Summary: This is an extract of Chapter 8 of the GHG Protocol. This chapter discusses the complexities of accounting for greenhouse gas (GHG) emissions reductions, emphasizing the importance of understanding changes in emissions over time and the implications of offsets from reduction projects. Key issues include the selection of baseline emissions, additionality, secondary effects, reversibility, and avoiding double counting. The document also highlights the need for companies to report their emissions accurately and transparently, particularly when engaging in GHG trades or implementing internal reduction projects.
As voluntary reporting, external GHG programs, and emission trading systems evolve, it is becoming more and more essential for companies 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 corporate 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 mitigation 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 level
From 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 operations 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 requirements or voluntary commitments by comparing actual emissions over time for the relevant scale. On a corporate-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 level
- Changes 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 indirect 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 Baseline Emission and Scenario
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 reduction 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). ****Secondary effects are typically the small, unintended GHG consequences of a project and include leakage (changes in the availability or quantity 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 relevant, 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 reservoirs). 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. 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 boundaries separately and independently of any GHG trades they undertake. GHG trades ****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 reductions 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.