May 12, 2022
By David Luke Oates, SVP of Power Markets Research, REsurety
The Greenhouse Gas Protocol is a foundational component of modern climate standards. It is incorporated into the Task Force on Climate-Related Financial Disclosures’ (TCFD) guidelines for voluntary climate disclosures1, as well as the Science-Based Targets Initiative’s (SBTi’s) recommendations for aligning corporate targets with climate goals.2 It has also largely been paralleled in the U.S. Security and Exchange Commission’s recent proposed rule on climate disclosures.3
The GHG Protocol has achieved considerable success in providing a common framework for voluntary disclosures. But it is now a fairly outdated standard, and its flaws are becoming more impactful and problematic. The GHG Protocol Corporate Standard was originally released in the early 2000s, with updated Scope 2 guidance released in 2015. The nearly seven years since that release have featured dramatic increases in corporate clean energy purchases and interest in accurate corporate climate disclosures.4 There is now growing interest in updating the GHG Protocol and addressing some of its shortcomings.
At REsurety, we spend much of our time helping buyers and sellers of clean electricity to manage their financial risks and achieve their decarbonization goals. We are particularly interested in ensuring that Scope 2 accounting is as effective as possible. Today, the GHG Protocol Scope 2 Guidance has two major flaws: 1) it does not ensure that all actual carbon emissions are accounted for across entities and 2) it often doesn’t create the right incentives for entities interested in decarbonization.
On the first item, the GHG Protocol’s Market-Based method for Scope 2 accounting allows reporting entities to apply REC purchases to cover their consumption at an emissions rate of 0 tons/MWh. It also allows entities to account for their grid consumption by applying a simple-average emissions rate. This average emissions rate reflects the same clean energy claimed through REC retirements, effectively double-counting the impact of clean energy and contributing to under-reporting of emissions.5 While this double-counting may have been of little concern a decade ago, the volume of today’s clean energy purchases make it a more serious problem.
On the second item, by relying on average emissions rates with low temporal and spatial granularity, current Scope 2 guidance risks send the wrong signals to entities interested in decarbonization. Consider an entity purchasing solar energy that mostly displaces coal generation, in a grid that also includes considerable baseload nuclear. Since the average emissions rate of this grid is much lower than the emissions rate of the displaced coal, the reduction in the entity’s carbon footprint would not reflect the solar energy’s full carbon impact. In general, the activities achieving the greatest amount of decarbonization are not fully rewarded under the current GHG Protocol, creating a misalignment of incentives. We think there is an opportunity to fix both of these problems.
Governments and corporate entities have recently made ambitious climate mitigation commitments. Truly delivering on these commitments will require a modernized set of carbon accounting rules to align incentives and avoid double-counting. We believe that a revised Scope 2 carbon accounting framework based on granular marginal emissions data can help address some of the shortcomings we mentioned above. We look forward to sharing more details on potential solutions to these challenges in the months to come.
In the interim, we love talking with anyone who shares our goals of more accurate carbon impact measurement and the tools to maximize that impact – so please contact us at [email protected] if you have any questions or want to connect and discuss.
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Footnotes:
[1] See p. 21, Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures, October 2021
[2] See p.3, SBTi Criteria and Recommendations, Version 5.0, October 2021
[3] See §I.D.2. (p. 40), The Enhancement and Standardization of Climate-Related Disclosures for Investors, SEC Proposed Rule, File No. S7-10-22
[4] U.S. corporate clean energy purchases grew from 1.2 GW/year in 2014 to over 11 GW/year in 2021. See Clean Energy Buyers Association Deal Tracker
[5] While this double-counting could theoretically be corrected by applying the residual mix emissions rate to all parties’ grid consumption, this approach is not feasible in many jurisdictions. Calculating the residual mix emissions rate depends on visibility into all private contracts for RECs between counterparties, something that individual reporting entities aren’t able to provide. In jurisdictions (such as the U.S.) where residual mix emissions rates are not available, current GHG Protocol guidance is to apply the average emissions rate to grid purchases. See GHG Protocol Scope 2 Guidance §6.11.4
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