Introduction

Index

Introduction

• GHG Protocol Corporate Accounting and Reporting Standard (this document, which provides a step-by-step guide for companies to use in quantifying and reporting their GHG emissions)

• GHG Protocol Project Quantification Standard (forthcoming; a guide for quantifying reductions from GHG mitigation projects)

• To help companies prepare a GHG inventory that represents a true and fair account of their emissions, through the use of standardized approaches and principles

• To simplify and reduce the costs of compiling a GHG inventory

• To provide business with information that can be used to build

an effective strategy to manage and reduce GHG emissions

• To provide information that facilitates participation in voluntary and mandatory GHG programs

• To increase consistency and transparency in GHG accounting and reporting among various companies and GHG programs.

Both business and other stakeholders benefit from converging on a common standard. For business, it reduces costs if their GHG inventory is capable of meeting different internal and external information requirements. For others, it improves the consistency, transparency, and understandability of reported information, making it easier to track and compare progress over time.

• Managing GHG risks and identifying reduction opportunities

• Public reporting and participation in voluntary GHG programs

• Participating in mandatory reporting programs

• Participating in GHG markets

• Recognition for early voluntary action.

• Voluntary GHG reduction programs, e.g., the World Wildlife Fund (WWF) Climate Savers, the U.S. Environmental Protection Agency (EPA) Climate Leaders, the Climate Neutral Network, and the Business Leaders Initiative on Climate Change (BLICC)

• GHG registries, e.g., California Climate Action Registry (CCAR), World Economic Forum Global GHG Registry

• National and regional industry initiatives, e.g., New Zealand Business Council for Sustainable Development, Taiwan Business Council for Sustainable Development, Association des entreprises pour la réduction des gaz à effet de serre (AERES)

• GHG trading programs, e.g., UK Emissions Trading Scheme (UK ETS), Chicago Climate Exchange (CCX), and the European Union Greenhouse Gas Emissions Allowance Trading Scheme (EU ETS)

• Sector-specific protocols developed by a number of industry asso- ciations, e.g., International Aluminum Institute, International Council of Forest and Paper Associations, International Iron and Steel Institute, the WBCSD Cement Sustainability Initiative, and the International Petroleum Industry Environmental Conservation Association (IPIECA).

Since GHG programs often have specific accounting and reporting requirements, companies should always check with any relevant programs for any additional requirements before developing their inventory.

• What should I consider when setting out to account for and report emissions? (chapter 2)

• How do I deal with complex company structures and shared ownership? (chapter 3)

• What is the difference between direct and indirect emissions and what is their relevance? (chapter 4)

• Which indirect emissions should I report? (chapter 4)

• How do I account for and report outsourced and leased operations? (chapter 4)

• What is a base year and why do I need one? (chapter 5)

• My emissions change with acquisitions and divestitures. How do I account for these? (chapter 5)

• How do I identify my company’s emission sources? (chapter 6)

• What kinds of tools are there to help me calculate emissions? (chapter 6)

• What data collection activities and data management issues do my facilities have to deal with? (chapter 6)

• What determines the quality and credibility of my emissions information? (chapter 7)

• How should I account for and report GHG offsets that I sell or purchase? (chapter 8)

• What information should be included in a GHG public emissions report? (chapter 9)

• What data must be available to obtain external verification of the inventory data? (chapter 10)

• What is involved in setting an emissions target and how do I report performance in relation to my target? (chapter 11)

1. GHG program is a generic term used to refer to any voluntary or mandatory international, national, sub-national government or non-governmental authority that registers, certifies, or regulates GHG emissions or removals.

2. Throughout the rest of this document, the term “company” or “busi- ness” is used as shorthand for companies, businesses and other types of organizations.

3. For example, WRI uses the GHG Protocol Corporate Standard to publicly report its own emissions on an annual basis and to participate in the Chicago Climate Exchange.

4. Trading programs that operate at the level of facilities primarily use the GHG Protocol Initiative calculation tools.

1 GHG Accounting and Reporting Principles

• Organizational structures: control(operational and financial), ownership, legal agreements, joint ventures, etc.

• Operational boundaries: on-site and off-site activities, processes, services, and impacts

• Business context: nature of activities,geographicloca- tions, industry sector(s), purposes of information, and users of information

2 Business Goals and Inventory Design

• Managing GHG risks and identifying reduction opportunities

• Public reporting and participation in voluntary GHG programs

• Participating in mandatory reporting programs

• Participating in GHG markets

• Recognition for early voluntary action

• Identifying risks associated with GHG constraints in the future

• Identifying cost effective reduction opportunities

• Setting GHG targets, measuring and reporting progress Public reporting and participation in voluntary GHG programs

• Voluntary stakeholder reporting of GHG emissions and progress towards GHG targets

• Reporting to government and NGO reporting programs, including GHG registries

• Eco-labelling and GHG certification Participating in mandatory reporting programs

• Participating in government reporting programs at the national, regional, or local level

• Supporting internal GHG trading programs

• Participating in external cap and trade allowance trading programs

• Calculating carbon/GHG taxes Recognition for early voluntary action

• Providing information to support “baseline protection” and/or credit for early action

3 Setting Organizational Boundaries

• Financial Control. The company has financial control over the operation if the former has the ability to direct the financial and operating policies of the latter with a view to gaining economic benefits from its activities.2 For example, financial control usually exists if the company has the right to the majority of benefits of the operation, however these rights are conveyed. Similarly, a company is considered to financially control an operation if it retains the majority risks and rewards of ownership of the operation’s assets.

• Operational Control. A company has operational control over an operation if the former or one of its subsidiaries (see Table 1 for definitions of financial accounting categories) has the full authority to introduce and implement its operating policies at the operation. This criterion is consistent with the current accounting and reporting practice of many compa- nies that report on emissions from facilities, which they operate (i.e., for which they hold the operating license). It is expected that except in very rare circumstances, if the company or one of its subsidiaries is the operator of a facility, it will have the full authority to introduce and implement its operating policies and thus has operational control.

• Official government reporting programs or certain emissions trading programs may require GHG data to be reported at a facility level. In these cases, consoli- dation of GHG data at a corporate level is not relevant

• To demonstrate the company’s account to wider stake- holders, companies may engage in voluntary public reporting, consolidating GHG data at a corporate level in order to show the GHG emissions of their entire business activities.

• Reflection of commercial reality. It can be argued that a company that derives an economic profit from a certain activity should take ownership for any GHG emissions generated by the activity. This is achieved by using the equity share approach, since this approach assigns ownership for GHG emissions on the basis of economic interest in a business activity. The control approaches do not always reflect the full GHG emissions portfolio of a company’s business activities, but have the advantage that a company takes full ownership of all GHG emissions that it can directly influence and reduce.

• Government reporting and emissions trading programs. Government regulatory programs will always need to monitor and enforce compliance. Since compliance responsibility generally falls to the operator (not equity holders or the group company that has financial control), governments will usually require reporting on the basis of operational control, either through a facility level-based system or involving the consolida- tion of data within certain geographical boundaries (e.g. the EU ETS will allocate emission permits to the operators of certain installations).

• Liability and risk management. While reporting and compliance with regulations will most likely continue to be based directly on operational control, the ulti- mate financial liability will often rest with the group company that holds an equity share in the operation or has financial control over it. Hence, for assessing risk, GHG reporting on the basis of the equity share and financial control approaches provides a more complete picture. The equity share approach is likely to result in the most comprehensive coverage of liability and risks. In the future, companies might incur liabilities for GHG emissions produced by joint operations in which they have an interest, but over which they do not have financial control. For example, a company that is an equity shareholder in an operation but has no financial control over it might face demands by the companies with a controlling share to cover its requisite share of GHG compliance costs.

• Alignment with financial accounting. Future financial accounting standards may treat GHG emissions as liabilities and emissions allowances /credits as assets. To assess the assets and liabilities a company creates by its joint operations, the same consolidation rules that are used in financial accounting should be applied in GHG accounting. The equity share and financial control approaches result in closer alignment between GHG accounting and financial accounting.

• Management information and performance tracking. For the purpose of performance tracking, the control approaches seem to be more appropriate since managers can only be held accountable for activities under their control.

• Cost of administration and data access. The equity share approach can result in higher administrative costs than the control approach, since it can be diffi- cult and time consuming to collect GHG emissions data from joint operations not under the control of the reporting company. Companies are likely to have better access to operational data and therefore greater ability to ensure that it meets minimum quality standards when reporting on the basis of control.

• Completeness of reporting. Companies might find it difficult to demonstrate completeness of reporting when the operational control criterion is adopted, since there are unlikely to be any matching records or lists of financial assets to verify the operations that are included in the organizational boundary.

1. 1 The term “operations” is used here as a generic term to denote any kind of business activity, irrespective of its organizational, gover- nance, or legal structures.

2. 2 Financial accounting standards use the generic term “control” for what is denoted as “financial control” in this chapter.

4 Setting Operational Boundaries

• Generation of electricity, heat, or steam. These emis- sions result from combustion of fuels in stationary sources, e.g., boilers, furnaces, turbines

• Physical or chemical processing.3 Most of these emis- sions result from manufacture or processing of chemicals and materials, e.g., cement, aluminum, adipic acid, ammonia manufacture, and waste processing

• Transportation of materials, products, waste, and employees. These emissions result from the combus- tion of fuels in company owned/controlled mobile combustion sources (e.g., trucks, trains, ships, airplanes, buses, and cars)

• Fugitive emissions. These emissions result from inten- tional or unintentional releases, e.g., equipment leaks from joints, seals, packing, and gaskets; methane emissions from coal mines and venting; hydrofluoro- carbon (HFC) emissions during the use of refrigeration and air conditioning equipment; and methane leakages from gas transport. SALE OF OWN-GENERATED ELECTRICITY Emissions associated with the sale of own-generated electricity to another company are not deducted/netted from scope 1. This treatment of sold electricity is consis- tent with how other sold GHG intensive products are accounted, e.g., emissions from the production of sold clinker by a cement company or the production of scrap steel by an iron and steel company are not subtracted from their scope 1 emissions. Emissions associated with the sale/transfer of own-generated electricity may be reported in optional information (see chapter 9).

• Extraction and production of purchased materials and fuels

• Transport-related activities Transportation of purchased materials or goods Transportation of purchased fuels Employee business travel Employees commuting to and from work Transportation of sold products Transportation of waste

• Electricity-related activities not included in scope 2 (see Appendix A)Extraction, production, and transportation of fuels consumed in the generation of electricity (either purchased or own generated by the reporting company)

• Purchase of electricity that is sold to an end user (reported by utility company)

• Generation of electricity that is consumed in a T&D system (reported by end-user)

• Leased assets, franchises, and outsourced activities— emissions from such contractual arrangements are only classified as scope 3 if the selected consolidation approach (equity or control) does not apply to them. Clarification on the classification of leased assets should be obtained from the company accountant (see section on leases below).

• Use of sold products and services

• Waste disposal
• Disposal of waste generated in operations
• Disposal of waste generated in the production of purchased materials and fuels
• Disposal of sold products at the end of their life



 

• They are large (or believed to be large) relative to the company’s scope 1 and scope 2 emissions

• They contribute to the company’s GHG risk exposure

• They are deemed critical by key stakeholders (e.g., feedback from customers, suppliers, investors, or civil society)

• There are potential emissions reductions that could be undertaken or influenced by the company. The following examples may help decide which scope 3 categories are relevant to the company.

• If fossil fuel or electricity is required to use the company’s products, product use phase emissions may be a relevant category to report. This may be espe- cially important if the company can influence product design attributes (e.g., energy efficiency) or customer behavior in ways that reduce GHG emissions during the use of the products.

• Outsourced activities are often candidates for scope 3 emissions assessments. It may be particularly important to include these when a previously outsourced activity contributed significantly to a company’s scope 1 or scope 2 emissions.

• If GHG-intensive materials represent a significant fraction of the weight or composition of a product used or manufactured (e.g., cement, aluminum), companies may want to examine whether there are opportunities to reduce their consumption of the product or to substitute less GHG-intensive materials.

