Allocating emissions

Introduction

Allocation is the process of partitioning GHG emissions from a single facility or other system¹ among its various outputs. Allocation is necessary when a single facility or other system produces multiple outputs and emissions are only quantified for the entire facility or system as a whole. Emissions from the shared facility or other system need to be divided between the various outputs.

Examples:

1. A single production facility may produce many different products and co-products², while activity data used to calculate GHG emissions is collected for the plant as whole. In this case, the facility’s energy use and emissions need to be allocated to its various outputs.

2. A company may purchase components from a supplier that manufactures a wide range of products for many different customers. In this case, the supplier’s activity data or emissions data need to be allocated among the various products so its customers know the emissions attributable to the specific products they buy, based on the fraction of total supplier production that is related to the customer’s purchases.

Allocation is not always necessary

When using primary data, allocation is not necessary if a facility or other system produces only one output, or emissions from producing each output are separately quantified. Allocation is not necessary when using secondary data since activity data and emissions factors are usually in reference to a single product.

Avoiding or minimizing allocation

When using primary data to calculate scope 3 emissions, companies should avoid or minimize allocation if possible. This is because allocation adds uncertainty to the emission estimates and may be especially inaccurate when an activity or facility produces a wide variety of products that differ significantly in their GHG contribution. For example, a supplier may manufacture twenty different types of products and only supply one type of product to the reporting company. It would be inaccurate to allocate scope 1 and scope 2 emissions if the goods have different levels of emissions intensity. Allocation should only be done when more accurate data is not available.

Companies can avoid or minimize allocation through collecting more detailed data. They can do this by :

1. Obtaining product-level³ emissions data from value chain partners.

2. Separately sub-metering⁴ energy use and other activity data e.g. at the production level.

3. Using engineering models to separately estimate emissions related to each product produced.

Approaches to allocating emissions from suppliers

To allocate emissions from a facility, total facility emissions from a facility are multiplied the reporting company’s purchases as a fraction of total production in the facility.

$$AllocatedFacilityEmissions=TotalFacilityEmissionsX\frac{ReportingCompan{y}^{\prime }sPurchasesfromthefacility}{TotalFacilityProduction}$$

Either the reporting company itself or its suppliers can allocate supplier emissions to the reporting company.

1. Supplier allocation: This involves individual suppliers reporting pre-allocated emissions data to the reporting company and disclosing the allocation metric used.

2. Reporting company allocation: This involves the reporting company allocating supplier emissions by obtaining two types of data from individual suppliers: 1) total supplier GHG emissions data (e.g., at the facility or business unit level), and 2) the reporting company’s share of the supplier’s total production, based on either physical factors (e.g., mass, volume, etc) or economic factors (e.g., revenue, spend).

Reporting company allocation is likely to ensure more consistency in methodologies for reporting company, while the supplier allocation approach may be more practical by avoiding the need for suppliers to report confidential business information.

Methods for allocating emissions

Companies should refer to the decision tree below to determine if allocation is necessary, and if so, which method to use.

Source: Corporate Value Chain (Scope 3) Accounting and Reporting Standard

There are two main methods for allocating emissions: physical allocation and economic allocation.

1. Physical allocation

Physical allocation involves allocating the emissions of an activity based on an underlying physical relationship between the multiple inputs / outputs and the quantity of emissions generated.

Examples of physical allocation factors and formulas include:

1. Mass of products: $$AllocatedFacilityEmissions=\frac{MassofProductsPurchased}{TotalMassofProductsProduced}XTotalEmissions$$

2. Volume of cargo transported: $$AllocatedFacilityEmissions=\frac{VolumeofCargoPurchased}{TotalVolumeofCargoProduced}XTotalEmissions$$

3. Energy content of heat and electricity co-products:

$$AllocatedFacilityEmissions=\frac{EnergyContentofProductsPurchased}{TotalEnergyContentofProductsProduced}XTotalEmissions$$

Physical allocation is expected to yield more representative emissions in several situations:

1. Manufacturing: In certain cases, manufacturing facilities may produce multiple products, each of which requires similar energy and material inputs to produce, but which differ significantly in market value. While the market value of the products differs, the physical quantity of emissions resulting from the production of each product is similar.

   In such a case, physical factors are more closely correlated with emissions and better approximate actual emissions associated with producing each product. Companies should consider multiple physical factors, which may include units of production, mass, volume, energy, or other metrics, and select the one that mostly correlates to emissions.

