credit in the voluntary carbon market, is that credible offset projects are able to demonstrate they have altered investor behavior with respect to that project, and thereby reduce greenhouse gas emissions. The voluntary green power market requires no such demonstration.

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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