The number of companies reporting on carbon emissions is growing each year but many struggle with the complexity of quantifying their Scope 2 emissions.
One of the most widely used and recognized standards for measuring and disclosing greenhouse gas emissions is the Carbon Disclosure Project (CDP), which is based on the principles and guidelines of the GHG Protocol. More than 9,000 companies from different sectors and regions around the world are currently using the CDP reporting process. Scope 2 emissions are a key part of annual sustainability reporting to CDP, but it’s an area that many companies struggle to report accurately.
In this article, we review what is included in Scope 2 emissions disclosures and discuss some considerations you need to be aware of for your annual energy and carbon reporting.
What are Scope 2 emissions?
The Scope 2 emissions definition is the indirect category of greenhouse gas (GHG) emissions, as outlined in the GHG Protocol Scope 2 Guidance, updated in 2015.
These emissions encompass the GHG emissions resulting from the consumption of purchased or acquired electricity, steam, heat, or cooling by the reporting company. While Scope 2 includes steam, heat, and cooling, the majority of Scope 2 emissions arise from companies importing electricity from the grid.
What Forms of Energy Are Tracked in Scope 2 Emissions?
The forms of energy tracked under the Scope 2 report include:
- Electricity
Almost all companies rely on electricity for their operations. Scope 2 emissions associated with electricity are generated when power plants burn fossil fuels off-site to generate electricity. Although the reporting company does not directly burn fossil fuels, it bears responsibility for the resulting emissions.
- Steam
Large industries often use steam for heating, cleaning, or as a direct input in their processes. Scope 2 emissions related to steam typically arise when it is provided through a combustion asset such as a boiler or thermal power plant that is not under the company's operational control.
- Heat
Heat can take various forms, but companies commonly utilize it as low to high-temperature hot water. If an office, for example, receives heat through a local district heat network operated by a third party, the emissions associated with that heat would fall under Scope 2.
- Cooling
Companies that require cooling for their operations, such as in cold storage facilities, may obtain cooling from third-party sources. In such cases, the emissions associated with the supplied cooling would be categorized as Scope 2. For instance, if a company receives chilled water from a third-party-owned and operated chiller, the emissions would be considered Scope 2.
By tracking and accounting for Scope 2 emissions, companies gain a comprehensive understanding of their indirect environmental impact and can develop strategies to reduce their carbon footprint throughout their energy consumption processes.
Location-Based and Market-Based Scope 2 Emissions Reporting Methodologies
Initially, only the “location-based” accounting methodology existed in Scope 2 Emissions Reporting; this meant that companies could only report their Scope 2 emissions by considering the electricity mix on the grid they consumed from. This accounting methodology just considers the electricity physically delivered by the local grid to the energy buyer.
A limitation of location-based emissions accounting is that buyers cannot impact their Scope 2 Score, regardless of the electricity they procure through their supply contracts.
In 2015, The GHG Protocol went through a review where market-based emissions accounting was introduced. As Greenhouse Gas Protocol has mentioned in their executive summary of the amendment to the GHG Protocol Scope 2 Guidance:
“Methods for Scope 2 accounting are “allocation” methods—allocating generator emissions to end-users. A location-based method reflects the average emissions intensity of grids on which energy consumption occurs (using mostly grid-average emission factor data).”
Market-based Scope 2 emissions take a more complex look at emissions and consider any contractual instruments that may be used in competitive energy markets. This means that any green tariffs, renewable certificates, or PPAs are considered in the final market-based emission calculation.
“A market-based method reflects emissions from electricity that companies have purposefully chosen (or their lack of choice). It derives emission factors from contractual instruments, which include any type of contract between two parties for the sale and purchase of energy bundled with attributes about the energy generation, or for unbundled attribute claims.”’
For most multinational companies, this has led to a dual-reporting requirement for Scope 2 emissions.
What Data is Needed in Scope 2 Emissions CDP Reporting?
The Carbon Disclosure Project (CDP) has become the standard for voluntary sustainability reporting. Scope 2 emissions play a crucial role in the Carbon Disclosure Project (CDP) reporting, a widely recognized standard for voluntary sustainability reporting. Accurately reporting Scope 2 emissions is vital as it can have a substantial impact on a company's final score within the CDP assessment.