2. Transportation: Allocating emissions from the transportation of cargo occurs when a single vehicle transports multiple products, activity data such as fuel use is collected at the vehicle level and a company chooses to estimate emissions by allocating total vehicle emissions to one or more of the products shipped.

   Companies should allocate emissions using physical allocation. They should allocate using either weight, volume or a combination of weight and volume, depending on whether the capacity of the vehicle is limited by weight, volume, or a combination of the two. The limiting factor depends on the mode of transport (road, rail, air or marine transport). For example, ocean-going vessels tend to be limited by volume, while trucks tend to be limited by weight.

   The equation for allocating vehicle emissions based on volume is:

   $$AllocatedEmissions=\frac{VolumeofVehicleOccupiedByTheProduct}{TotalVolumeofVehicle}XTotalVehicleEmissions$$

   Companies may also calculate emissions without allocating emissions by using secondary data e.g., industry-average emission factors based on metric ton-km traveled.

3. Commercial buildings (e.g., leased assets, franchises)

   Commercial buildings include retail facilities, warehouses, distribution centers, and owned or leased office buildings.

   Allocating emissions from commercial buildings occurs when activity data is collected at the facility/building level and the reporting company chooses to estimate emissions for a subset of products by allocating total facility emissions to one or more products located at the facility.

   Companies should allocate emissions using either volume or area, depending on the limiting factor of the capacity of the facility and the factor mostly closely correlated with energy use and emissions. For example, to allocate emissions from a retail facility, a company may divide total facility emissions by the relative volume (e.g., quantity of shelf space) occupied by a given product within a retail facility.

   To obtain more accurate estimates, companies should separate total facility energy use and total quantity of products sold between refrigerated storage and non-refrigerated storage. Where the same product is stacked on pallets or shelves, companies may divide emissions per unit of volume or floor space by the total number of products occupying that area to determine emissions per unit of product.

   The equation for allocating emissions from a building based on area is:

   $$AllocatedEmissions=\frac{VolumeofRetailFacilityOccupiedByTheProduct}{TotalVolumeofRetailFacility}XTotalRetailFacilityEmissions$$

   Companies may also calculate emissions from retail and warehousing without allocating emissions by using secondary data e.g., industry average emission factors expressed in units of emissions per volume or floor space.

2. Economic allocation

Economic allocation involves allocating emissions of an activity based on the market value⁵ of each output / product.

Economic allocation is expected to yield more representative emissions estimates in certain situations such as:

1. when a physical relationship between the activity and emissions cannot be established;

2. when a co-product would not be produced by the common facility or system without the market demand for the primary product and/or other valueable co-products;

3. when a co-product was previously a waste output that acquires value in the market place as a replacement for another product;

4. investments, where emissions should be allocated to the reporting company based on the company’s proportional share of equity or debt in the investee; and

5. other situations where economic allocation best reflects the causal relationship between the production of the outputs and resulting emissions.

No allocation for waste generated in the reporting company’s operations

Companies generate revenue through the sale of co-products, but in most cases, receive none from waste. Most times, they pay to dispose it off.

If a facility produces waste during production, no emissions from the facility should be allocated to the waste. All emissions from the facility should instead be allocated among the facility’s other outputs. If waste becomes useful and marketable for use in another system, it is no longer considered waste and should be treated like other types of outputs.

However, companies should account for all emissions related to waste within category 5 (Waste generated in operations) and category 12 (End-of-life treatment of sold products).

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Next: Calculating upstream emissions

Footnotes

1. A system is any source of emissions e.g., an activity, vehicle, production line, business unit, facility, etc.

2. These are secondary but valuable products that are generated alongside the main product during a manufacturing process. For example, crude oil refining produces gasoline, diesel, jet fuel, and asphalt as co-products.

3. Product-level data refers to the cradle-to-gate emissions of an individual product, i.e., all the emissions that occur in the life cycle of purchased products, up to the point of receipt by the reporting company, excluding emissions that are owned or controlled by the reporting company.

4. Separately sub-metering a production line allows a company to read an energy meter first before the line starts and again when the run of a product finishes. Sub-metering yields the quantity of the energy used to a specific product without the need for allocation.

5. The market value of a product should be determined using the price the reporting company pays to acquire products from the supplier (selling price), rather than the costs incurred by the supplier to manufacture its products (production cost).