• Large manufacturing companies may have significant emissions related to transporting purchased materials to centralized production facilities.

• Commodity and consumer product companies may want to account for GHGs from transporting raw materials, products, and waste.

• Service sector companies may want to report on emis- sions from employee business travel; this emissions source is not as likely to be significant for other kinds of companies (e.g., manufacturing companies). 3. Identify partners along the value chain. Identify any partners that contribute potentially significant amounts of GHGs along the value chain (e.g., customers/users, product designers/manufac- turers, energy providers, etc.). This is important when trying to identify sources, obtain relevant data, and calculate emissions. 4. Quantify scope 3 emissions. While data availability and reliability may influence which scope 3 activities are included in the inventory, it is accepted that data accuracy may be lower. It may be more important to understand the relative magnitude of and possible changes to scope 3 activities. Emission estimates are acceptable as long as there is transparency with regard to the estimation approach, and the data used for the analysis are adequate to support the objectives of the inventory. Verification of scope 3 emissions will often be difficult and may only be considered if data is of reliable quality.

• USING EQUITY SHARE OR FINANCIAL CONTROL: The lessee only accounts for emissions from leased assets that are treated as wholly owned assets in financial accounting and are recorded as such on the balance sheet (i.e., finance or capital leases).

• USING OPERATIONAL CONTROL: The lessee only accounts for emissions from leased assets that it oper- ates (i.e., if the operational control criterion applies).

5 Tracking Emissions Over Time

• Public reporting

• Establishing GHG targets

• Managing risks and opportunities

• Structural changes in the reporting organization that have a significant impact on the company’s base year emissions. A structural change involves the transfer of ownership or control of emissions-generating activ- ities or operations from one company to another. While a single structural change might not have a significant impact on the base year emissions, the cumulative effect of a number of minor structural changes can result in a significant impact. Structural changes include:

• Mergers, acquisitions, and divestments

• Outsourcing and insourcing of emitting activities

• Changes in calculation methodology or improvements in the accuracy of emission factors or activity data that result in a significant impact on the base year emissions data

• Discovery of significant errors, or a number of cumu- lative errors, that are collectively significant.

• For the purpose of reporting progress towards volun- tary public GHG targets, companies may follow the standards and guidance in this chapter

• A company subject to an external GHG program may face external rules governing the choice and recalcu- lation of base year emissions

• For internal management goals, the company may follow the rules and guidelines recommended in this document, or it may develop its own approach, which should be followed consistently.

• The recalculated GHG emissions data for all years between the base year and the reporting year

• All actual emissions as reported in respective years in the past, i.e., the figures that have not been recalcu- lated. Reporting the original figures in addition to the recalculated figures contributes to transparency since it illustrates the evolution of the company’s structure over time.

1. Terminology on this topic can be confusing. Base year emissions should be differentiated from the term “baseline,” which is mostly used in the context of project-based accounting. The term base year focuses on a comparison of emissions over time, while a baseline is a hypothetical scenario for what GHG emissions would have been in the absence of a GHG reduction project or activity.

2. For more information on the timing of base year emissions recalcula- tions, see the guidance document “Base year recalculation methodologies for structural changes” on the GHG Protocol website (www.ghgprotocol.org).

6 Identifying and Calculating GHG Emissions

• Stationary combustion: combustion of fuels in stationary equipment such as boilers, furnaces, burners, turbines, heaters, incinerators, engines, flares, etc.

• Mobile combustion: combustion of fuels in trans- portation devices such as automobiles, trucks, buses, trains, airplanes, boats, ships, barges, vessels, etc.

• Process emissions: emissions from physical or chem- ical processes such as CO2 from the calcination step in cement manufacturing, CO2 from catalytic cracking in petrochemical processing, PFC emissions from aluminum smelting, etc.

• Fugitive emissions: intentional and unintentional releases such as equipment leaks from joints, seals, packing, gaskets, as well as fugitive emissions from coal piles, wastewater treatment, pits, cooling towers, gas processing facilities, etc. Every business has processes, products, or services that generate direct and/or indirect emissions from one or more of the above broad source categories. The GHG Protocol calculation tools are organized based on these categories. Appendix D provides an overview of direct and indirect GHG emission sources organized by scopes and industry sectors that may be used as an initial guide to identify major GHG emission sources.

• Cross-sector tools that can be applied to different sectors. These include stationary combustion, mobile combustion, HFC use in refrigeration and air condi- tioning, and measurement and estimation uncertainty.

• Sector-specific tools that are designed to calculate emissions in specific sectors such as aluminum, iron and steel, cement, oil and gas, pulp and paper, office- based organizations.

• Overview: provides an overview of the purpose and content of the tool, the calculation method used in the tool, and a process description

• Choosing activity data and emission factors: provides sector-specific good practice guidance and references for default emission factors

• Calculation methods: describes different calculation methods depending on the availability of site-specific activity data and emission factors

• Quality control: provides good practice guidance

• Internal reporting and documentation: provides guidance on internal documentation to support emissions calculations.

• Secure databases available over the company intranet or internet, for direct data entry by facilities

• Spreadsheet templates filled out and e-mailed to a corpo- rate or division office, where data is processed further

• Paper reporting forms faxed to a corporate or division office where data is re-entered in a corporate data- base. However, this method may increase the likelihood of errors if there are not sufficient checks in place to ensure the accurate transfer of the data.

• Centralized: individual facilities report activity/fuel use data (such as quantity of fuel used) to the corpo- rate level, where GHG emissions are calculated.

• Decentralized: individual facilities collect activity/fuel use data, directly calculate their GHG emissions using approved methods, and report this data to the corporate level.

• The staff at the corporate or division level can calcu- late emissions data in a straightforward manner on the basis of activity/fuel use data; and

• Emissions calculations are standard across a number of facilities.

• GHG emission calculations require detailed knowledge of the kind of equipment being used at facilities;

• GHG emission calculation methods vary across a number of facilities;

• Process emissions (in contrast to emissions from burning fossil fuels) make up an important share of total GHG emissions;

• Resources are available to train facility staff to conduct these calculations and to audit them;

• A user-friendly tool is available to simplify the calcu- lation and reporting task for facility-level staff; or

• Local regulations require reporting of GHG emissions at a facility level.

• A brief description of the emission sources

• A list and justification of specific exclusion or inclu- sion of sources

• Comparative information from previous years

• The reporting period covered

• Any trends evident in the data

• Progress towards any business targets

• A discussion of uncertainties in activity/fuel use or emissions data reported, their likely cause, and recom- mendations for how data can be improved

• A description of events and changes that have an impact on reported data (acquisitions, divestitures, closures, technology upgrades, changes of reporting boundaries or calculation methodologies applied, etc.).

• Activity data for freight and passenger transport activities (e.g., freight transport in tonne-kilometers)

• Activity data for process emissions (e.g., tonnes of fertilizer produced, tonnes of waste in landfills)

• Clear records of any calculations undertaken to derive activity/fuel use data

• Local emission factors necessary to translate fuel use and/or electricity consumption into CO2 emissions.

• A description of GHG calculation methodologies and any changes made to those methodologies relative to previous reporting periods

• Ratio indicators (see chapter 9)

• Details on any data references used for the calculations, in particular information on emission factors used. Clear records of calculations undertaken to derive emissions data should be kept for any future internal or external verification.

7 Managing Inventory Qulality

• It is more efficient to widen the scope of existing embedded management and assurance processes than to develop a separate function responsible for generating and reporting GHG information.

• As GHG information becomes increasingly monetized, it will attract the same attention as other key performance indicators of businesses. Therefore, management will need to ensure adequate procedures are in place to report reliable data. These procedures can most effectively be implemented by functions within the organization that oversee corporate governance, internal audit, IT, and company reporting.

Another factor that is often not given sufficient emphasis is training of personnel and communication of GHG objectives. Data generation and reporting systems are only as reliable as the people who operate them. Many well-designed systems fail because the precise reporting needs of the company are not adequately explained to the people who have to interpret a reporting standard and calculation tools. Given the complexity of accounting boundaries and an element of subjectivity that must accompany source inclusion and equity share, inconsistent inter- pretation of reporting requirements is a real risk. It is also important that those responsible for supplying input data are aware of its use. The only way to minimize this risk is through clear communication, adequate training and knowledge sharing.

Managing Inventory Quality

An inventory program framework

A practical framework is needed to help companies conceptualize and design a quality management system and to help plan for future improvements. This frame- work focuses on the following institutional, managerial, and technical components of an inventory (Figure 11):

M E T H O D S : These are the technical aspects of inventory preparation. Companies should select or develop method- ologies for estimating emissions that accurately represent the characteristics of their source categories. The GHG Protocol provides many default methods and calculation tools to help with this effort. The design of an inventory program and quality management system should provide for the selection, application, and updating of inventory methodologies as new research becomes available, changes are made to business operations, or the impor- tance of inventory reporting is elevated.

DATA: This is the basic information on activity levels, emission factors, processes, and operations. Although methodologies need to be appropriately rigorous and detailed, data quality is more important. No method- ology can compensate for poor quality input data. The design of a corporate inventory program should facilitate the collection of high quality inventory data and the maintenance and improvement of collection procedures.

INVENTORY PROCESSES AND SYSTEMS: These are the institutional, managerial, and technical procedures for preparing GHG inventories. They include the team and processes charged with the goal of producing a high quality inventory. To streamline GHG inventory quality

management, these processes and systems may be inte- grated, where appropriate, with other corporate processes related to quality.

DOCUMENTATION: This is the record of methods, data, processes, systems, assumptions, and estimates used to prepare an inventory. It includes everything employees need to prepare and improve a company’s inventory. Since estimating GHG emissions is inherently technical (involving engineering and science), high quality, trans- parent documentation is particularly important to credibility. If information is not credible, or fails to be effectively communicated to either internal or external stakeholders, it will not have value.

Companies should seek to ensure the quality of these components at every level of their inventory design.

Implementing an inventory quality management system

A quality management system for a company’s inventory program should address all four of the inventory compo- nents described above. To implement the system, a company should take the following steps:

1. Establish an inventory quality team. This team should be responsible for implementing a quality manage- ment system, and continually improving inventory quality. The team or manager should coordinate interactions between relevant business units, facilities and external entities such as government agency programs, research institutions, verifiers, or consulting firms.

2. Develop a quality management plan.

This plan describes the steps a company is taking to implement its quality management system, which should be incorporated into the design of its inventory program from the beginning, although further rigor and coverage of certain procedures may be phased in over multiple years. The plan should include proce- dures for all organizational levels and inventory development processes—from initial data collection to final reporting of accounts. For efficiency and comprehensiveness, companies should integrate (and extend as appropriate) existing quality systems to cover GHG management and reporting, such as any

Generic quality management measures

ISO procedures. To ensure accuracy, the bulk of the plan should focus on practical measures for imple- menting the quality management system, as described in steps three and four.

Perform generic quality checks.

These apply to data and processes across the entire inventory, focusing on appropriately rigorous quality checks on data handling, documentation, and emission calculation activities (e.g., ensuring that correct unit conversions are used). Guidance on quality checking procedures is provided in the section on implementation below (see table 4).

1. Perform source-category-specific quality checks. This includes more rigorous investigations into the appro- priate application of boundaries, recalculation procedures, and adherence to accounting and reporting principles for specific source categories, as well as the quality of the data input used (e.g., whether electricity bills or meter readings are the best source of consumption data) and a qualitative descrip- tion of the major causes of uncertainty in the data. The information from these investigations can also be used to support a quantitative assessment of uncer- tainty. Guidance on these investigations is provided in the section on implementation below.
2. Review final inventory estimates and reports. After the inventory is completed, an internal technical review should focus on its engineering, scientific, and other technical aspects. Subsequently, an internal managerial review should focus on securing official corporate approval of and support for the inventory. A third type of review involving experts external to the company’s inventory program is addressed in chapter 10.
3. Institutionalize formal feedback loops. The results of the reviews in step five, as well as the results of every other component of a company’s quality management system, should be fed back via formal feedback proce- dures to the person or team identified in step one. Errors should be corrected and improvements imple- mented based on this feedback.
4. Establish reporting, documentation, and archiving procedures. The system should contain record keeping procedures that specify what information will be docu- mented for internal purposes, how that information should be archived, and what information is to be reported for external stakeholders. Like internal and external reviews, these record keeping procedures include formal feedback mechanisms.

