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GHGP Scope 2 Updates: What Do They Mean for Your Company?

by: Shehzad Wadalawala

Climate disclosures are increasingly expected for organizations everywhere. Whether driven by customers, employees, investors, or regulators, the trend is clear: More companies are disclosing their climate impact (by 2022, nearly 19,000 companies had shared their emissions through the Climate Disclosure Project).  

Increasing disclosure comes with additional scrutiny of the information presented. Some regulatory bodies, such as the U.S. Federal Trade Commission (FTC) have taken steps to limit “greenwashing,” the process of conveying a false impression of misleading information about how a company’s products are environmentally sound. To enable fair comparisons between companies, standardized reporting is necessary.

Location-Based and Market-Based Methods of Carbon Accounting

Although it may seem as though there are several different carbon accounting frameworks, the vast majority align with or are derived from the Greenhouse Gas Protocol (GHGP).

In 2001, the GHGP established a measure for scope 2, or indirect emissions associated with electricity consumption, using the location-based method. Under the location-based method, companies report emissions by multiplying regional emissions average factors by the amount of electricity consumed in that region and summing this calculation over all regions where they operate. Starting in 2015, the GHGP added the market-based method, which allowed companies to use market instruments such as Renewable Energy Certificates (“RECs”) to reduce their emissions, effectively converting the emissions factor for energy consumed to zero for the volume of RECs purchased and retired. 

The implementation of the market-based method has led to significant voluntary action. Many companies have made commitments to 100% renewable energy (often referred to as 100% RE). Companies can meet 100% RE commitments by purchasing RECs or entering into a long-term power purchase agreement (PPA) with a renewable project developer. According to the Clean Energy Buyers Association (CEBA), energy customers have voluntarily procured more than 71 gigawatts of clean energy in the United State since 2014: In 2022 alone, these procurement deals were equivalent to 70% of all the carbon-free energy capacity added to the grid.

Nat Bullard, formerly at BNEF, noted in a recent presentation (slide 85) that 92% of the world’s GDP is covered by a net zero target, and large companies with sustainable goals seek to highlight their environmental leadership. In 2016, 92% of the Fortune 500 responded to the Climate Disclosure Project (CDP) using the GHGP directly or indirectly, cementing the importance of GHGP as a foundational standard. This means any GHGP scope 2 updates will have far-reaching impacts.

New Procurement Philosophies: Emissionality and 24/7 CFE

While the market-based method has driven voluntary action, there is growing sentiment that not all production of clean energy is equivalent. More specifically, most experts recommend greater consideration of where and when clean energy is produced. For example, adding solar to a grid that has ample solar production in the middle of the day has a much lower environmental impact than adding solar to a grid that relies heavily on coal and natural gas.  

There are two prominent schools of thought on what companies should aim to do with their clean energy procurement. One goal, advocated by Google, is to match all energy consumption with clean energy in the same grid and in the same hour, also known as hourly matching or 24/7 carbon-free energy (CFE). Another goal, championed by the Emissions First Partnership, is to focus directly on emissions impact and to procure clean energy wherever the most cost-effective carbon abatement can be achieved. This goal is sometimes referred to as emissionality. Both goals seek to decarbonize electric grids, albeit through different measures.

GHGP Scope 2 Updates — More Granular Emissions Accounting 

As governments and other agencies debate expectations and rules for corporate clean energy goals, most have thus far supported the hourly matching approach. Executive Order 14057 established 24/7 carbon-free targets for U.S. government energy consumption. For green hydrogen, the EU has established hourly matching requirements, and it is likely that the U.S. will follow suit with the Inflation Reduction Act’s 45V tax credit.

The GHGP, recognizing that more granularity is required in emissions accounting, is currently revising its guidelines, with new standards expected to be established in 2025. It is already clear that the impact of the changes will be significant: CA SB 253, which is estimated to impact 75% of the Fortune 1000, will require reporting of scope 1, 2 and 3 in accordance with the GHGP. Further, the SEC will likely point to the GHGP scope 2 updates (and scope 1 and 3) in its disclosure requirements for all public companies.  

As for what the changes will be, various companies and experts are advocating for the 24×7 CFE and emissionality approaches. In addition, a third method based on marginal emissions impact has been proposed. While we don’t know how the debates will settle, one thing is clear — the rules will change, and companies need to be ready. More granular reporting, both with respect to location and time, presents an extremely complex math problem. Tools like Verse’s Aria software, which draws on generative AI to perform fast, rigorous analysis, can solve this problem in a fraction of the time it would take using spreadsheets.

Contact us to learn how Aria can help you more accurately forecast your organization’s emissions and optimize your clean energy procurement.