Aligning the GHG Protocol towards corporate incentives for expanding clean energy access

The Greenhouse Gas Protocol framework

The Greenhouse Gas (GHG) Protocol was established in 1998, through a joint partnership between World Resources Institute and World Business Council for Sustainable Development, with the objective of establishing corporate standards for reporting GHG emissions and supporting the global transition efforts towards a net-zero emission economy. Corporate GHG accounting is particularly critical, as businesses are the main contributors to global emissions. In 2023, 97% of the companies on Standard and Poor’s 500 reported emissions to the CDP (formerly Carbon Disclosure Project) using the GHG Protocol.

Under the GHG Protocol, emissions are categorised at three levels: Scope 1 emissions are directly associated with sources that are owned or controlled by a company; Scope 2 emissions are indirect emissions released from the energy purchased by the company; and Scope 3 emissions include all indirect emissions (beyond Scope 2) that occur along the company’s value chain, through both upstream and downstream activities (see Figure 1). 

Figure 1: Categorising greenhouse gas emissions along the value chain

The GHG protocol has designed detailed frameworks to support disclosing companies with their emissions measurement from all three scopes. The GHG accounting landscape, however, evolved significantly over the years due to countries requiring companies to disclose their GHG emissions, the development of voluntary and mandatory disclosure frameworks, and the growing commitment to net-zero emissions targets. 

Furthermore, the quantity and quality of data also improved, along with the demand for more credible reporting. These developments prompted the GHG Protocol to launch a review process in 2022, with the formation of expert working groups and stakeholder consultations, with the target to release the updated version by the end of 2027. This post focuses on the proposed revisions to Scope 2 emissions reporting and the debate around these changes.

Methods and limitations of Scope 2 emissions reporting

The main sources of Scope 2 emissions include purchased electricity (from utility providers) and purchased steam, heat, and cooling (from external facilities) that rely on fossil fuels. The GHG Protocol requires dual reporting for Scope 2 to holistically capture a company’s emissions through: 

1. Location-based method: Using the average emissions (CO₂ per megawatt-hour (MWh)) of the local grid to calculate total emissions from energy consumed by the company; and

2. Market-based method: Calculating emissions derived from energy attributes on contractual agreements between the company and an external party – such as energy attribute certificates (EACs), power purchase agreements (PPAs), and supplier-specific emission factors.

The market-based method provides an incentive for companies to support renewable energy generation, as it reflects the portion of a company’s electricity use that is matched by a clean energy purchase. To illustrate, a company consuming 10,000 MWh of electricity annually from a fossil-heavy grid can procure 10,000 MWh of clean electricity and apply the associated EACs (where one EAC certifies that one MWh of renewable energy generated was added to a grid) to eliminate the emissions from its 10,000 MWh of procured electricity, thereby achieving zero market-based emissions. Moreover, the EACs procured create an additional revenue stream for clean energy projects (in addition to the latter's physical electricity sales). This supports the profitability of clean energy projects and enables increased investment that contributes to global grid decarbonisation efforts.  

However, the Scope 2 Guidance has been subject to debates on the limitations and opportunities for improving GHG reporting. Central to the discussions is whether (or not) Scope 2 accounting should reflect ‘procurement’ instead of ‘use’ (or ‘deliverability’) of electricity. The market-based method has been challenged by activists for underestimating and misattributing actual emissions from electricity consumption because it serves as an accounting measure that does not reflect instantaneous changes to atmospheric emissions.

Others see opportunities to expand market-based GHG accounting to support a broader spectrum of EACs for more types of climate solutions, and motivate more companies to procure EACs to address the finance gap and support the energy transition. 

Proposed revisions to Scope 2 Guidance

The GHG Protocol has proposed the following revisions to Scope 2 Guidance, which are currently open for public deliberations:

1. Updating GHG inventory (the list of a company’s emission sources) rules to accommodate both regional and temporal (hourly) matching

This aims to improve the accuracy of reported emissions data and enhance comparability of GHG inventories across companies with different energy procurement strategies. Under this provision, clean electricity generation and its consumption must take place within the same local grid region, and at the same time as their hourly load, to count towards Scope 2 emissions. This narrowing of ‘market boundaries’ would imply that if a company in one area of Europe procures renewable energy from another area of the continent, this would not count towards Scope 2 market-based emission reduction claims (as is the case currently).

2. Designing a Marginal Emissions Impact metric to acknowledge renewable energy purchases that don’t fall within a local grid region

This will be permitted for procurement spending anywhere globally that supports clean energy generation in the most carbon-intensive grid regions and leads to grid decarbonisation benefits. If the company in the example above now procures renewable energy from an area with a fossil-heavy grid, this could directly incentivise procurement that prioritises grid decarbonisation and can, therefore, be reported under this metric.