A company’s quality management system and overall inventory program should be treated as evolving, in keeping with a company’s reasons for preparing an inventory. The plan should address the company’s strategy for a multi-year implementation (i.e., recognize that inventories are a long-term effort), including steps to ensure that all quality control findings from previous years are adequately addressed.

Practical measures for implementation

Although principles and broad program design guidelines are important, any guidance on quality management would be incomplete without a discussion of practical inventory quality measures. A company should imple- ment these measures at multiple levels within the company, from the point of primary data collection to the final corporate inventory approval process. It is important to implement these measures at points in the inventory program where errors are mostly likely to occur, such as the initial data collection phase and during calculation and data aggregation. While corporate level inventory quality may initially be emphasized, it is important to ensure quality measures are implemented at all levels of disaggre- gation (e.g., facility, process, geographical, according to a particular scope, etc) to be better prepared for GHG markets or regulatory rules in the future.

Companies also need to ensure the quality of their histor- ical emission estimates and trend data. They can achieve this by employing inventory quality measures to mini- mize biases that can arise from changes in the characteristics of the data or methods used to calculate historical emission estimates, and by following the stan- dards and guidance of chapter 5.

The third step of a quality management system, as described above, is to implement generic quality checking measures. These measures apply to all source categories and all levels of inventory preparation. Table 4 provides a sample list of such measures.

The fourth step of a quality management system is source category-specific data quality investigations. The information gathered from these investigations can also be used for the quantitative and qualitative assessment of data uncertainty (see section on uncertainty). Addressed below are the types of source-specific quality measures that can be employed for emission factors, activity data, and emission estimates.





EMISSION FACTORS AND OTHER PARAMETERS

For a particular source category, emissions calculations will generally rely on emission factors and other parame- ters (e.g., utilization factors, oxidation rates, methane conversion factors).2 These factors and parameters may be published or default factors, based on company- specific data, site-specific data, or direct emission or other measurements. For fuel consumption, published emission factors based on fuel energy content are gener- ally more accurate than those based on mass or volume, except when mass or volume based factors have been measured at the company- or site-specific level. Quality investigations need to assess the representativeness and applicability of emission factors and other parameters to the specific characteristics of a company. Differences between measured and default values need to be qualita- tively explained and justified based upon the company’s operational characteristics.

ACTIVITY DATA

The collection of high quality activity data will often be the most significant limitation for corporate GHG inven- tories. Therefore, establishing robust data collection procedures needs to be a priority in the design of any company’s inventory program. The following are useful measures for ensuring the quality of activity data:

• Develop data collection procedures that allow the same data to be efficiently collected in future years.
• Convert fuel consumption data to energy units before applying carbon content emission factors, which may be better correlated to a fuel’s energy content than its mass.
• Compare current year data with historical trends. If data do not exhibit relatively consistent changes from year to year then the causes for these patterns should be investigated (e.g., changes of over 10 percent from year to year may warrant further investigation).
• Compare activity data from multiple reference sources (e.g., government survey data or data compiled by trade associations) with corporate data when possible. Such checks can ensure that consistent data is being reported to all parties. Data can also be compared among facilities within a company.
• Investigate activity data that is generated for purposes other than preparing a GHG inventory. In doing so, companies will need to check the applicability of this data to inventory purposes, including completeness, consistency with the source category definition, and consistency with the emission factors used. For example, data from different facilities may be exam- ined for inconsistent measurement techniques, operating conditions, or technologies. Quality control measures (e.g., ISO) may have already been conducted during the data’s original preparation. These measures can be integrated with the company’s inventory quality management system.
• Check that base year recalculation procedures have been followed consistently and correctly (see chapter 5).
• Check that operational and organizational boundary decisions have been applied correctly and consistently to the collection of activity data (see chapters 3 and 4).
• Investigate whether biases or other characteristics that could affect data quality have been previously identi- fied (e.g., by communicating with experts at a particular facility or elsewhere). For example, a bias could be the unintentional exclusion of operations at smaller facilities or data that do not correspond exactly with the company’s organizational boundaries.
• Extend quality management measures to cover any additional data (sales, production, etc.) used to esti- mate emission intensities or other ratios.
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Interface: Integration of emissions and business data systems

Interface, Inc., is the world’s largest manufacturer of carpet tiles and upholstery fabrics for commercial interiors. The company has established an environmental data system that mirrors its corpo- rate financial data reporting. The Interface EcoMetrics system is designed to provide activity and material flow data from business units in a number of countries (the United States, Canada, Australia, the United Kingdom, Thailand and throughout Europe) and provides metrics for measuring progress on environmental issues such as GHG emissions. Using company-wide accounting guidelines and standards, energy and material input data are reported to a central database each quarter and made available to sustainability personnel. These data are the foundation of Interface’s annual inventory and enable data comparison over time in the pursuit of improved quality. Basing emissions data systems on financial reporting helps Interface improve its data quality. Just as financial data need to be documented and defensible, Interface’s emissions data are held to standards that promote an increasingly transparent, accurate, and high-quality inventory. Integrating its financial and emissions data systems has made Interface’s GHG accounting and reporting more useful as it strives to be a “completely sustainable company” by 2020.

1. EMISSION ESTIMATES Estimated emissions for a source category can be compared with historical data or other estimates to ensure they fall within a reasonable range. Potentially unreasonable estimates provide cause for checking emission factors or activity data and determining whether changes in methodology, market forces, or other events are sufficient reasons for the change. In situations where actual emission monitoring occurs (e.g., power plant CO2 emissions), the data from moni- tors can be compared with calculated emissions using activity data and emission factors. If any of the above emission factor, activity data, emis- sion estimate, or other parameter checks indicate a problem, more detailed investigations into the accuracy of the data or appropriateness of the methods may be required. These more detailed investigations can also be utilized to better assess the quality of data. One potential measure of data quality is a quantitative and qualitative assessment of their uncertainty.

Inventory quality and inventory uncertainty

Preparing a GHG inventory is inherently both an accounting and a scientific exercise. Most applications for company-level emissions and removal estimates require that these data be reported in a format similar to financial accounting data. In financial accounting, it is standard practice to report individual point estimates (i.e., single value versus a range of possible values). In contrast, the standard practice for most scientific studies of GHG and other emissions is to report quantitative data with estimated error bounds (i.e., uncertainty). Just like financial figures in a profit and loss or bank account statement, point estimates in a corporate emission inven- tory have obvious uses. However, how would or should the addition of some quantitative measure of uncertainty to an emission inventory be used?

In an ideal situation, in which a company had perfect quantitative information on the uncertainty of its emis- sion estimates at all levels, the primary use of this information would almost certainly be comparative. Such comparisons might be made across companies, across business units, across source categories, or through time. In this situation, inventory estimates could even be rated or discounted based on their quality before they were used, with uncertainty being the objec- tive quantitative metric for quality. Unfortunately, such objective uncertainty estimates rarely exist.

TYPES OF UNCERTAINTIES

Uncertainties associated with GHG inventories can be broadly categorized into scientific uncertainty and estimation uncertainty. Scientific uncertainty arises when the science of the actual emission and/or removal process is not completely understood. For example, many direct and indirect factors associated with global warming potential (GWP) values that are used to combine emission estimates for various GHGs involve significant scientific uncertainty. Analyzing and quanti- fying such scientific uncertainty is extremely problematic and is likely to be beyond the capacity of most company inventory programs.



Estimation uncertainty arises any time GHG emissions are quantified. Therefore all emissions or removal esti- mates are associated with estimation uncertainty. Estimation uncertainty can be further classified into two types: model uncertainty and parameter uncertainty.

Model uncertainty refers to the uncertainty associated with the mathematical equations (i.e., models) used to characterize the relationships between various parame- ters and emission processes. For example, model uncertainty may arise either due to the use of an incor- rect mathematical model or inappropriate input into the model. As with scientific uncertainty, estimating model uncertainty is likely to be beyond most company’s inventory efforts; however, some companies may wish to utilize their unique scientific and engi- neering expertise to evaluate the uncertainty in their emission estimation models.

Parameter uncertainty refers to the uncertainty associ- ated with quantifying the parameters used as inputs (e.g., activity data and emission factors) into estima- tion models. Parameter uncertainties can be evaluated through statistical analysis, measurement equipment precision determinations, and expert judgment. Quantifying parameter uncertainties and then esti- mating source category uncertainties based on these parameter uncertainties will be the primary focus of companies that choose to investigate the uncertainty in their emission inventories.

LIMITATIONS OF UNCERTAINTY ESTIMATES

Given that only parameter uncertainties are within the feasible scope of most companies, uncertainty estimates for corporate GHG inventories will, of necessity, be imperfect. Complete and robust sample data will not always be available to assess the statistical uncertainty in every parameter. For most parameters (e.g., liters of gasoline purchased or tonnes of limestone consumed), only a single data point may be available. In some cases, companies can utilize instrument precision or calibration information to inform their assessment of statistical uncertainty. However, to quantify some of the systematic uncertainties5 associated with parameters and to supplement statistical

uncertainty estimates, companies will usually have to rely on expert judgment. The problem with expert judgment, though, is that it is difficult to obtain in a comparable (i.e., unbiased) and consistent manner across parameters, source categories, or companies.

For these reasons, almost all comprehensive estimates of uncertainty for GHG inventories will be not only imper- fect but also have a subjective component and, despite the most thorough efforts, are themselves considered highly uncertain. In most cases, uncertainty estimates cannot be interpreted as an objective measure of quality. Nor can they be used to compare the quality of emission estimates between source categories or companies.

Exceptions to this include the following cases in which it is assumed that either statistical or instrument precision data are available to objectively estimate each para- meter’s statistical uncertainty (i.e., expert judgment is not needed):

• When two operationally similar facilities use identical emission estimation methodologies, the differences in scientific or model uncertainties can, for the most part, be ignored. Then quantified estimates of statis- tical uncertainty can be treated as being comparable between facilities. This type of comparability is what is aimed for in some trading programs that prescribe specific monitoring, estimation, and measurement requirements. However, even in this situation, the degree of comparability depends on the flexibility that participants are given for estimating emissions, the homogeneity across facilities, as well as the level of enforcement and review of the methodologies used.
• Similarly, when a single facility uses the same estima- tion methodology each year, the systematic parameter uncertainties—in addition to scientific and model uncertainties—in a source’s emission estimates for two years are, for the most part, identical.7 Because the systematic parameter uncertainties then cancel out, the uncertainty in an emission trend (e.g., the difference between the estimates for two years) is generally less than the uncertainty in total emissions for a single year. In such a situation, quantified uncer- tainty estimates can be treated as being comparable over time and used to track relative changes in the quality of a facility’s emission estimates for that source category. Such estimates of uncertainty in emission trends can also be used as a guide to setting a facility’s emissions reduction target. Trend uncer- tainty estimates are likely to be less useful for setting broader (e.g., company-wide) targets (see chapter 11) because of the general problems with comparability between uncertainty estimates across gases, sources, and facilities.

Given these limitations, the role of qualitative and quan- titative uncertainty assessments in developing GHG inventories include:

• Promoting a broader learning and quality feedback process.
• Supporting efforts to qualitatively understand and document the causes of uncertainty and help identify ways of improving inventory quality. For example, collecting the information needed to determine the statistical properties of activity data and emission factors forces one to ask hard questions and to care- fully and systematically investigate data quality.
• Establishing lines of communication and feedback with data suppliers to identify specific opportunities to improve quality of the data and methods used.
• Providing valuable information to reviewers, verifiers, and managers for setting priorities for investments into improving data sources and methodologies.

