ALVARO RAMIRO GUZMÁN
Companies are under increasing pressure to engage with the climate crisis. Customers, employees, and investors are demanding climate action - influencing corporates to disclose their climate impact and make credible climate goals. This has led to a huge growth in the number of companies disclosing their emissions through different sustainability standards.
The Carbon Disclosure Project (CDP) is one of the most popular standards and is based on the GHG Protocol. Over 9,000 companies globally are now reporting to CDP. Scope 2 emissions are a key part of annual sustainability reporting, but it’s an area that many companies struggle to report accurately. In this article, we hope to answer some of your questions regarding Scope 2 to help with your annual reporting process.
What are Scope 2 emissions?
In the updated GHG Protocol Scope 2 Guidance, Scope 2 is defined as “an indirect emission category that includes GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by the reporting company”. While it includes steam, heat, and cooling the majority of Scope 2 emissions arise due to companies importing electricity from the grid.
Scope 2 can be distinguished from Scope 1 – which covers direct emissions created on-site or in company owned vehicles and Scope 3 – which concerns a company’s supply chain emissions.
Location-based vs. Market-based
In 2015, the GHG Protocol updated its guidance regarding Scope 2 reporting. One of the main changes in the update was the introduction of location-based and market-based Scope 2 reporting.
Location-based Scope 2 emissions are based on the average emission factor of the local grid. Market -based Scope 2 reporting takes a more complex look at emissions and considers any contractual instruments that may be used in competitive energy markets. This means that any green tariffs, renewable certificates, or PPA’s are considered in the final market-based emission calculation.
For most multinational companies, this has led to a dual-reporting requirement for Scope 2 emissions.
What forms of energy are tracked in Scope 2?
- Electricity: Almost every company uses electricity as part of their operations. Scope 2 emissions are created when power plants burn fossil fuels to generate electricity off-site. Even though the reporting company doesn’t directly burn the fossil fuels, it’s ultimately responsible for the resulting emissions.
- Steam: Large industries use steam for heating, cleaning, or directly in their processes. To qualify as Scope 2 emissions, steam will generally be provided through a combustion asset such as a boiler or thermal power plant – which is outside a company’s operational control.
- Heat: Heat can be in various forms but generally companies will use it as low to high temperature hot water. For example, if an office was supplied heat through a local district heat network operated by a third-party – the emissions would be in Scope 2.
- Cooling: For companies using cooling in their operations such as in cold stores, they could be supplied with cooling from a third-party. In this scenario, cooling would be reported as Scope 2 emissions. For example, if a company was supplied chilled water from a chiller owned and operated by a third-party, the emissions would be classed as Scope 2.
Scope 2 emissions in CDP reporting: What data is needed?
The Carbon Disclosure Project (CDP) has become the standard for voluntary sustainability reporting. Scope 2 emissions are a key part of the CDP response and can have a significant impact on a company’s final score. For more insights into sustainability reporting, check out this article.
To help understand the key data required to report Scope 2 under CDP, we have outlined the main CDP questions that relate to Scope 2:
Question: C5.1 - Provide your base year and base year emissions (Scopes 1 and 2).
This question requires data on Scope 2 emissions in the base year for both market-based and location-based emissions.
Question: C6.3 - What were your organisation’s gross global Scope 2 emissions in metric tons CO2e?
Data is needed that represents the total global Scope 2 emissions in the reporting year and previous years if applicable.
Question: C7.5 - Break down your total gross global Scope 2 emissions by country/region.
This question requests data that shows the breakdown of emissions per country. Data is also required for purchased electricity, steam, heat, and cooling in MWh and how much of this energy is low carbon.
Question: C7.6 (a/b/c) - Break down your total gross global Scope 2 emissions by business division/facility or activity.
This question requires location and market-based emission data in Mton Co2e. If segregated data is available, all sub-questions can be filled in to provide a high-level of disclosure of a company’s source and location of emissions.
Question: C8.2a - Report your organisation’s energy consumption totals (excluding feedstocks) in MWh.
Data is needed on Scope 2 emission sources in MWh from both renewable and non-renewable sources. Points are scored for a higher percentage of renewable energy in the total 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.