3. Promoting feasibility provisions to support companies with transitioning the revised Scope 2 Guidance

Suggestions include ensuring eligibility of existing contracts, selective exemptions for lower-volume energy consumers, and allowing companies to use their annual electricity data to estimate electricity consumption (alongside hourly reporting).

Reactions and concerns

Whereas these proposed revisions respond to select stakeholder demands for more credible reporting, they have also raised concerns about perceived complexity that could unintentionally raise costs, reduce market participation, and lower investments in clean energy and grid decarbonisation. While the GHG Protocol’s commitment to complete transparency around emission accounting and reporting is commendable, it is important to also be cognisant of the real-world market, data availability, and budgetary constraints. 

For example, hourly EACs (known as ‘Granular Certificates’) are unavailable in most markets globally and most energy customers don’t have access to their hourly use data. It’s also important to better appreciate the broader development and social benefits of supporting green transition universally beyond emissions counting (for example, electricity is critical to ensure children can study at night, healthcare facilities have refrigeration for medicines and vaccines, businesses can stay open longer). 

Case study: Energy Peace Partners’ Peace Renewable Energy Credit

According to United Nations Trade and Development’s World Investment Report 2023, an estimated US$4 trillion is required annually to be on track to achieve the Sustainable Development Goals by 2030, and more than half of this (US$2.2 trillion) is needed for energy transition (renewable energy investments and decommissioning of fossil fuel plants) alone. Bridging this financing gap requires innovative financing instruments and solutions. Market-based GHG accounting created a pathway to attract corporate clean energy procurement to support clean energy access where investments would not traditionally flow. 

In 2020, Energy Peace Partners (EPP), a non-profit registered in the US, introduced the Peace Renewable Energy Credit (P-REC), which enables corporate clean energy buyers to help expand energy access in settings affected by fragility and conflict (FCS) where the energy access challenge is profound. In 2023, less than 60% of the population residing in FCS were connected, and this year three-quarters of the FCS were assessed as extremely vulnerable to climate change. Moreover, in these settings, grid expansion to scale access is not always feasible (due to the lack of government’s fiscal capacity, high costs, security risks, etc.) and options such as mini-grids and stand-alone home systems offer viable alternatives. 

As a specialised EAC, P-RECs provide companies the mechanism and opportunity to support renewable energy mini-grids that are oftentimes linked to community benefit projects in FCS communities. Microsoft was the first corporate buyer of P-RECs from Nuru, a solar energy company based in the Democratic Republic of Congo, in 2020. This transaction led to the installation of streetlights in the Ndosho neighbourhood of Goma. Subsequently, Google, Block, and Oriflame have partnered with P-RECs in South Sudan, Nigeria, Chad, and Somalia. Together, P-REC transactions have expanded energy access for over 215,000 people across these five countries. 

Implications of Scope 2 reform for energy markets in fragile and conflict-affected settings

The proposed revisions to Scope 2 Guidance can significantly expand or diminish the corporate buyer market for energy access – and P-RECs in particular – in FCS. For example, hourly requirements may significantly harm P-REC markets (because hourly use data is unavailable and requires sophisticated equipment, such as smart meters, to track), reducing incentives for companies to support clean energy outside the narrower market boundaries currently being deliberated. 

Alternatively, as advocated by the Leapfrog Alliance – that propagates climate equity and enabling unelectrified, underserved communities to leapfrog over the fossil energy system – allowing companies to procure up to 10% of their clean energy outside their market boundary within market-based GHG accounting would create a helpful incentive for P-REC markets.

Furthermore, the introduction of new requirements for companies to report Marginal Emissions Impact as a third reporting metric would increase the appeal of P-RECs, since the baseline of comparison in FCS regions is typically diesel and charcoal (two of the most carbon-intensive energy resources). EPP has submitted and published its formal appeal to the GHG Protocol, advocating for impact-based exceptions to standard geographic matching requirements under Scope 2 market-based accounting, and requiring Marginal Emissions Impact reporting for Scope 2 emissions. 

Call to action: Appeal to the GHG Protocol

The GHG Protocol is urged to incentivise corporate investment in underserved regions – particularly fragile and conflict-affected settings – through allowing companies to procure a portion of their clean energy outside their market boundary, relaxing the hourly reporting requirement, and supporting clean energy financing in the most carbon-intensive grid regions. This will be important to unlock investment, expand energy access and drive deeper levels of grid decarbonisation worldwide.

Special thanks to Doug Miller (Director of Market Development, Energy Peace Partners) for informing this post.
 

Notes:

1. The World Bank Group publishes the list of FCS annually. Given the protracted nature of fragility and conflict, an overwhelming majority of the same countries have remained on the list over the years. The data on FCS electricity access is the average of the FCS on the 2023 list.

2. IGC’s State Fragility initiative (SFi) is a member of the Leapfrog Alliance, convened by the EPP to scale corporate clean energy investments in unelectrified and underserved communities.

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