The biggest fight in the Environmental, Social, and Governance (ESG) space is one you may not have heard of. The Greenhouse Gas Protocol (GHGP) Scope 2 Guidance, which lays out rules for how the biggest companies in the world report their electricity-based emissions, is being updated right now.
Some of those global corporate giants are proposing an emissions offsetting approach that will weaken climate targets and open loopholes that allow them to claim success without delivering more ambitious – yet still attainable – climate outcomes.
What is the GHGP Scope 2 Guidance all about?
The GHGP Scope 2 guidance dictates the voluntary emissions disclosure and reporting for over 9,000 companies and over 3,800 TWh1 of electricity consumption globally, almost as much electricity as the US generates each year. The GHGP is also referenced in an ISO Standard for greenhouse gas reporting, the proposed SEC climate disclosure rule, the EU’s Corporate Sustainability Reporting Directive, and California’s climate disclosure law. This matters a lot and companies are acting like it.
Scope 2 describes the indirect emissions from purchased energy, with electricity forming the largest share. It’s similar to the challenge being grappled with by Treasury for the 45V hydrogen tax credits, but in this case looking at how all types of companies report their electricity emissions, not just hydrogen producers trying to claim tax credits.
Under current GHGP rules, companies can lower their reported scope 2 emissions by buying tradable instruments such as Renewable Energy Certificates (RECs), without requirements that these RECs be correlated in time and location to where they are “claimed.” A company could claim Texas solar energy is powering their Pennsylvania factory at night, months later. And if being solar-powered all night long sounds like greenwashing, well…it is.
Proposed changes to the GHGP – The good and the bad.
One suggested change is to make the current accounting rules more granular so that a company claiming zero Scope 2 emissions would need to match their hour-by-hour electricity demand with purchases of clean energy delivered to the grids where they are consuming. Doing so would prevent the kind of bait-and-switch described above. That means no more Texas solar power being claimed at night in Pennsylvania. This approach is supported by a significant body of peer-reviewed research from the likes of Princeton and the International Energy Agency (here, here, here, and here), and would match guidelines that are already being put into place in other areas, like in the U.S. Treasury’s proposed approach to the hydrogen tax credits.
On the other hand, some large companies, led by Amazon and Meta, have recently joined forces as the Emissions First Partnership (EFP). They propose that a company should be able to claim zero Scope 2 emissions by offsetting their own emissions with dubious claims for emissions reductions elsewhere, at any other place and time. The proposal uses emissions estimates often referred to as “marginal emissions,” referring to the emissions impacts of whichever electricity generator is ramping up or down in response to real-time demand changes. Unfortunately, there are some critical issues with this proposal that would create or expand loopholes to let the biggest corporations off the hook for their emissions, right at a time when it is critical to hold them to account.
The most glaring issues with an “emissions first” framework.
1. Emissions avoidance are claimed via offsets, and offsets have an additionality problem.
Just like the carbon offset world, the EFP approach is plagued by the question of whether the action for which a claim is being made would have happened without the company’s involvement, otherwise known as “additionality.”
EFP allows offsetting emissions with no requirements for additionality. This allows companies to purchase the lowest-hanging-fruit renewable energy certificates and take credit for actions that would have likely happened anyway. Under this kind of offsetting system, purchasing these credits may have no impact at all.
2. These offsets can happen anywhere at any time.
Under the EFP proposal, there is no correlation between where and when the offsets are purchased and where and when they are used to claim net-zero emissions back home. The current GHGP includes a nebulous definition of “market boundaries” within which companies must purchase the certificates they plan to apply to their operations. In practice, this has led to ridiculous scenarios like Germany claiming clean power from Iceland despite there being no physical wires delivering that electricity. The EFP approach would drastically weaken that already weak standard. This would move a critical corporate accountability system backwards and open up even more flexibilities and loopholes for climate reporting.
3. The EFP system allocates credit based on something that did not happen, which will never be exact.
Avoided emissions are estimates based on counterfactual modeling and can never be truly observed or verified. When the proof lives inside a computer model, it will never fully reflect reality.
There is a fundamental lack of consistency and trust between models attempting to estimate the marginal emissions impact of a given action. As PJM, the operator of the largest electric grid in the western hemisphere, notes, “It’s important to understand that marginal units do not provide a prediction of what would happen. They only show what has just happened.” Using a model to estimate and offer credit for what may have happened otherwise is not an effective tool for accurate emissions accounting.
4. More emissions could be “avoided” than could ever be emitted in the first place.
As a reminder, EFP uses the concept of a “marginal generator,” the plant generating more or less electricity in response to demand, and “marginal emissions,” which come from that marginal generator.
Consider an admittedly simplified analogy. Imagine dinner at a busy restaurant. Three people are paying their bill after each enjoying a steak, but they are all feeling guilty about not having eaten a healthier option. Meanwhile, three new diners sit down next to them and learn there is only one remaining steak in the kitchen. To offset their guilt, the steak eaters each offer to pay for the meals of the three people who just sat down – as long as they each order a salad. So, the three people who just sat down all order a salad and the one steak left in the kitchen is not eaten. Now, the steak eaters claim they have each avoided eating one steak by paying for a salad at the other table. The steak-eaters proudly claim steak neutrality. In reality, only the one steak left in the kitchen was avoided. Under this “marginal meal” accounting, more steaks have been claimed as “avoided” than ever could have been eaten.
Back to the power system. Suppose the marginal unit on the grid is a 200 MW coal plant running at half capacity. Over an hour it produces 100 MWh, and thus only 100 additional MWh of coal power is not running and can possibly claim to be avoided. Over the same hour, 300 MWh of wind energy is all claiming to offset the marginal resource – the coal power plant. The wind power is claiming to prevent 300 MWh of coal power generation. But just like there was only one steak in the kitchen, there is only 100 MWh of avoided coal capacity that could have run. Marginal emissions accounting doesn’t reflect that reality and overcounts the benefits.
Where do we go from here?
Real investments in new clean energy can have positive impacts, and if EFP wants to use their approach to invest in clean electricity around the world, they should. In fact, the GHGP’s Protocol for Project Accounting provides a way for companies to account for this. But embedding this framework into the rules of the road for the GHGP Scope 2 guidance will open up a shortcut to absolve companies of the responsibility of reducing their own emissions. The EFP approach serves these companies’ climate disclosure needs more than the needs of impactful decarbonization investments.
On the other hand, moving to a more granular accounting system based on physical electricity system realities will bring more integrity to climate disclosure, support investments in clean energy when and where it is needed, and incentivize the deployment of technologies needed to achieve full decarbonization.
Not every company needs a 24/7 hourly matching goal today, though we applaud those who do. Achieving a fully decarbonized grid, using frameworks like granular accounting to mobilize capital and deploy advanced technologies, is a lot like solar power, it does not happen overnight, and we should not pretend that it does.
Put simply – we need to make Scope 2, Scope True.