The GHG Protocol Corporate Standard has developed a supplementary guidance document on uncertainty assess- ments (“Guidance on uncertainty assessment in GHG inventories and calculating statistical parameter uncer- tainty”) along with an uncertainty calculation tool, both of which are available on the GHG Protocol website. The guidance document describes how to use the calculation tool in aggregating uncertainties. It also discusses in more depth different types of uncertainties, the limita- tions of quantitative uncertainty assessment, and how uncertainty estimates should be properly interpreted.

Additional guidance and information on assessing uncertainty—including optional approaches to devel- oping quantitative uncertainty estimates and eliciting judgments from experts — can also be found in EPA's Emissions Inventory Improvement Program, Volume VI: Quality Assurance/Quality Control (1999) and in chapter 6 of the IPCC’s Good Practice Guidance (2000a).



 

8 Accounting for GHG Reductions

As voluntary reporting, external GHG programs, and emission trading systems evolve, it is becoming more and more essential for compa- nies to understand the implications of accounting for GHG emissions changes over time on the one hand, and, on the other hand, accounting for offsets or credits that result from GHG reduction projects. This chapter elaborates on the different issues associated with the term “GHG reductions.”

The GHG Protocol Corporate Standard focuses on accounting and reporting for GHG emissions at the company or organizational level. Reductions in corpo- rate emissions are calculated by comparing changes in the company’s actual emissions inventory over time relative to a base year. Focusing on overall corporate or organizational level emissions has the advantage of helping companies manage their aggregate GHG risks and opportunities more effectively. It also helps focus resources on activities that result in the most cost- effective GHG reductions.

In contrast to corporate accounting, the forthcoming GHG Protocol Project Quantification Standard focuses on the quantification of GHG reductions from GHG miti- gation projects that will be used as offsets. Offsets are discrete GHG reductions used to compensate for (i.e., offset) GHG emissions elsewhere, for example to meet a voluntary or mandatory GHG target or cap. Offsets are calculated relative to a baseline that represents a hypothetical scenario for what emissions would have been in the absence of the project.

Corporate GHG reductions at facility or country levelFrom the perspective of the earth's atmosphere, it does not matter where GHG emissions or reductions occur. From the perspective of national and international policymakers addressing global warming, the location where GHG reductions are achieved is relevant, since policies usually focus on achieving reductions within specific countries or regions, as spelled out, for example, in the Kyoto Protocol. Thus companies with global operations will have to respond to an array of state, national, or regional regulations and requirements that address GHGs from operations or facilities within a specific geographic area.

The GHG Protocol Corporate Standard calculates GHG emissions using a bottom-up approach. This involves calculating emissions at the level of an individual source or facility and then rolling this up to the corporate level. Thus a company’s overall emissions may decrease, even if increases occur at specific sources, facilities, or opera- tions and vice-versa. This bottom-up approach enables companies to report GHG emissions information at different scales, e.g., by individual sources or facilities, or by a collection of facilities within a given country. Companies can meet an array of government require- ments or voluntary commitments by comparing actual emissions over time for the relevant scale. On a corpo-

rate-wide scale, this information can also be used when setting and reporting progress towards a corporate-wide GHG target (see chapter 11).

In order to track and explain changes in GHG emissions over time, companies may find it useful to provide information on the nature of these changes. For example, BP asks each of its reporting units to provide such information in an accounting movement format using the following categories (BP 2000):

• Acquisitions and divestments
• Closure
• Real reductions (e.g., efficiency improvements, material or fuel substitution)
• Change in production levelChanges in estimation methodology Other

This type of information can be summarized at the corporate level to provide an overview of the company’s performance over time.

Reductions in indirect emissions

Reductions in indirect emissions (changes in scope 2 or 3 emissions over time) may not always capture the actual emissions reduction accurately. This is because there is not always a direct cause-effect relationship between the activity of the reporting company and the resulting GHG emissions. For example, a reduction in air travel would reduce a company’s scope 3 emissions. This reduction is usually quantified based on an average emission factor of fuel use per passenger. However, how this reduction actually translates into a change in GHG emissions to the atmosphere would depend on a number of factors, including whether another person takes the “empty seat” or whether this unused seat contributes to reduced air traffic over the longer term. Similarly, reductions

in scope 2 emissions calculated with an average grid emissions factor may over- or underestimate the actual reduction depending on the nature of the grid.

Generally, as long as the accounting of indirect emissions over time recognizes activities that in aggregate change global emissions, any such concerns over accuracy should not inhibit companies from reporting their indi- rect emissions. In cases where accuracy is more important, it may be appropriate to undertake a more

detailed assessment of the actual reduction using a project quantification methodology.

Project based reductions and offsets/credits

Project reductions that are to be used as offsets should be quantified using a project quantification method, such as the forthcoming GHG Protocol Project Quantification Standard, that addresses the following accounting issues:

• SELECTION OF A BASELINE SCENARIO AND EMISSION. The baseline scenario represents what would have happened in the absence of the project. Baseline emissions are the hypothetical emissions associated with this scenario. The selection of a baseline scenario always involves uncertainty because it represents a hypothetical scenario for what would have happened without the project. The project reduction is calculated as the difference between the baseline and project emissions. This differs from the way corporate or organizational reductions are measured in this document, i.e., in relation to an actual historical base year.
• DEMONSTRATION OF ADDITIONALITY. This relates to whether the project has resulted in emission reductions or removals in addition to what would have happened in the absence of the project. If the project reduction is used as an offset, the quantification procedure should address additionality and demonstrate that the project itself is not the baseline and that project emissions are less than baseline emissions. Additionality ensures the integrity of the fixed cap or target for which the offset is used. Each reduction unit from a project used as an offset allows the organization or facility with a cap or target one additional unit of emissions. If the project were going to happen anyway (i.e., is non-additional), global emissions will be higher by the number of reduc- tion units issued to the project.
• IDENTIFICATION AND QUANTIFICATION OF RELEVANT SECONDARY EFFECTS. These are GHG emissions changes resulting from the project not captured by the primary effect(s).1 Secondary effects are typically the small, unintended GHG consequences of a project and include leakage (changes in the availability or quan- tity of a product or service that results in changes in GHG emissions elsewhere) as well as changes in GHG emissions up- and downstream of the project. If rele- vant, secondary effects should be incorporated into the calculation of the project reduction.
• CONSIDERATION OF REVERSIBILITY. Some projects achieve reductions in atmospheric carbon dioxide levels by capturing, removing and/or storing carbon or GHGs in biological or non-biological sinks (e.g., forestry, land use management, underground reser- voirs). These reductions may be temporary in that the removed carbon dioxide may be returned to the atmosphere at some point in the future through intentional activities or accidental occurrences— such as harvesting of forestland or forest fires, etc.2 The risk of reversibility should be assessed, together with any mitigation or compensation measures included in the project design.
• AVOIDANCE OF DOUBLE COUNTING. To avoid double counting, the reductions giving rise to the offset must occur at sources or sinks not included in the target or cap for which the offset is used. Also, if the reductions occur at sources or sinks owned or controlled by someone other than the parties to the project (i.e., they are indirect), the ownership of the reduction should be clarified to avoid double counting.

Offsets may be converted into credits when used to meet an externally imposed target. Credits are convertible and transferable instruments usually bestowed by an external GHG program. They are typically generated from an activity such as an emissions reduction project and then used to meet a target in an otherwise closed system, such as a group of facilities with an absolute emissions cap placed across them. Although a credit is usually based on the underlying reduction calculation, the conversion of an offset into a credit is usually subject to strict rules, which may differ from program to program. For example, a Certified Emission Reduction (CER) is a credit issued by the Kyoto Protocol Clean Development Mechanism. Once issued, this credit can be traded and ultimately used to meet Kyoto Protocol targets. Experience from the “pre- compliance” market in GHG credits highlights the importance of delineating project reductions that are to be used as offsets with a credible quantification method capable of providing verifiable data.

Reporting project based reductions

It is important for companies to report their physical inventory emissions for their chosen inventory bound- aries separately and independently of any GHG trades they undertake. GHG trades3 should be reported in its public GHG report under optional information—either in relation to a target (see chapter 11) or corporate

inventory (see chapter 9). Appropriate information addressing the credibility of purchased or sold offsets or credits should be included.

When companies implement internal projects that reduce GHGs from their operations, the resulting reductions are usually captured in their inventory’s boundaries. These reductions need not be reported separately unless they are sold, traded externally, or otherwise used as an offset or credit. However, some companies may be able to make changes to their own operations that result in GHG emissions changes at sources not included in their own inventory boundary, or not captured by comparing emissions changes over time. For example:

• Substituting fossil fuel with waste-derived fuel that might otherwise be used as landfill or incinerated without energy recovery. Such substitution may have no direct effect on (or may even increase) a company’s own GHG emissions. However, it could result in emissions reductions elsewhere by another organization, e.g., through avoiding landfill gas and fossil fuel use.
• Installing an on-site power generation plant (e.g., a combined heat and power, or CHP, plant) that provides surplus electricity to other companies may increase a company’s direct emissions, while displacing the consumption of grid electricity by the companies supplied. Any resulting emissions reduc- tions at the plants where this electricity would have otherwise been produced will not be captured in the inventory of the company installing the on-site plant.
• Substituting purchased grid electricity with an on-site power generation plant (e.g., CHP) may increase a company’s direct GHG emissions, while reducing the GHG emissions associated with the generation of grid electricity. Depending on the GHG intensity and the supply structure of the electricity grid, this reduction may be over- or underestimated when merely comparing scope 2 emissions over time, if the latter are quantified using an average grid emission factor.

These reductions may be separately quantified, for example using the GHG Protocol Project Quantification Standard, and reported in a company’s public GHG report under optional information in the same way as GHG trades described above.



NOTES

1. 1 Primary effects are the specific GHG reducing elements or activities (reducing GHG emissions, carbon storage, or enhancing GHG removals) that the project is intended to achieve.
2. 2 This problem with the temporary nature of GHG reductions is sometimes referred to as the “permanence” issue.
3. 3 The term “GHG trades” refers to all purchases or sales of allowances, offsets, and credits.
 

9 Reporting GHG Emissions

Acredible GHG emissions report presents relevant information that is complete, consistent, accurate and transparent. While it takes time to develop a rigorous and complete corporate inventory of GHG emissions, knowledge will improve with experience in calculating and reporting data. It is therefore recommended that a public GHG report:

• Be based on the best data available at the time of publication, while being transparent about its limitations
• Communicate any material discrepancies identified in previous years
• Include the company’s gross emissions for its chosen inventory boundary separate from and independent of any GHG trades it might engage in.

Reported information shall be “relevant, complete, consistent, transparent and accurate.” The GHG Protocol Corporate Standard requires reporting a minimum of scope 1 and scope 2 emissions.

Required information

A public GHG emissions report that is in accordance with the GHG Protocol Corporate Standard shall include the following information:

DESCRIPTION OF THE COMPANY AND INVENTORY BOUNDARY

• An outline of the organizational boundaries chosen, including the chosen consolidation approach.
• An outline of the operational boundaries chosen, and if scope 3 is included, a list specifying which types of activities are covered.
• The reporting period covered. INFORMATION ON EMISSIONS
• Total scope 1 and 2 emissions independent of any GHG trades such as sales, purchases, transfers, or banking of allowances.
• Emissions data separately for each scope.
• Emissions data for all six GHGs separately (CO2, CH4, N2O, HFCs, PFCs, SF6) in metric tonnes and in tonnes of CO2 equivalent.
• Year chosen as base year, and an emissions profile over time that is consistent with and clarifies the chosen policy for making base year emissions recalculations.
• Appropriate context for any significant emissions changes that trigger base year emissions recalculation (acquisitions/divestitures, outsourcing/insourcing, changes in reporting boundaries or calculation methodologies, etc.).
• Emissions data for direct CO2 emissions from biologi- cally sequestered carbon (e.g., CO2 from burning biomass/biofuels), reported separately from the scopes.
• Methodologies used to calculate or measure emissions, providing a reference or link to any calculation tools used.
• Any specific exclusions of sources, facilities, and /or operations.