Data is needed to show the details of renewable energy claims under Scope 2. Specific data is required on renewable sources such as unbundled energy attribute certificates and Power Purchase Agreements (PPAs) – detailing technology type, MWh consumed, and the region of consumption.
Question: C10.1 - Indicate the verification/assurance status that applies to your reported emissions.
The question relates to whether the Scope 2 emissions have been verified. Points are awarded if a third-party verification or assurance process is in place.
Review the full guidance on CDP reporting on the CDP website.
How do I report Scope 2 if there are no renewable certificates?
When reporting the market-based method, companies can include a number of contractual instruments such as RECs and GOs to offset emissions. But sometimes there are cases where no certificates are available. Below is a breakdown of when this can happen and what steps to take:
- On-site Generation (Owned/Operated): If a company owns an on-site power plant, then any emissions from the plant are reported in Scope 1. In the case of a renewable plant such as a solar rooftop array, no emissions are reported.
- Direct Line (Third-Party Owner e.g PPA): Some large industries could source their power directly from a generator. In this case, if no certificates are available, the source-specific emission factor would be used. In the case of a renewable plant, the source emission factor will likely be zero.
- Grid Power: If renewable power consumed from the grid isn’t backed by certificates – then Scope 2 will be reported using the market-based emission factor hierarchy. This means finding the next and most accurate reporting factor. For example, if certificates aren’t available, the emission factor of a supplier could be used. If that isn’t available, then grid average emission factors may need to be used.
How can I reduce my Scope 2 emissions?
Imported grid electricity is the main source of Scope 2 emissions. The best way to start reducing your Scope 2 emissions is to engage in the purchase of renewable energy. Renewable energy can be accounted for as zero carbon in Scope 2 reporting. The most common renewable energy purchasing options are outlined below:
- Renewable Energy Certificates: These are green certificates that have been ‘separated’ from the physical supply of electricity. They can be purchased through suppliers, brokers, or exchanges.
- Green Supply Tariffs: Most energy suppliers now offer some type of energy contract that is based on renewable power.
- Off-Site Power Purchase Agreement (PPA): In this option, an energy consumer contracts directly with a large renewable generator located off-site. Contracts will be long-term and usually involve massive volumes of power.
- On-site Renewable Generation: A renewable energy plant installed at a company’s premises. The on-site power plant could be owned and operated by either the company itself or a third-party.
Each option has its own characteristics and some companies may be more suited to specific options than others. For a full deep-dive into each renewable energy purchasing option – check out our recent article, Purchasing Renewable Energy: Energy Products Compared.
New Digital tools can add credibility to Scope 2 reporting
Collecting reliable data for Scope 2 emissions reporting isn’t easy. For instance, collecting energy certificates from energy suppliers can be a pain. Especially for companies reporting emissions data across countries with numerous sites. Also energy consumption data is not always consistent and available in a timely manner across the organisation.
New digital tools have now and softwares have been developed to make the data collection process automatic and reliable. Through direct integrations with certificate registries or grid operator platforms, these software are able to consolidate all the key Scope 2 data in one platform. This avoids data quality problems of human errors, accuracy, timeliness of data collection, and verification, etc.
Even if these are the basic minimum requirements to report zero energy emissions according to GHG Protocol, sustainability leaders are going one step further and looking at the real environmental impact of their green energy. For that, they want to know from which plant their energy was coming from, from which region and at what time. Blockchain technology can be a strong enabler to give transparency over the energy source.
When can Blockchain help?
- Data Collection from the source: Blockchain can be a transparency layer on top of an energy certificate to notarise the exact power plant that was assigned to specific energy consumers at a specific time. This can help energy buyers to increase their environmental ranking scores.
- No Certificates Available: In countries where no certificates are available – blockchain can work as a digital notary to prove where the energy was purchased and consumed. This can help energy buyers to further reduce their Scope 2 emissions.
- Verification & auditability: Emissions verification is an expensive and time-consuming process – blockchain allows for instant verification and can cut out the high costs of human verification.
If you would like to discuss how we can help with your Scope 2 reporting, please get in contact with us.