To assist you in understanding the essential data needed for reporting Scope 2 emissions under the CDP framework, we have outlined the primary CDP questions that pertain to Scope 2 reporting:
Question: C5.1 - Provide your base year and base year emissions (Scopes 1 and 2).
Data is needed for both market-based and location-based emissions of Scope 2 in the base year.
Question: C6.3 - What were your organization’s gross global Scope 2 emissions in metric tons CO2e?
Data is required to reflect the total global Scope 2 emissions for the reporting year, including any relevant data from previous years, if applicable.
Question: C7.5 - Break down your total gross global Scope 2 emissions by country/region.
This question asks for data that provides a breakdown of emissions per country. Additionally, data is required for purchased electricity, steam, heat, and cooling in megawatt-hours (MWh), as well as the proportion of this energy that is categorized as low carbon.
Question: C7.6 (a/b/c) - Break down your total gross global Scope 2 emissions by business division/facility or activity.
For this question, it is necessary to provide location and market-based emission data in metric tons of carbon dioxide equivalent (Mton CO2e). If segregated data is available, it is recommended to fill in all sub-questions to offer a comprehensive disclosure of the company's emissions sources and their respective locations. This will provide a detailed overview of the company's emission footprint and enhance transparency regarding the origin and distribution of emissions.
Question: C8.2a - Report your organization’s energy consumption totals (excluding feedstocks) in MWh.
Data is required for Scope 2 emission sources in megawatt-hours (MWh) from both renewable and non-renewable sources. It is important to note that higher scores are awarded for a greater percentage of renewable energy within the total energy supply.
Question: C8.2e - Provide details on the electricity, heat, steam, and/or cooling amounts that were accounted for at a zero-emission factor in the market-based Scope 2 figure reported in C6.3.
Detailed data is needed to provide information on renewable energy claims under Scope 2. Specifically, the data should include details about renewable sources, such as unbundled energy attribute certificates and Power Purchase Agreements (PPAs). This information should encompass the technology type, megawatt-hours (MWh) consumed, and the region where the consumption takes place.
Question: C10.1 - Indicate the verification/assurance status that applies to your reported emissions.
The question pertains to whether the Scope 2 emissions have undergone verification. Points can be earned if there is a third-party verification or assurance process in place to validate the accuracy and reliability of the reported emissions.
Review the full guidance on CDP reporting on the CDP website.
How to Measure Scope 2 Emissions Without Renewable Certificates?
When it comes to reporting Scope 2 emissions, companies often utilize contractual instruments like Energy Attribute Certificates (EACs), which are often referred to as Guarantees of Origin (GOs) in Europe and Renewable Energy Certificates (RECs) in the US, to offset their emissions. However, there are situations where these certificates may not be available. In such cases, it is important to understand the alternative steps to report accurately. Here's a breakdown of different scenarios and the corresponding reporting approach:
- On-site Generation (Owned/Operated): If your company owns an on-site power plant, any emissions generated by the plant should be reported under Scope 1. However, in the case of a renewable plant, such as a solar rooftop array, no emissions need to be reported.
- Direct Line (Third-Party Owner, e.g., Power Purchase Agreement): Some large industries have direct power supply arrangements with generators. If no renewable certificates are available in this scenario, you should use the source-specific emission factor to determine emissions. In the case of a renewable plant, the source emission factor is likely to be zero, indicating no emissions.
- Grid Power: When renewable power consumed from the grid is not backed by certificates, reporting Scope 2 emissions requires following the market-based emission factor hierarchy. This involves finding the next most accurate reporting factor. For instance, if certificates are unavailable, you can use the emission factor provided by your supplier. If that information is not accessible, then the grid's average emission factors can be utilized.
By following these steps, companies can report their Scope 2 emissions even without renewable certificates, ensuring accurate and transparent reporting. While renewable certificates are beneficial for demonstrating a commitment to clean energy, understanding the alternatives allows companies to fulfill their reporting obligations effectively.
Common Challenges in Scope 2 Emissions Reporting
Challenges in Scope 2 reporting are not uncommon for businesses, and they can have significant implications for credibility, resource allocation, costs, and accuracy.