Optional information

A public GHG emissions report should include, when applicable, the following additional information:

INFORMATION ON EMISSIONS AND PERFORMANCE

• Emissions data from relevant scope 3 emissions activities for which reliable data can be obtained.
• Emissions data further subdivided, where this aids transparency, by business units/facilities, country, source types (stationary combustion, process, fugitive, etc.), and activity types (production of electricity, transportation, generation of purchased electricity that is sold to end users, etc.).
• Emissions attributable to own generation of elec- tricity, heat, or steam that is sold or transferred to another organization (see chapter 4).
• Emissions attributable to the generation of electricity, heat or steam that is purchased for re-sale to non-end users (see chapter 4).
• A description of performance measured against internal and external benchmarks.
• Emissions from GHGs not covered by the Kyoto Protocol (e.g., CFCs, NOx,), reported separately from scopes.
• Relevant ratio performance indicators (e.g. emissions per kilowatt-hour generated, tonne of material production, or sales).
• An outline of any GHG management/reduction programs or strategies.
• Information on any contractual provisions addressing GHG-related risks and obligations.
• An outline of any external assurance provided and a copy of any verification statement, if applicable, of the reported emissions data
• Information on the causes of emissions changes that did not trigger a base year emissions recalculation (e.g., process changes, efficiency improvements, plant closures).
• GHG emissions data for all years between the base year and the reporting year (including details of and reasons for recalculations, if appropriate)
• Information on the quality of the inventory (e.g., infor- mation on the causes and magnitude of uncertainties in emission estimates) and an outline of policies in place to improve inventory quality. (see chapter 7).
• Information on any GHG sequestration.
• A list of facilities included in the inventory.
• A contact person.

INFORMATION ON OFFSETS• Information on offsets that have been purchased or

developed outside the inventory boundary, subdivided by GHG storage/removals and emissions reduction projects. Specify if the offsets are verified/certified (see chapter 8) and/or approved by an external GHG program (e.g., the Clean Development Mechanism, Joint Implementation).

• Information on reductions at sources inside the inven- tory boundary that have been sold/transferred as offsets to a third party. Specify if the reduction has been verified/certified and/or approved by an external GHG program (see chapter 8).

By following the GHG Protocol Corporate Standard reporting requirements, users adopt a compre- hensive standard with the necessary detail and

transparency for credible public reporting. The appropriate level of reporting of optional information categories can be determined by the objectives and intended audience for the report. For national or voluntary GHG programs, or for internal management purposes, reporting requirements may vary (Appendix C summarizes the requirements of various GHG programs).

For public reporting, it is important to differentiate between a summary of a public report that is, for example, published on the Internet or in Sustainability/ Corporate Social Responsibility reporting (e.g., Global Reporting Initiative) and a full public report that contains all the necessary data as specified by the reporting standard spelled out in this volume. Not every circulated report must contain all information as specified by this standard, but a link or reference needs to be made to a publicly available full report where all information is available.

For some companies, providing emissions data for specific GHGs or facilities/business units, or reporting ratio indicators, may compromise business confiden- tiality. If this is the case, the data need not be publicly reported, but can be made available to those auditing the GHG emissions data, assuming confidentiality is secured.

Companies should strive to create a report that is as transparent, accurate, consistent and complete as possible. Structurally, this may be achieved by adopting the reporting categories of the standard (e.g., required description of the company and inventory boundary, required information on corporate emissions, optional information on emissions and performance, and optional information on offsets) as a basis of the report. Qualitatively, including a discussion of the reporting company’s strategy and goals for GHG accounting, any particular challenges or tradeoffs faced, the context of decisions on boundaries and other accounting parameters, and an analysis of emissions trends

may help provide a complete picture of the company’s inventory efforts.

Double Counting

Companies should take care to identify and exclude from reporting any scope 2 or scope 3 emissions that are also reported as scope 1 emissions by other facilities, business units, or companies included in the emissions inventory consolidation (see chapter 6).

Use of ratio indicators

Two principal aspects of GHG performance are of interest to management and stakeholders. One concerns the overall GHG impact of a company—that is the absolute quantity of GHG emissions released to the atmosphere. The other concerns the company’s GHG emissions normalized by some business metric that results in a ratio indicator. The GHG Protocol Corporate Standard requires reporting of absolute emissions; reporting of ratio indicators is optional.

Ratio indicators provide information on performance relative to a business type and can facilitate compar- isons between similar products and processes over time. Companies may choose to report GHG ratio indicators in order to:

• Evaluate performance over time (e.g., relate figures from different years, identify trends in the data, and show performance in relation to targets and base years (see chapter 11).
• Establish a relationship between data from different categories. For example, a company may want to establish a relationship between the value that an action provides (e.g., price of a tonne of product) and its impact on society or on the environment (e.g., emissions from product manufacturing).
• Improve comparability between different sizes of busi- ness and operations by normalizing figures (e.g., by assessing the impact of different sized businesses on the same scale).

It is important to recognize that the inherent diversity of businesses and the circumstances of individual companies can result in misleading indicators. Apparently minor differences in process, product, or location can be significant in terms of environmental effect. Therefore, it is necessary to know the business context in order to be able to design and interpret ratio indicators correctly.

Companies may develop ratios that make most sense for their business and are relevant to their decision- making needs. They may select ratios for external reporting that improve the understanding and clarify the interpretation of their performance for their stakeholders. It is important to provide some perspec- tive on issues such as scale and limitations of indicators in a way that users understand the nature of the information provided. Companies should consider what ratio indicators best capture the bene- fits and impacts of their business, i.e., its operations, its products, and its effects on the marketplace and on the entire economy. Some examples of different ratio indicators are provided here.

PRODUCTIVITY/EFFICIENCY RATIOS.

Productivity/efficiency ratios express the value or achievement of a business divided by its GHG impact. Increasing efficiency ratios reflect a positive perform- ance improvement. Examples of productivity/efficiency ratios include resource productivity (e.g., sales per GHG) and process eco-efficiency (e.g., production volume per amount of GHG).



INTENSITY RATIOS

Intensity ratios express GHG impact per unit of physical activity or unit of economic output. A physical intensity ratio is suitable when aggre- gating or comparing across businesses that have similar products. An economic intensity ratio is suitable when aggregating or comparing across businesses that produce different products. A declining intensity ratio reflects a positive performance improvement. Many companies historically tracked environmental perform- ance with intensity ratios. Intensity ratios are often called “normalized” environmental impact data. Examples of intensity ratios include product emission intensity (e.g., tonnes of CO2 emissions per electricity generated); service intensity (e.g., GHG emissions per function or per service); and sales intensity (e.g., emis- sions per sales).

PERCENTAGES

A percentage indicator is a ratio between two similar issues (with the same physical unit in the numerator and the denominator). Examples of percentages that can be meaningful in performance reports include current GHG emissions expressed as a percentage of base year GHG emissions.

For further guidance on ratio indicators refer to CCAR, 2003; GRI, 2002; Verfaillie and Bidwell, 2000.

 

10 Verification of GHG Emissions

Verification is an objective assessment of the accuracy and completeness of reported GHG information and the conformity of this information to pre-established GHG accounting and reporting principles. Although the practice

of verifying corporate GHG inventories is still evolving the emergence of widely accepted standards, such as the GHG Protocol Corporate Standard and the forth- coming GHG Protocol Project Quantification Standard, should help GHG verification become more uniform, credible, and widely accepted.

This chapter provides an overview of the key elements of a GHG verification process. It is relevant to companies who are developing GHG inventories and have planned for, or are considering, obtaining an independent verifi- cation of their results and systems. Furthermore, as the process of developing a verifiable inventory is largely the same as that for obtaining reliable and defensible data, this chapter is also relevant to all companies regardless of any intention to commission a GHG verification.

Verification involves an assessment of the risks of mate- rial discrepancies in reported data. Discrepancies relate to differences between reported data and data generated from the proper application of the relevant standards and methodologies. In practice, verification involves the prioritization of effort by the verifier towards the data and associated systems that have the greatest impact on overall data quality.

Relevance of GHG principles

The primary aim of verification is to provide confidence to users that the reported information and associated statements represent a faithful, true, and fair account of a company’s GHG emissions. Ensuring transparency and verifiability of the inventory data is crucial for verifica- tion. The more transparent, well controlled and well documented a company’s emissions data and systems are, the more efficient it will be to verify. As outlined in chapter 1, there are a number of GHG accounting and reporting principles that need to be adhered to when compiling a GHG inventory. Adherence to these princi- ples and the presence of a transparent, well-documented system (sometimes referred to as an audit trail) is the basis of a successful verification.

Goals

Before commissioning an independent verification, a company should clearly define its goals and decide whether they are best met by an external verification. Common reasons for undertaking a verification include:

• Increased credibility of publicly reported emissions information and progress towards GHG targets, leading to enhanced stakeholder trust
• Increased senior management confidence in reported information on which to base investment and target- setting decisions
• Improvement of internal accounting and reporting practices (e.g., calculation, recording and internal reporting systems, and the application of GHG accounting and reporting principles), and facilitating learning and knowledge transfer within the company
• Preparation for mandatory verification requirements of GHG programs.

Internal assurance

While verification is often undertaken by an independent, external third party, this may not always be the case. Many companies interested in improving their GHG inventories may subject their information to internal verification by personnel who are independent of

the GHG accounting and reporting process. Both internal and external verification should follow similar procedures and processes. For external stakeholders, external third part verification is likely to significantly increase the credibility of the GHG inventory. However, independent internal verifications can also provide valuable assurance over the reliability of information.

Internal verification can be a worthwhile learning expe- rience for a company prior to commissioning an external verification by a third party. It can also provide external verifiers with useful information to begin their work.

The concept of materiality

The concept of “materiality” is essential to understanding the process of verification. Chapter 1 provides a useful interpretation of the relationship between the principle of completeness and the concept of materiality. Information is considered to be material if, by its inclusion or exclu- sion, it can be seen to influence any decisions or actions taken by users of it. A material discrepancy is an error (for example, from an oversight, omission or miscalcula- tion) that results in a reported quantity or statement being significantly different to the true value or meaning. In order to express an opinion on data or information, a verifier would need to form a view on the materiality of all identified errors or uncertainties.

While the concept of materiality involves a value judg- ment, the point at which a discrepancy becomes material (materiality threshold) is usually pre-defined. As a rule of thumb, an error is considered to be materially misleading

if its value exceeds 5% of the total inventory for the part of the organization being verified.

The verifier needs to assess an error or omission in the full context within which information is presented. For example, if a 2% error prevents a company from achieving its corporate target then this would most likely be considered material. Understanding how verifiers apply a materiality threshold will enable companies to more readily establish whether the omissions of an indi- vidual source or activity from their inventory is likely to raise questions of materiality.

Materiality thresholds may also be outlined in the requirements of a specific GHG program or determined by a national verification standard, depending on who is requiring the verification and for what reasons. A materiality threshold provides guidance to verifiers on what may be an immaterial discrepancy so that they can concentrate their work on areas that are more likely to lead to materially misleading errors. A materiality threshold is not the same as de minimis emissions, or a permissible quantity of emissions that a company can leave out of its inventory.

Assessing the risk of material discrepancy

Verifiers need to assess the risk of material discrepancy of each component of the GHG information collection and reporting process. This assessment is used to plan and direct the verification process. In assessing this risk, they will consider a number of factors, including:

• The structure of the organization and the approach used to assign responsibility for monitoring and reporting GHG emissions
• The approach and commitment of management to GHG monitoring and reporting
• Development and implementation of policies and processes for monitoring and reporting (including documented methods explaining how data is generated and evaluated)
• Processes used to check and review calculation methodologies
• Complexity and nature of operations
• Complexity of the computer information system used to process the information
• The state of calibration and maintenance of meters used, and the types of meters used
• Reliability and availability of input dataAssumptions and estimations appliedAggregation of data from different sources
• Other assurance processes to which the systems and data are subjected (e.g., internal audit, external reviews and certifications).

