Market Based vs Location Based Emissions Accounting Rules - Episode 90

Let's get into the wonky world of emissions accounting, where the corporate standard for reporting is in the process of being refined. The GHG Protocol Corporate Standard has solicited input into whether a market-based or location-based approach to accounting is appropriate. And the final determination could significantly impact not only tomorrow's decarbonization activities, but possibly how today's approaches are handled as well.

Paul digs into this topic in order to better understand the implications for companies of any size.

For further reference:

"Detailed Summary of Responses from Scope 2 Guidance Stakeholder Survey" - GHG Protocol, July 2023

"Detailed Summary of Responses from Market-based Accounting Approaches Stakeholder Survey" - GHG Protocol, April 2024

"Location-based and market-based: Understanding Scope 2" - Carbonary

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Transcript

This is Eight Minutes – a podcast helping you understand the energy and climate challenge in just a few minutes – I’m your host, Paul Schuster.

The Greenhouse Gas Protocol Corporate Standard governs how companies report on their greenhouse gas emissions. First published in 2004, the protocol has taken on increasing importance – not only as more and more companies are reporting emissions, but as changing technologies and a rapid ramp up in renewable power has tested old ways of thinking about accounting methodologies.

For the last couple of years, the World Resources Institute and World Business Council for Sustainable Development (the entities that oversee the GHG protocol) have been taking a hard look at existing carbon accounting methods, specifically around whether companies can use market-based accounting or location-based accounting in their reporting. The outcome of those deliberations could be significant, affecting not just the reporting, but HOW companies invest in the decarbonization strategies of their business.

Eight Minutes – it’s how long it takes the sun’s rays to hit earth – or about how long it took Chappel Roan to go from obscurity to a major pop star … We’re all hot to go - Let’s get it on!

The GHG protocol has only been around for twenty years. And a LOT has happened over that time period. Renewable energy is coming online at a frantic pace and more companies than ever are aligning themselves with net zero aspirations. As such, the WRI and WBCSD, the two entities overseeing the GHG Protocol, are digging into the old methodologies and seeing whether they still work in today’s environment.

Of critical importance is the concept of market based vs location based accounting. As wonky as it is to be talking accounting methodologies – the debate around *which* accounting methodology to use has attracted an incredible amount of attention in the sustainability space. Over 400 entities responded to a market survey launched last year soliciting input on Scope 2 methods, and an additional 343 entities submitted comments on a broader survey around market vs. location based methodologies. 

The reason why its getting so much attention is because the protocol’s final determination is going have a significant impact on how corporations go about decarbonizing in the first place.

The terms – market-based and accounting-based – come from the way the GHG protocol has been looking at Scope 2 emissions for the past two decades. Scope 2 are those emissions that come from a companies use of electricity or steam or heat. If your facility is using a lot of electricity in the middle of, say, coal heavy Indiana – that electricity usage may require a coal plant to stay in business and emit a LOT of carbon. 

Companies would address this in a few ways – first, figure out how to use LESS power in the first place. But then, maybe invest in renewable energy so that the power you consume can at least be “clean”.

The way to ensure that you’re supporting renewable power is through an Environmental Attribute Certificate. Those certificates go by different names in different countries – in Europe they may be known as Guarantees of Origin while herein the US they are called Renewable Energy Certificates, or RECs. One REC equates to one megawatt hour of renewably generated power.

And, under a market-based standard, companies can apply one REC to one megawatt hour of their energy usage to essentially offset their load. 

But that REC *could* be from just about anywhere. Our theoretical company in Indiana, for instance, could buy RECs from Texas and support wind or solar power down there – and count those benefits against their midwestern facility.

The location-based methodology is a bit stricter and, instead, looks at the power grid into which your facility is connected. It evaluates the amount of coal and gas and oil generated power being used, assigns an emission factor to those generating units and calculates out a weighted factor that can be used to determine the *physical* related emissions of the factory. Advocates for this approach argue that this is more realistic of a reporting structure, as the power that the facility actually USES should be what determines the emissions. And looking at the actual delivered energy can be more impactful because the emissions intensity of the grid could change from hour to hour if, for instance, a lot of solar is used during the day – and gas power used during the night. A more detailed evaluation of physical emissions may be needed in order to drive more effective decarbonization solutions. 

Advocates on the other side, for market based rules, point out that being more flexible on the accounting enables more options on investment into renewable power and decarbonization. If limited to just the local power grid, there may be structural or other issues that prevent a company from investing. And what we need is MORE investment into clean technology, not less. 

And regarding the hourly emissions argument, market based advocates contend that the challenge of measuring, accounting for, and tracking those emissions would make the task prohibitively expensive for all but the largest of companies. 

Which complicates the GHG Protocol’s goal – do they emphasize, in a sense, accuracy – or do they stress participation and investment?

There may not be a correct answer – an investment into an area overly saturated with renewable energy may not be highly impactful. But if driving toward locational based rules means that a number of companies stop investing at all …

Today, the GHG protocol allows EITHER methodology to be used for Scope 2 accounting – kind of a “kick the can down the road” as we figure out what’s quote-unquote “right”. But the WRI and WBCSD are trying to figure out whether to consolidate accounting into ONE methodology come next year.

What’s more? That dual accounting option, today, is ONLY available for Scope 2 reporting. There’s an inconsistency as to how Scopes 1 and 3 are accounted for – as only Scope 2 allows this market based approach. Does the protocol remove market based completely, consolidate the approaches and focus on accuracy? Or does it go the *other* way and introduce market based solutions for things like supply chain emissions? Where a company could, possibly, purchase RECs to offset the emissions being generated across their value chain?

 The implications are important. For one thing, thousands of companies, today, rely upon market based solutions to reach their sustainability goals. Are those PPAs and VPPAs suddenly worthless if the protocol changes to a location based measurement? Is there a weird grandfathering clause that gets implemented? How does one track THAT?

And if market based processes are tossed out, what impact will that have on renewable investment. Will we see a corresponding increase in more localized solutions – or not? And is it even the responsibility of an ACCOUNTING organization to incentivize activity … or should they really be focused on accuracy … and let the industry figure out how best to respond to that?

This is – a wonky issue, deep in how the world looks at carbon and emissions, but the resulting decision by the GHG protocol could have significant implications. The WRI and WBCSD continue to discuss options with interested stakeholders, and they have posted comments and suggestions on their website to help guide a transparent review of this issue. Their goal is to have revised standards released in 2025.

Which means that a lot of corporate sustainability decisions over the course of the next year are going to be made in something of an uncertain haze. With everything else going on in politics and financial markets, let’s add the uncertainty of carbon accounting to our list of challenges, too.

I’m Paul Schuster – and this has been your eight minutes.