- Lack of credibility
One of the primary challenges faced by companies is the lack of credibility in their Scope 2 reporting. This can be due to missing Energy Attribute Certificates (EACs) proofs, a lack of visibility into the origin of energy sources, or errors in data inputs. With the impending mandatory non-financial disclosure requirements in 2024, businesses will be under increased pressure to provide reliable and verifiable emissions data, making credibility even more crucial.
- Need of too many resources
Another challenge is the resource-intensive nature of collecting, consolidating, and aggregating energy and CO2 data for Scope 2 reporting. For multinational corporations, this process may require the involvement of multiple full-time employees and take up to six months per year. Additionally, data often comes with delays and relies on non-collaborative and outdated energy suppliers, further complicating the process.
- Rising costs
Rising costs are also a challenge for businesses when it comes to Scope 2 reporting. Historically, auditors may have been more lenient in checking EAC claims. However, as the mandatory non-financial disclosure deadline approaches, auditors are likely to increase their scrutiny, leading to higher costs for businesses to ensure compliance and accuracy in their reporting.
- Manual errors
Finally, manual errors in data input pose a significant challenge in Scope 2 reporting. Often, information is entered into spreadsheets or software systems manually, which can result in human errors. These errors can undermine the accuracy and credibility of the reported data, making it essential for businesses to find ways to minimize manual errors and improve data coordination between global teams.
Addressing these challenges is crucial for businesses to maintain credibility, comply with regulatory requirements, and accurately report their emissions. With the right tools and solutions, businesses can overcome these challenges and demonstrate their commitment to sustainability, driving positive change in the corporate world.
How to Reduce Scope 2 Emissions?
To effectively reduce your Scope 2 emissions, it is crucial to focus on addressing the main source of emissions - imported grid electricity. By actively engaging in the purchase of renewable energy, you can make significant progress in reducing your environmental impact.
Renewable energy can be accounted for as zero carbon in Scope 2 reporting. The most common renewable energy purchasing options are outlined below:
- Energy Attribute Certificates (EACs)
EACs represent the environmental attributes of renewable energy generation and can be purchased separately from electricity. By buying EACs, you support renewable energy projects and can claim the associated emissions reductions in your Scope 2 reporting. This is a flexible option that allows you to support renewable energy without directly changing your electricity supplier.
- Green Supply Tariffs
Green tariffs are offered by electricity suppliers and allow customers to choose a tariff that supports renewable energy. By opting for a green tariff, you ensure that a portion or all of the electricity you consume is sourced from renewable energy generators. This can be an accessible and straightforward way to increase your renewable energy consumption and reduce Scope 2 emissions.
- Power Purchase Agreement (PPA)
PPAs involve long-term contracts with renewable energy generators. Through a PPA, your organization can directly purchase electricity from a specific renewable energy project. This ensures a dedicated supply of renewable energy and allows you to claim the emissions reduction associated with that energy source. PPAs are often suitable for larger organizations with the capacity to enter into such agreements.
- On-site Renewable Generation
Installing renewable energy systems on your premises, such as solar panels or wind turbines, enables you to generate clean energy directly. By producing renewable energy on-site, you can significantly reduce your reliance on grid electricity and lower your Scope 2 emissions. This option provides long-term sustainability benefits and can often be combined with other renewable energy purchasing strategies.
When implementing these renewable energy purchasing options, it is essential to verify the environmental attributes and ensure that the energy sources meet recognized standards for sustainability. By actively reducing your reliance on fossil fuel-based grid electricity and transitioning to renewable energy sources, you can master how to reduce Scope 2 emissions and contribute to a more sustainable future.
How Can Flexidao Help You With Your Scope 2 Reporting?
Accurately reporting Scope 2 emissions can be daunting, especially when dealing with multiple sites across different countries and the challenges of obtaining energy certificates from suppliers. Additionally, organizations often need help with consistent and timely availability of energy consumption data throughout their operations.
New digital tools and software solutions have emerged to address these challenges, revolutionizing the data collection process for Scope 2 emissions reporting. Innovative platforms like Flexidao’s consolidate all the essential Scope 2 emissions data into a single hub by leveraging direct integrations with certificate registries or grid operator platforms. This automation eliminates human errors, enhances data accuracy, ensures timely collection, and streamlines the verification process. It also helps make better and faster procurement decisions due to the digitization of renewable contracts and certificates.
Explore your specific Scope 2 emissions reporting needs and how our experts can best support your organization’s efforts. Reach out to us today.