Establishing the verification parameters

The scope of an independent verification and the level of assurance it provides will be influenced by the company's goals and/or any specific jurisdictional requirements. It is possible to verify the entire GHG inventory or specific parts of it. Discrete parts may be specified in terms of geographic location, business units, facilities, and type of emissions. The verification process may also examine more general managerial issues, such as quality manage- ment procedures, managerial awareness, availability of resources, clearly defined responsibilities, segregation of duties, and internal review procedures.

The company and verifier should reach an agreement up- front on the scope, level and objective of the verification. This agreement (often referred to as the scope of work) will address issues such as which information is to be included in the verification (e.g., head office consolidation only or information from all sites), the level of scrutiny to which selected data will be subjected (e.g., desk top review or on-site review), and the intended use of the results of the verification). The materiality threshold is another item to be considered in the scope of work. It will be of key consid- eration for both the verifier and the company, and is linked to the objectives of the verification.

The scope of work is influenced by what the verifier actu- ally finds once the verification commences and, as a result, the scope of work must remain sufficiently flexible to enable the verifier to adequately complete the verification.

A clearly defined scope of work is not only important to the company and verifier, but also for external stakeholders to be able to make informed and appro- priate decisions. Verifiers will ensure that specific exclusions have not been made solely to improve the company’s performance. To enhance transparency and credibility companies should make the scope of work publicly available.

Site visits

Depending on the level of assurance required from verification, verifiers may need to visit a number of sites to enable them to obtain sufficient, appropriate evidence over the completeness, accuracy and reliability of reported information. The sites visited should be repre- sentative of the organization as a whole. The selection of sites to be visited will be based on consideration of a number of factors, including:

• Nature of the operations and GHG sources at each site
• Complexity of the emissions data collection and calculation process
• Percentage contribution to total GHG emissions from each site
• The risk that the data from sites will be materially misstated
• Competencies and training of key personnel
• Results of previous reviews, verifications, and uncertainty analyses.

Timing of the verification

The engagement of a verifier can occur at various points during the GHG preparation and reporting process. Some companies may establish a semi-permanent internal verification team to ensure that GHG data stan- dards are being met and improved on an on-going basis.

Verification that occurs during a reporting period allows for any reporting deficiencies or data issues to be addressed before the final report is prepared. This may be particularly useful for companies preparing high profile public reports. However, some GHG programs may require, often on a random selection basis, an inde- pendent verification of the GHG inventory following the submission of a report (e.g., World Economic Forum Global GHG Registry, Greenhouse Challenge program in Australia, EU ETS). In both cases the verification cannot be closed out until the final data for the period has been submitted.



Selecting a verifier

Some factors to consider when selecting a verifier include their:

• previous experience and competence in undertaking GHG verifications
• understanding of GHG issues including calculation methodologies
• understanding of the company’s operations and industry
• objectivity, credibility, and independence.

It is important to recognize that the knowledge and qual- ifications of the individual(s) conducting the verification can be more important than those of the organization(s) they come from. Companies should select organizations based on the knowledge and qualifications of their actual verifiers and ensure that the lead verifier assigned to them is appropriately experienced. Effective verification of GHG inventories often requires a mix of specialized skills, not only at a technical level (e.g., engineering experience, industry specialists) but also at a business level (e.g., verification and industry specialists).

Preparing for a GHG verification

The internal processes described in chapter 7 are likely to be similar to those followed by an independent veri- fier. Therefore, the materials that the verifiers need are similar. Information required by an external verifier is likely to include the following:

• Information about the company's main activities and GHG emissions (types of GHG produced, description of activity that causes GHG emissions)
• Information about the company/groups/organiza- tion (list of subsidiaries and their geographic location, ownership structure, financial entities within the organization)
• Details of any changes to the company’s organiza- tional boundaries or processes during the period, including justification for the effects of these changes on emissions data
• Details of joint venture agreements, outsourcing and contractor agreements, production sharing agree- ments, emissions rights and other legal or contractual documents that determine the organizational and operational boundaries
• Documented procedures for identifying sources of emissions within the organizational and operational boundaries
• Information on other assurance processes to which the systems and data are subjected (e.g. internal audit, external reviews and certifications)
• Data used for calculating GHG emissions. This might, for example, include:
• Energy consumption data (invoices, delivery notes, weigh-bridge tickets, meter readings: electricity, gas pipes, steam, and hot water, etc.)
• Production data (tonnes of material produced, kWh of electricity produced, etc.)
• Raw material consumption data for mass balance calculations (invoices, delivery notes, weighbridge tickets, etc.)
• Emission factors (laboratory analysis etc.). Description of how GHG emissions data have

been calculated:

• Emission factors and other parameters used and their justification
• Assumptions on which estimations are based
• Information on the measurement accuracy of meters and weigh-bridges (e.g., calibration records), and other measurement techniques
• Equity share allocations and their alignment with financial reporting
• Documentation on what, if any, GHG sources or activities are excluded due to, for example, tech- nical or cost reasons.
• Information gathering process:
• Description of the procedures and systems used to collect, document and process GHG emissions data at the facility and corporate level
• Description of quality control procedures applied (internal audits, comparison with last year’s data, recalculation by second person, etc.).
• Other information:
• Selected consolidation approach as defined in chapter 3
• list of (and access to) persons responsible for collecting GHG emissions data at each site and at the corporate level (name, title, e-mail, and tele- phone numbers)
• information on uncertainties, qualitative and if available, quantitative. Appropriate documentation needs to be available to support the GHG inventory being subjected to external verification. Statements made by management for which there is no available supporting documentation cannot be verified. Where a reporting company has not yet imple- mented systems for routinely accounting and recording GHG emissions data, an external verification will be difficult and may result in the verifier being unable to issue an opinion. Under these circumstances, the veri- fiers may make recommendations on how current data collection and collation process should be improved so that an opinion can be obtained in future years. Companies are responsible for ensuring the existence, quality and retention of documentation so as to create an audit trail of how the inventory was compiled. If a company issues a specific base year against which it assesses its GHG performance, it should retain all relevant historical records to support the base year data. These issues should be born in mind when designing and implementing GHG data processes and procedures. Using the verification findings Before the verifiers will verify that an inventory has met the relevant quality standard, they may require the company to adjust any material errors that they identi- fied during the course of the verification. If the verifiers and the company cannot come to an agreement regarding adjustments, then the verifier may not be able to provide the company with an unqualified opinion. All material errors (individually or in aggregate) need to be amended prior to the final verification sign off.

As well as issuing an opinion on whether the reported information is free from material discrepancy, the veri- fiers may, depending on the agreed scope of work, also issue a verification report containing a number of recom- mendations for future improvements. The process of verification should be viewed as a valuable input to the process of continual improvement. Whether verification is undertaken for the purposes of internal review, public reporting or to certify compliance with a particular GHG program, it will likely contain useful information and guidance on how to improve and enhance a company’s GHG accounting and reporting system.

Similar to the process of selecting a verifier, those selected to be responsible for assessing and imple- menting responses to the verification findings should also have the appropriate skills and understanding of GHG accounting and reporting issues.

 

11 Setting a GHG Target

Setting targets is a routine business practice that helps ensure that an issue is kept on senior management’s “radar screen” and factored into relevant decisions about what products and services to provide and what

materials and technologies to use. Often, a corporate GHG emission reduction target is the logical follow-up to developing a GHG inventory.

This chapter provides guidance on the process of setting and reporting on a corporate GHG target. Although the chapter focuses on emissions, many of the consid- erations equally apply to GHG sequestration (see Appendix B). It is not the purpose of this chapter to prescribe what a company’s target should be, rather the focus is on the steps involved, the choices to be made, and the implications of those choices.

Why Set a GHG Target?

Any robust business strategy requires setting targets for revenues, sales, and other core business indicators, as well as tracking performance against those targets. Likewise, effective GHG management involves setting a GHG target. As companies develop strategies to reduce the GHG emissions of their products and operations, corporate-wide GHG targets are often key elements of these efforts, even if some parts of the company are

or will be subject to mandatory GHG limits. Common drivers for setting a GHG target include:

• MINIMIZING AND MANAGING GHG RISKS

While developing a GHG inventory is an important step towards identifying GHG risks and opportunities, a GHG target is a planning tool that can actually drive GHG reductions. A GHG target will help raise internal awareness about the risks and opportunities presented by climate change and ensure the issue is on the busi- ness agenda. This can serve to minimize and more effectively manage the business risks associated with climate change.

• ACHIEVING COST SAVINGS AND STIMULATING INNOVATIONImplementing a GHG target can result in cost savings by driving improvements in process innovation and resource efficiency. Targets that apply to products can drive R&D, which in turn creates products and serv- ices that can increase market share and reduce emissions associated with the use of products.
• PREPARING FOR FUTURE REGULATIONS

Internal accountability and incentive mechanisms that are established to support a target’s implementation can also equip companies to respond more effectively to future GHG regulations. For example, some compa- nies have found that experimenting with internal GHG trading programs has allowed them to better under- stand the possible impacts of future trading programs on the company.

• DEMONSTRATING LEADERSHIP AND CORPORATE RESPONSIBILITYWith the emergence of GHG regulations in many parts of the world, as well as growing concern about the effects of climate change, a commitment such as setting a public corporate GHG target demonstrates leadership and corporate responsibility. This can improve a company’s standing with customers, employees, investors, business partners, and the public, and enhance brand reputation.
• PARTICIPATING IN VOLUNTARY PROGRAMS

A growing number of voluntary GHG programs are emerging to encourage and assist companies in setting, implementing, and tracking progress toward GHG targets. Participation in voluntary programs can result in public recognition, may facilitate recog- nition of early action by future regulations, and enhance a company’s GHG accounting and reporting capacity and understanding.

Steps in Setting a Target

Setting a GHG target involves making choices among various strategies for defining and achieving a GHG reduction. The business goals, any relevant policy context, and stakeholder discussions should inform these choices.

The following sections outline the ten steps involved. Although presented sequentially, in practice target setting involves cycling back and forth between the steps. It is assumed that the company has developed a GHG inventory before implementing these steps. Figure 12 summarizes the steps.

1. Obtain senior management commitment

As with any corporate wide target, senior management buy-in and commitment particularly at the board/CEO level is a prerequisite for a successful GHG reduction program. Implementing a reduction target is likely to necessitate changes in behavior and decision-making throughout the organization. It also requires estab- lishing an internal accountability and incentive system and providing adequate resources to achieve the target. This will be difficult, if not impossible, without senior management commitment.







2. Decide on the target type

There are two broad types of GHG targets: absolute and intensity-based. An absolute target is usually expressed in terms of a reduction over time in a specified quantity of GHG emissions to the atmosphere, the unit typically being tonnes of CO2-e. An intensity target is usually expressed as a reduction in the ratio of GHG emissions relative to another business metric.1 The comparative metric should be carefully selected. It can be the output of the company (e.g. tonne CO2-e per tonne product, per kWh, per tonne mileage) or some other metric such as sales, revenues or office space. To facilitate transparency, companies using an intensity target should also report the absolute emissions from sources covered by the target.

Box 4 summarizes the advantages and disadvantages of each type of target. Some companies have both an absolute and an intensity target. Box 5 provides exam- ples of corporate GHG targets. The Royal Dutch/Shell case study illustrates how a corporate wide absolute target can be implemented by formulating a combina- tion of intensity targets at lower levels of decision-making within the company.

3. Decide on the target boundary

The target boundary defines which GHGs, geographic oper- ations, sources, and activities are covered by the target. The target and inventory boundary can be identical, or

the target may address a specified subset of the sources included in the company inventory. The quality of the GHG inventory should be a key factor informing this choice. The questions to be addressed in this step include the following:

• WHICH GHGS?

Targets usually include one or more of the six major GHGs covered by the Kyoto Protocol. For companies with significant non-CO2 GHG sources it usually makes sense to include these to increase the range of reduction opportunities. However, practical monitoring limitations may apply to smaller sources.

• WHICH GEOGRAPHICAL OPERATIONS?

