The need for measuring scope 2 emissions
Introduction
There are four main reasons why companies should consider accounting and reporting their scope 2 emissions. A scope 2 inventory can help an organisation:
identify and understand the risks and opportunities associated with emissions from purchased and consumed electricity;
identify internal GHG reduction opportunities;
engage energy suppliers and partners in GHG management; and
enhance stakeholder information and corporate reputation through transparent public reporting.
Identifying and understanding the risks and opportunities associated with emissions from purchased and consumed electricity;
The use of electricity poses different GHG related risks:
1) Regulatory risk
Corporate exposure to regulatory risks in the electricity sector depends on regulatory policy design. For instance, CO2 taxes on electricity consumption may be levied equally on all consumers, regardless of their supplier or product choice, based on CO2 in a supplier’s delivered product, or only to certain consumer classes where exemptions may exist.
In these circumstances, a contractual instrument for specified power may or may not shield companies from these additional costs. Customers of an electric utility generally bear the cost of environmental compliance for the resources owned by their utility, or the energy purchased by the utility, which would be shown in a utility-specific emission factor in the market-based method.
These costs and risks are not necessarily shared among all consumers equally on the same grid, which would otherwise be suggested by the location-based method.
2) Energy costs and reliability
Electricity suppliers may pass on the fluctuating prices of fuels to their customers. The kind of energy the supplier uses affects how much emissions are produced. This mix of energy sources is reflected in the supplier-specific emission factor. The market-based method for calculating emissions uses this supplier-specific information. It gives a clearer picture of both the emissions linked to the electricity a company buys and the potential costs tied to fuel price fluctuations.
Certain overall costs related to grid operation and maintenance could be allocated to all consumers regardless of their individual choice of electricity supplier, electricity product, or tariff. Additionally, maintaining regional grid reliability often requires a mix of generation resources. The location-based method incorporates the GHG emissions of this mix into the grid average emissions factor, while the market-based method may allow users to only evaluate the GHG emissions associated with the energy generation represented in their purchased product, thereby missing some of the reliability risks faced by consumers in the entire grid.
For many companies, energy use represents a significant cost. Reducing energy use is the first choice to reduce impacts and costs. Reducing energy use correlates with a decreased total in the location-based result. Companies reducing energy consumption also pay proportionally less for any low-carbon supplier tariffs or premiums, or any unbundled certificates in the market-based method.
3) Reputation risk
Companies should avoid misleading claims and potential double counting between scope 2 inventories. Transparent disclosure about a company’s energy procurement and its key attributes in the market-based method can help clarify the company’s strategy and rationale.
4) Product and technology risk
Companies may face decreased consumer demand for products that are GHG-intensive, in favor of a competitor producing low-emission goods. Being able to compare companies’ performances across similar scope 2 methods can ensure that consumers understand the differences in a company’s energy procurement choices.
5) Legal risk
Companies are required by law to report both location-based and market-based scope 2 emissions. In addition, if companies claim the use of instruments that do not meet the quality criteria, they could be double-claiming emissions conveyed by other instruments to other parties.
Accounting and reporting scope 2 emissions also helps organisations identify opportunities that they can pursue to improve performance and business operations. Examples include:
1) Efficiency and cost savings
A reduction in GHG emissions often corresponds to decreased costs and an increase in companies’ operational efficiency.
2) Innovation
A comprehensive approach to GHG management provides new incentives for innovation in energy management and procurement.
3) Increased sales and customer loyalty
Low-emissions goods and services are increasingly more valuable to consumers, and demand continues to grow for products with low-carbon electricity.
4) Improved stakeholder relations
This is through proactive disclosure and demonstration of environmental stewardship. Examples include:
demonstrating a legal and ethical responsibility to shareholders;
informing regulators;
building trust in the community;
improving relationships with customers and suppliers; and
increasing employee morale.
5) Company differentiation
External parties, including customers, investors, regulators, shareholders, and others are increasingly interested in documented emissions reductions. Accounting and reporting scope 2 emissions with greater consistency and transparency about contractual instruments demonstrates a best practice that can differentiate companies in an increasingly environmentally consious marketplace.
Identifying GHG reduction opportunities, set reduction targets, and track performance
Comprehensive scope 2 accounting and reporting should serve as a consistent basis to set reduction targets and measure and track progress towards them over time. Companies should use the boundaries and definitions in scope 2 as a basis for setting GHG reduction targets, energy-use targets and energy procurement targets.
Each accounting method can provide an important indicator of performance and show the context in which emissions totals are changing. For example, regional emissions trends shown in the location-based method may change over time due to factors outside of a company’s direct control, such as electricity supplier quotas for renewable energy, emission policies and regulations, the collective impact of energy efficiency or demand-side management, or voluntary demand for new renewables.
Transparent reporting also allows for a more consistent comparison of performance over time and comparison with other companies.
Engaging energy suppliers and partners in GHG management
Reducing emissions from the energy sector requires the participation of all entities in the energy value chain, including energy generators, suppliers, retailers, and consumers.
The two scope 2 accounting methods can help consumers engage with their energy value chain on key demand and supply issues. For instance, generators produce energy in response to local or regional aggregate demand, and individual scope 2 inventories can help highlight how reductions in energy use can reduce both scope 2 emissions and contribute to reducing grid-wide demand.
Additionally, scope 2 accounting can provide a motivation for consumers to partner with suppliers offering low-carbon products, and to seek out opportunities to leverage a company’s own financial resources to help develop new projects.
Energy producers, suppliers and consumers all account for GHG emissions based on organisational and operational boundaries. Scope 2 accounting can help energy consumers identify the impact of different energy production and purchasing arrangements on GHG emissions.
Enhancing stakeholder information and corporate reputation through transparent public reporting
Energy markets and energy attribute certificate markets may be difficult topics to explain to people who are not familiar with attribute tracking, labeling, or claims systems. Reporting scope 2 emissions using both the location-based and the market-based methods can help describe the different dimensions of the grid more clearly.
With the location-based method, consumers can explain that they are served by all the energy sources deployed on the grid. On the other hand, a company’s energy supply choices are shown in the market-based totals. Reporting both methods’ results provides important information for assessing corporate performance.