The Emerging Shape of New Scope 2 Rules

This month we return to the GHG Protocol update to scope 2 rules. It remains the case that nothing has been formally decided yet. But, with a draft consultation on the way in October, we are beginning to glimpse the outline of a new set of scope 2 requirements.

The emerging shape of new scope 2 rules

The GHG Protocol looks set to retain existing dual reporting requirements.

Companies operating in competitive energy markets will still need to report their scope 2 emissions using both the:

- Location-based method: to reflect the average emissions intensity of electricity grids where consumption takes place, and
- Market-based method: to reflect emissions from electricity that companies have purposefully chosen to buy.

The update is set to focus on increasing the precision and accuracy of these approaches.

In addition, the GHG Protocol is debating whether to require or recommend that companies report on the emissions impacts of their actions in their electricity sector. This would involve using a form of project-based accounting (see our December newsletter for an explanation), which has both powerful advocates and fierce detractors.

Updates to the location-based method

The new rules will confirm a continued role for the location-based method as the way to quantify electricity emissions delivered in a specific time and place, independent of contractual arrangements.

In theory, the location-based method should accurately allocate emissions to companies based on their total physical demand for grid energy and capture the average emissions intensity of the energy that has been consumed.

But, in reality, many companies are using national and annual emission factors that lack sufficient spatial or temporal precision to be truly representative.

To address this, the new GHG Protocol rules will require companies to use the most precise emission factors accessible to them.

Precision will be defined using a hierarchy that ranks emissions factors based on how closely they reflect the time and location of consumption. Data on consumption will be preferred over production given the potential for the latter to be distorted by imports and storage discharge.

To ensure feasibility, emission factors are likely to be considered accessible only if they are both publicly available and free to use. Companies may opt to pay for more precise emission factors but will not be required to do so.

Firms that don’t have access to hourly metered data on their electricity usage will be able to either estimate their hourly consumption using load pro files or else use the most precise consumption data available to them.

It’s important to emphasise that firms are not being required to match hourly consumption with renewable or zero-carbon energy here - simply to report on a timelier basis.

Changes to market-based requirements

The market-based approach will also continue as a way to quantify emissions from specific sources of electricity generation that are contractually linked to a reporting company.

In theory, the market-based method reflects the electricity companies choose to procure through contracts (e.g. PPAs) and certificates (e.g. RECs) and could create market signals to influence supply-side generation.

In practice, as we discussed in our February newsletter, there is a lot of scepticism as to whether such instruments influence the electricity that is being generated.

As a solution, the GHG Protocol is planning to introduce several changes to how companies match their electricity consumption to procured energy.

Companies will need to separate the share of electricity they are matching to specific generation sources between:

- Standard Supply Service, which includes carbon free electricity supplied under regulated cost recovery, government mandates or publicly owned generation. The idea is that firms will qualify for a pro rata share of this clean energy to avoid double counting and resource shuffling to meet climate targets.
‍- Voluntary Procurement, which reflects claims that demonstrate that a company has exclusive financial and contractual ownership over a source of electricity generation. This includes contract-based renewable energy purchases like PPAs, as well as RECs.

When matching voluntary procurement to physical electricity use, the GHG Protocol is likely to impose two additional constraints aimed at driving greater traceability between the two:

- Time-matching: new rules will introduce the principle that market instruments acquired bycompanies should match the time pro file of electricity use to the highest degree of granularity possible. The goal is to avoid companies procuring renewable energy (e.g. solar) that can’ t be matched to their actual load patterns (e.g. overnight electricity use).

The GHG Protocol is debating whether to introduce an hourly matching requirement for energy intensive companies with annual electricity consumption of over 5GWh.

Companies below this threshold might only need to match on a monthly or annual basis.

- Deliverability: procured electricity will also need to be acquired within the same market boundaries as the consumption it is being matched against. Market boundaries could be defined as bidding zones, emissions reporting boundaries or national borders depending on where the company operates. The objective is to avoid firms procuring energy that can’t actually be dispatched to the market where consumption takes place.

Opening the door to impact accounting

The GHG Protocol is also contemplating including a measure of scope 2 emissions impact. This is a new way to reflect electricity-related climate impact that goes beyond existing inventory approaches. And it has been strongly advocated by the likes of the Emissions First Partnership, which includes influential high energy consumers like Amazon and Meta.

It relies on the concept of “carbon-matching”. Instead of companies matching procured renewable energy to their electricity use in MWh, companies would instead match the emissions that have been induced by their electricity consumption with the emissions that have been avoided from procuring renewable energy.

The approach uses a form of carbon accounting called project or consequential accounting. To date, this type of accounting has played a limited role in corporate emissions disclosures - though it underpins carbon offset methodologies. It is now being considered by the GHG Protocol as part of a possible new Action and Market Instruments standard or guidance.

Whereas inventory accounting measures how emissions change over time, project-based accounting relies on a counterfactual analysis of what would otherwise have happened. In this case, it uses marginal emission rates to capture the emissions that would have been generated by the marginal plant on the grid in the absence of procuring renewable energy.

The Emissions First Partnership argues that companies should be able to count avoided emissions from renewable procurement they have undertaken anywhere in the world - not just the local market. They claim this would facilitate cost-effective decarbonisation since the marginal impact of renewable generation is likely to be more significant in dirtier grids.

Critics contest that this approach is little more than a repackaging of the controversial offsetting model, potentially reducing the incentive for companies to help decarbonise their local grids and allowing them to sidestep accountability for their own emissions.

At present the GHG Protocol is evaluating several different versions of this type of approach within a special working group, which includes both advocates and sceptics. It has yet to make a firm decision whether to require or recommend an emissions impact measure but the fact that it is even on the table is in itself significant.

The Minimum Line

The update to scope 2 rules is one of the most controversial and contested aspects of the GHG Protocol revision. In part, because electrification is a fundamental pillar of economy-wide decarbonisation. To date, it's also been one of the easier levers for companies to pull.

Big tech has been vocal in this debate given that AI is massively increasing their use of energy.

Meta and Amazon, through the Emissions First Partnership, have come out strongly in favour of an impact-based approach. By contrast, Google is part of an alternative 24/7 Carbon-Free Coalition, which favours continual matching of electricity use with carbon-free electricity.

The balance of academic opinion tends to consider the 24/7 approach to be more robust. Though it may be technically challenging to implement for companies that lack the resources of a large tech firm. By contrast, proponents of the impact-based approach argue that it provides firms with much needed flexibility. Sceptics see it as a byword for greenwashing.

As we discussed in our recent webinar, ultimately the debate comes down to the best way to have climate impact. The GHG Protocol needs to strike a balance between enabling companies to have greater influence, while guaranteeing the integrity of their actions.

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