Only country or regional operations with reliable GHG inventory data should be included in the target. For companies with global operations, it makes sense to limit the target’s geographical scope until a robust and reli- able inventory has been developed for all operations. Companies that participate in GHG programs involving trading2 will need to decide whether or not to include the emissions sources covered in the trading program in their corporate target. If common sources are included, i.e., if there is overlap in sources covered between the corporate target and the trading program, companies should consider how they will address any double counting resulting from the trading of GHG reductions in the trading program (see step 8).

• WHICH DIRECT AND INDIRECT EMISSION SOURCES?

Including indirect GHG emissions in a target will facilitate more cost-effective reductions by increasing the reduction opportunities available. However, indirect emissions are generally harder to measure accurately and verify than direct emissions although some categories, such as scope 2 emissions from purchased electricity, may be amenable to accurate measurement and verification. Including indirect emissions can raise issues with regard to ownership and double counting of reductions, as indirect emis- sions are by definition someone else’s direct emissions (see step 8).

• SEPARATE TARGETS FOR DIFFERENT TYPES OF BUSINESSES?

For companies with diverse operations it may make more sense to define separate GHG targets for different core businesses, especially when using an intensity target, where the most meaningful business metric for defining the target varies across business units (e.g., GHGs per tonne of cement produced or barrel of oil refined).

4. Choose the target base year

For a target to be credible, it has to be transparent how target emissions are defined in relation to past emissions. Two general approaches are available: a fixed target base year or a rolling target base year.

• USING A FIXED TARGET BASE YEAR.

Most GHG targets are defined as a percentage reduction in emis- sions below a fixed target base year (e.g., reduce CO2 emissions 25 percent below 1994 levels by 2010). Chapter 5 describes how companies should track emis- sions in their inventory over time in reference to a fixed base year. Although it is possible to use different years for the inventory base year and the target base year, to streamline the inventory and target reporting process, it usually makes sense to use the same year for both. As with the inventory base year, it is impor- tant to ensure that the emissions data for the target base year are reliable and verifiable. It is possible to use a multi-year average target base year.

The same considerations as described for multi-year average base years in chapter 5 apply.

Chapter 5 provides standards on when and how to recalculate base year emissions in order to ensure like-with-like comparisons over time when structural changes (e.g., acquisitions/divestitures) or changes in measurement and calculation methodologies alter the emissions profile over time. In most cases, this will also be an appropriate approach for recalculating data for a fixed target base year.

• USING A ROLLING TARGET BASE YEAR.

Companies may consider using a rolling target base year if obtaining and maintaining reliable and verifiable data for a fixed target base year is likely to be challenging (for example, due to frequent acquisitions). With a rolling target base year, the base year rolls forward at regular time intervals, usually one year, so that emis- sions are always compared against the previous year.4 However, emission reductions can still be collectively



stated over several years. An example would be “from 2001 through 2012, emissions will be reduced by one percent every year, compared to the previous year.” When structural or methodological changes occur, recalculations only need to be made to the previous year.7 As a result, like-with-like comparisons of emissions in the “target starting year” (2001 in the example) and “target completion year” (2012) cannot be made because emissions are not recalcu- lated for all years back to the target starting year.

The definition of what triggers a base-year emissions recalculation is the same as under the fixed base year approach. The difference lies in how far back emissions are recalculated. Table 5 compares targets using the rolling and fixed base year approaches while Figure 14 illustrates one of the key differences.

RECALCULATIONS UNDER INTENSITY TARGETS

While the standard in chapter 5 applies to absolute inventory emissions of companies using intensity targets, recalculations for structural changes for the purposes of the target are not usually needed unless the structural change results in a significant change in the GHG intensity. However, if recalculations for structural changes are made for the purposes of the target, they should be made for both the absolute emissions and the business metric. If the target business metric becomes irrelevant through a structural change, a reformulation of the target might be needed (e.g., when a company refocuses on a different industry but had used an industry-specific business metric before).

5. Define the target completion date

The target completion date determines whether the target is relatively short- or long-term. Long-term targets (e.g., with a completion year ten years from the time the target is set) facilitate long-term planning for large capital investments with GHG benefits. However, they might encourage later phase-outs of less efficient equipment. Generally, long-term targets depend on uncertain future developments, which can have opportu- nities as well as risks, which is illustrated in Figure 13. A five-year target period may be more practical for organizations with shorter planning cycles.

6. Define the length of the commitment period

The target commitment period is the period of time during which emissions performance is actually measured against the target. It ends with the target completion date. Many companies use single-year commitment periods, whereas the Kyoto Protocol, for example, speci- fies a multi-year “first commitment period” of five years (2008 – 2012). The length of the target commitment period is an important factor in determining a company’s level of commitment. Generally, the longer the target commitment period, the longer the period during which emissions performance counts towards the target.

• EXAMPLE OF A SINGLE YEAR COMMITMENT PERIOD.

Company Beta has a target of reducing emissions by 10 percent compared to its target base year 2000, by the commitment year 2010. For Beta to meet its target, it is sufficient for its emissions to be, in the year 2010, no more than 90 percent of year 2000 emissions.

• EXAMPLE OF A MULTI-YEAR COMMITMENT PERIOD.

Company Gamma has a target of reducing emissions by 10 percent, compared to its target base year 2000, by the commitment period 2008–2012. For Gamma to meet its target, its sum total emissions from 2008–2012 must not exceed 90 percent of year 2000 emissions times five (number of years in the

commitment period). In other words, its average emissions over those five years must not exceed 90 percent of year 2000 emissions.

Target commitment periods longer than one year can be used to mitigate the risk of unpredictable events in one particular year influencing performance against the target. Figure 15 shows that the length of the target commitment period determines how many emis- sions are actually relevant for target performance.

For a target using a rolling base year, the commitment period applies throughout: emission performance is continuously being measured against the target every year from when the target is set until the target completion date.

7. Decide on the use of GHG offsets or credits8 A GHG target can be met entirely from internal reduc- tions at sources included in the target boundary or through additionally using offsets that are generated from GHG reduction projects that reduce emissions at sources (or enhance sinks) external to the target boundary.9 The use of offsets may be appropriate when







the cost of internal reductions is high, opportunities for reductions limited, or the company is unable to meet its target because of unexpected circumstances. When reporting on the target, it should be specified whether offsets are used and how much of the target reduction was achieved using them.

CREDIBILITY OF OFFSETS AND TRANSPARENCY

There are currently no generally accepted methodologies for quantifying GHG offsets. The uncertainties that surround GHG project accounting make it difficult to establish that an offset is equivalent in magnitude to the internal emissions it is offsetting.10 This is why compa- nies should always report their own internal emissions in separate accounts from offsets used to meet the target, rather than providing a net figure (see step 10). It is also important to carefully assess the credibility of offsets used to meet a target and to specify the origin and nature of the offsets when reporting. Information needed includes:

• the type of project
• geographic and organizational origin
• how offsets have been quantified
• whether they have been recognized by external programs (CDM, JI, etc.) One important way to ensure the credibility of offsets is to demonstrate that the quantification methodology adequately addresses all of the key project accounting challenges in chapter 8. Taking these challenges into account, the forthcoming GHG Protocol Project Quantification Standard aims to improve the consistency, credibility, and rigor of project accounting. Additionally, it is important to check that offsets have not also been counted towards another organization’s GHG target. This might involve a contract between the buyer and seller that transfers ownership of the offset. Step 8 provides more information on accounting for GHG trades in relation to a corporate target, including establishing a policy on double counting. OFFSETS AND INTENSITY TARGETS When using offsets under intensity targets, all the above considerations apply. In order to determine compliance with the target, the offsets can be subtracted from the figure used for absolute emissions (the numerator); the

resulting difference is then divided by the corresponding metric. It is important, however, that absolute emissions are still reported separately both from offsets and the business metric (see step 9 below).

8. Establish a target double counting policy

This step addresses double counting of GHG reductions and offsets, as well as allowances issued by external trading programs. It applies only to companies that engage in trading (sale or purchase) of GHG offsets or whose corporate target boundaries interface with other companies’ targets or external programs.

Given that there is currently no consensus on how such double counting issues should be addressed, companies should develop their own “Target Double Counting Policy.” This should specify how reductions and trades related to other targets and programs will be reconciled with their corporate target, and accordingly which types of double counting situations are regarded as relevant. Listed here are some examples of double counting that might need to be addressed in the policy.

• DOUBLE COUNTING OF OFFSETS. This can occur when a GHG offset is counted towards the target by both the selling and purchasing organizations. For example, company A undertakes an internal reduction project that reduces GHGs at sources included in its own target. Company A then sells this project reduction to company B to use as an offset towards its target, while still counting it toward its own target. In this case, reductions are counted by two different organizations against targets that cover different emissions sources. Trading programs address this by using registries that allocate a serial number to all traded offsets or credits and ensuring the serial numbers are retired once they are used. In the absence of registries this could be addressed by a contract between seller and buyer.
• DOUBLE COUNTING DUE TO TARGET OVERLAP.11

This can occur when sources included under a company’s corporate target are also subject to limits by an external program or another company’s target. Two examples:

• Company A has a corporate target that includes GHG sources that are also regulated under a trading program. In this case, reductions at the common sources are used by company A to meet both its corporate target and the trading program target.

Company B has a corporate target to reduce its direct emissions from the generation of electricity.12 Company C who purchases electricity directly from company B also has a corporate target that includes indirect emissions from the purchase of electricity (scope 2). Company C undertakes energy efficiency measures to reduce its indirect emissions from the use of the electricity. These will usually show up as reductions in both companies’ targets.13

These two examples illustrate that double counting is inherent when the GHG sources where the reductions occur are included in more than one target of the same or different organizations. Without limiting the scope of targets it may be difficult to avoid this type of double counting and it probably does not matter if the double counting is restricted to the organizations sharing the same sources in their targets (i.e., when the two targets overlap).

• DOUBLE COUNTING OF ALLOWANCES TRADED IN EXTERNAL PROGRAMS. This occurs when a corporate target overlaps with an external trading program and allowances that cover the common sources are sold in the trading program for use by another organization and reconciled with the regulatory target, but not reconciled with the corporate target. This example differs from the previous example in that double counting occurs across two targets that are not over- lapping (i.e., they do not cover the same sources). This type of double counting could be avoided if the company selling the allowances reconciles the trade with its corporate target (see Holcim case study). Whatever the company decides to do in this situation, in order to maintain credibility, it should address buying and selling of allowances in trading programs in a consistent way. For example, if it decides not to reconcile allowances that it sells in a trading program with its corporate target, it should also not count any allowances of the same type that it purchases to meet its corporate target.

Ideally a company should try to avoid double counting in its corporate target if this undermines the environmental integrity of the target. Also, any prevented double counting between two organizations provides an addi- tional incentive for one of these companies to further reduce emissions. However, in practice the avoidance of double counting can be quite challenging, particularly for companies subject to multiple external programs and when indirect GHG emissions are included in the target. Companies should therefore be transparent about their

double counting policy and state any reasons for choosing not to address some double counting situations.

The Holcim case study describes how one company has chosen to track performance towards its target and address double counting issues.

Decide on the target level

The decision on setting the target level should be informed by all the previous steps. Other considerations to take into account include:

• Understanding the key drivers affecting GHG emis- sions by examining the relationship between GHG emissions and other business metrics, such as produc- tion, square footage of manufacturing space, number of employees, sales, revenue, etc.
• Developing different reduction strategies based on the major reduction opportunities available and examining their effects on total GHG emissions. Investigate how emissions projections change with different mitigation strategies.
• Looking at the future of the company as it relates to GHG emissions.
• Factoring in relevant growth factors such as production plans, revenue or sales targets, and Return on Investment (ROI) of other criteria that drive investment strategy.



• Considering whether there are any existing environmental or energy plans, capital investments, product/service changes, or targets that will affect GHG emissions. Are there plans already in place for fuel switching, on site power generation, and/or renewable energy investments that affect the future GHG trajectory?
• Benchmarking GHG emissions with similar organizations. Generally, organizations that have not previously invested in energy and other GHG reductions should be capable of meeting more aggres- sive reduction levels because they would have more cost-effective reduction opportunities.

Track and report progress Once the target has been set, it is necessary to track performance against it in order to check compliance, and also—in order to maintain credibility—to report emissions and any external reductions in a consistent, complete and transparent manner.

CARRY OUT REGULAR PERFORMANCE CHECKS.

In order to track performance against a target, it is important to link the target to the annual GHG inventory process and make regular checks of emissions in relation to the target. Some companies use interim targets for this purpose (a target using a rolling target base year automatically includes interim targets every year).



Appendix A - Accounting for Indirect Emissions from Purchased Electricity

This appendix provides guidance on how to account companies and electricity suppliers often exercise

for and report indirect emissions associated with

the purchase of electricity. Figure A–1 provides an overview of the transactions associated with purchased electricity and the corresponding emissions.

Purchased electricity for own consumption

Emissions associated with the generation of purchased electricity that is consumed by the reporting company are reported in scope 2. Scope 2 only accounts for the portion of the direct emissions from generating elec- tricity that is actually consumed by the company. A company that purchases electricity and transports it in a transmission and distribution (T&D) system that it owns or controls reports the emissions associated with T&D losses under scope 2. However, if the reporting company owns or controls the T&D system but generates (rather than purchases) the electricity transmitted through its wires, the emissions associated with T&D losses are not reported under scope 2, as they would already be accounted for under scope 1. This is the case when generation, transmission, and distribution systems are vertically integrated and owned or controlled by the same company.

Purchased electricity for resale to end-users

Emissions from the generation of purchased electricity for resale to end-users, for example purchases by a utility company, may be reported under scope 3 in the category “generation of purchased electricity that is sold to end-users.” This reporting category is particu- larly relevant for utility companies that purchase wholesale electricity supplied by independent power producers for resale to their customers. Since utility

choice over where they purchase electricity, this provides them with an important

GHG reduction opportunity (see Seattle City Light case study in chapter 4). Since scope 3 is optional, companies that are unable to track their electricity sales in terms of end users and non-end users can choose not to report these emissions in scope 3. Instead, they can report the total emissions associated with purchased electricity that is sold to both end- and non-end-users under optional information in the category “generation of purchased electricity, heat, or steam for re-sale to non-end users.”

Purchased electricity for resale to intermediaries

Emissions associated with the generation of purchased electricity that is resold to an intermediary (e.g., trading transactions) may be reported under optional information under the category “Generation of purchased electricity, heat, or steam for re-sale to non- end users.” Examples of trading transactions include brokerage/trading room transactions involving purchased electricity or any other transaction in which electricity is purchased directly from one source or the spot market and then resold to an intermediary (e.g., a non-end user). These emissions are reported under optional information separately from scope 3 because there could be a number of trading transactions before the electricity finally reaches the end-user. This may cause duplicative reporting of indirect emissions from a series of electricity trading transactions for the same electricity.



GHG emissions upstream of the generation of electricityEmissions associated with the extraction and production of fuels consumed in the generation of purchased electricity may be reported in scope 3 under the cate- gory “extraction, production, and transportation of fuels consumed in the generation of electricity.” These emissions occur upstream of the generation of electricity. Examples include emissions from mining of coal, refining of gasoline, extraction of natural gas, and production of hydrogen (if used as a fuel).

Choosing electricity emission factors

To quantify scope 2 emissions, the GHG Protocol Corporate Standard recommends that companies obtain source/supplier specific emission factors for the elec- tricity purchased. If these are not available, regional or grid emission factors should be used. For more information on choosing emission factors, see the relevant GHG Protocol calculation tools available on the GHG Protocol website (www.ghgprotocol.org).

GHG emissions associated with the consumption of electricity in T&D Emissions from the generation of electricity that is consumed in a T&D system may be reported in scope 3 under the category “generation of electricity that is consumed in a T&D system” by end-users. Published electricity grid emission factors do not usually include T&D losses. To calculate these emissions, it may be necessary to apply supplier or location specific T&D loss factors. Companies that purchase electricity and trans- port it in their own T&D systems would report the portion of electricity consumed in T&D under scope 2.

Accounting for indirect emissions associated with T&D losses

There are two types of electricity emission factors: Emission factor at generation (EFG) and Emissions factor at consumption (EFC). EFG is calculated from CO2 emissions from generation of electricity divided by amount of electricity generated. EFC is calculated from CO2 emissions from generation divided by amount of electricity consumed.



As these equations indicate, EFC multiplied by the amount of consumed electricity yields the sum of emissions attrib- utable to electricity consumed during end use and transmission and distribution. In contrast, EFG multiplied by the amount of consumed electricity yields emissions attributable to electricity consumed during end use only.

Consistent with the scope 2 definition (see chapter 4), the GHG Protocol Corporate Standard requires the use of EFG to calculate scope 2 emissions. The use of EFG ensures internal consistency in the treatment of electricity related upstream emissions categories and avoids double counting in scope 2. Additionally, there are several other advantages in using EFG:

1. 1) It is simpler to calculate and widely available in published regional, national, and international sources.
2. 2) It is based on a commonly used approach to calculate emissions intensity, i.e., emissions per unit of produc- tion output.
3. 3) It ensures transparency in reporting of indirect emis- sions from T&D losses.

The formula to account for emissions associated with T&D losses is the following:



Appendix B - Accounting for Sequestered Atmospheric Carbon

A key purpose of the GHG Protocol Corporate Standard Information on a company’s impacts on sequestered

is to provide companies with guidance on how to

develop inventories that provide an accurate and complete picture of their GHG emissions both from their direct operations as well as those along the value chain.1 For some types of companies, this is not possible without addressing the company’s impacts on sequestered atmospheric carbon.2

Sequestered atmospheric carbon

During photosynthesis, plants remove carbon (as CO2) from the atmosphere and store it in plant tissue. Until this carbon is cycled back into the atmosphere, it resides in one of a number of “carbon pools.” These pools include (a) above ground biomass (e.g., vegeta- tion) in forests, farmland, and other terrestrial environments, (b) below ground biomass (e.g., roots), and (c) biomass-based products (e.g., wood products) both while in use and when stored in a landfill.

Carbon can remain in some of these pools for long periods of time, sometimes for centuries. An increase in the stock of sequestered carbon stored in these pools represents a net removal of carbon from the atmos- phere; a decrease in the stock represents a net addition of carbon to the atmosphere.

Why include impacts on sequestered carbon in corporate GHG inventories?It is generally recognized that changes in stocks of sequestered carbon and the associated exchanges of carbon with the atmosphere are important to national level GHG emissions inventories, and consequently, these impacts on sequestered carbon are commonly addressed in national inventories (UNFCCC, 2000). Similarly, for companies in biomass-based industries, such as the forest products industry, some of the most significant aspects of a company’s overall impact on atmospheric CO2 levels will occur as a result of impacts on sequestered carbon in their direct operations as well as along their value chain. Some forest product companies have begun to address this aspect of their GHG footprint within their corporate GHG inventories (Georgia Pacific, 2002). Moreover, WBCSD’s Sustainable Forest Products Industry Working Group—which represents a significant cluster of inte- grated forestry companies operating internationally—is developing a project that will further investigate carbon measurement, accounting, reporting, and ownership issues associated with the forest products value chain.

atmospheric carbon can be used for strategic planning, for educating stakeholders, and for identifying opportunities for improving the company’s GHG profile. Opportunities may also exist to create value from reductions created along the value chain by companies acting alone or in partnership with raw material providers or customers.

Accounting for sequestered carbon in the context of the GHG Protocol Corporate Standard Consensus methods have yet to be developed under the GHG Protocol Corporate Standard for accounting of sequestered atmospheric carbon as it moves through the value chain of biomass-based industries. Nonetheless, some issues that would need to be addressed when addressing impacts on sequestered carbon in corporate inventories can be examined in the context of existing guidance provided by the GHG Protocol Corporate Standard as highlighted below.

SETTING ORGANIZATIONAL BOUNDARIES

The GHG Protocol Corporate Standard outlines two approaches for consolidating GHG data—the equity share approach and the control approach. In some cases, it may be possible to apply these approaches directly to emissions/removals associated with sequestered atmos- pheric carbon. Among the issues that may need to be examined is the ownership of sequestered carbon under the different types of contractual arrangements involving land and wood ownership, harvesting rights, and control of land management and harvesting deci- sions. The transfer of ownership as carbon moves through the value chain may also need to be addressed. In some cases, as part of a risk management program for instance, companies may be interested in performing value chain assessments of sequestered carbon without regard to ownership or control just as they might do for scope 2 and 3 emissions.

SETTING OPERATIONAL BOUNDARIES

As with GHG emissions accounting, setting operational boundaries for sequestered carbon inventories would help companies transparently report their impacts on sequestered carbon along their value chain. Companies may, for example, provide a description of the value chain capturing impacts that are material to the results of the analysis. This should include which pools are

included in the analysis, which are not, and the rationale for the selections. Until consensus methods are developed for characterizing impacts on sequestered atmospheric carbon along the value chain, this information can be included in the “optional information” section of a GHG inventory compiled using the GHG Protocol Corporate Standard.

TRACKING REMOVALS OVER TIME

As is sometimes the case with accounting for GHG emis- sions, base year data for impacts on sequestered carbon may need to be averaged over multiple years to accom- modate the year-to-year variability expected of these systems. The temporal scale used in sequestered carbon accounting will often be closely tied to the spatial scale over which the accounting is done. The question of how to recalculate base years to account for land acquisition and divestment, land use changes, and other activities also needs to be addressed.

IDENTIFYING AND CALCULATING GHG REMOVALS

The GHG Protocol Corporate Standard does not include consensus methods for sequestered carbon quantifica- tion. Companies should, therefore, explain the methods used. In some instances, quantification methods used in national inventories can be adapted for corporate- level quantification of sequestered carbon. IPCC (1997; 2000b) provides useful information on how to do this. In 2004, IPCC is expected to issue Good Practice Guidance for Land Use, Land Use Change and Forestry, with information on methods for quan- tification of sequestered carbon in forests and forest products. Companies may also find it useful to consult the methods used to prepare national inventories for those countries where significant parts of their company’s value chain reside.

In addition, although corporate inventory accounting differs from project-based accounting (as discussed below), it may be possible to use some of the calculation and monitoring methods derived from project level accounting of sequestration projects.

ACCOUNTING FOR REMOVAL ENHANCEMENTS

A corporate inventory can be used to account for yearly removals within the corporate inventory boundary. In contrast, the forthcoming GHG Protocol Project

Quantification Standard is designed to calculate project reductions that will be used as offsets, relative to a hypo- thetical baseline scenario for what would have happened without the project. In the forestry sector, projects take the form of removal enhancements.

Chapter 8 in this document addresses some of the issues that must be addressed when accounting for offsets from GHG reduction projects. Much of this guidance is also applicable to removal enhancement projects. One example is the issue of reversibility of removals — also briefly described in chapter 8.

REPORTING GHG REMOVALS

Until consensus methods are developed for character- izing impacts on sequestered atmospheric carbon along the value chain, this information can be included in the “optional information” section of the inventory (See chapter 9). Information on sequestered carbon in the company’s inventory boundary should be kept separate from project-based reductions at sources that are not in the inventory boundary. Where removal enhancement projects take place within a company’s inventory boundary they would normally show up as an increase in carbon removals over time, but can also be reported in optional information. However, they should also be iden- tified separately to ensure that they are not double counted. This is especially important when they are sold as offsets or credits to a third party.

As companies develop experience using various methods for characterizing impacts on sequestered carbon, more information will become available on the level of accuracy to expect from these methods. In the early stages of developing this experience, however, companies may find it difficult to assess the uncer- tainty associated with the estimates and therefore may need to give special care to how the estimates are represented to stakeholders.

NOTES

1. In this Appendix, “value chain” means a series of operations and entities, starting with the forest and extending through end-of-life management, that (a) supply or add value to raw materials and inter- mediate products to produce final products for the marketplace and (b) are involved in the use and end-of-life management of these products.
2. In this Appendix the term “sequestered atmospheric carbon” refers exclusively to sequestration by biological sinks.
 

Appendix C and D have not been included here. Please see the standard.