Seeing double in emissions?
As the announcement for the proposed SEC Climate Disclosure Rule approaches, and California solidifies its climate disclosure law, corporate sustainability reporting has gained significant attention, especially regarding scope 3 emissions. Many companies are grappling with questions about the criticality of including scope 3 in their organizational footprint, whether it should be part of mandatory disclosures, and how to accurately calculate these emissions. One of the common points of confusion when it comes to scope 3 is double counting.
Many people wonder, if my scope 1 emissions are someone else’s scope 2 & 3 emissions, aren’t we double counting? The answer is yes. Accounting for scope 2 and 3 emissions, by definition, always leads to multiple actors counting the same emissions in their inventories. However, it is on purpose and for good reason.
This week, James Baglia, Senior Climate Analytics Lead at Persefoni, shares his expertise on what double counting is, why it can be a valuable tool for companies and investors, and when to avoid double counting.
What is double counting, and how does it occur?
While scope 1 emissions pertain solely to direct emissions from sources owned or controlled by a company, scope 2 and 3 emissions encompass a broader spectrum of indirect emissions stemming from various aspects of business operations, such as the upstream emissions of your purchases, the downstream emissions of your sold products, or the emissions from companies in your investment portfolio.
Consider an electricity provider burning 10,000 tonnes of coal to generate electricity, resulting in 25,000 tonnes of CO2e emissions. In a world where everyone accounts for their scope 1-3 emissions, then several entities would count those same emissions linked to that coal. This includes the company that sold the coal, the electricity provider that burned it, the company that purchased that coal-generated electricity, and investors that have a stake in any of these three companies.
While this may seem unconventional, it's intentional. Double counting enables investors to make well-informed investment decisions with a better understanding of the transition risks involved. Also, if a company only considers its direct emissions, there would be little knowledge of where they have the opportunity to engage in low-carbon practices, products, or investments. Instead, it would be tempting to offload as many emissions as possible outside their facilities and assets, making them another entity's direct emissions.
Double counting emissions is not an accounting error
If the goal of corporate carbon accounting were to calculate total global emissions, double counting would cause inaccuracies. But that isn’t the goal. The real purpose is to find meaningful and actionable information about the emissions profile. If the aim were a global tally, one could bypass scope 2 and 3, and simply sum up everyone’s direct emissions (scope 1). However, more straightforward methods exist for measuring global GHG emissions and concentrations.
Carbon accounting, particularly by companies, takes a more nuanced approach to emissions than merely tallying them up just for the sake of having a total carbon footprint. It seeks to understand who or what can influence which emissions in order to enable and incentivize the reduction of those emissions. Multiple actors count the same emissions because they can all influence the activities contributing to those emissions through their value chain. For example, they can opt for greener suppliers, design more efficient products, and invest in more sustainable companies.
Financial accounting quantifies direct flows in and out of a business, whereas carbon accounting quantifies flows to the atmosphere caused by a business. Determining who holds responsibility and influence over GHG-emitting activities, while vital to enabling decarbonization, is a more complex question than quantifying emissions alone.
If Company B pays a trucking company to transport goods purchased from Company A, who bears responsibility for the emissions coming from the truck’s exhaust pipe?
Of course, the trucking company itself influences the emitting activity. But does some of the responsibility extend to Company A for supplying the goods, or to Company B for demanding the goods? How about the truck manufacturer? Could they influence the emissions if they produced electric trucks or more fuel-efficient trucks instead? Is the company that produces the gasoline or diesel burned in the truck also involved? Should some of the emissions from burning fossil fuels be attributed to fossil fuel companies? For all these questions, the answer is “yes” when accounting for all three scopes of the GHG Protocol. This means each of these companies would count those same emissions in their GHG inventory.
Double counting may seem like a flaw at first glance, but double counting is not by accident; it’s by design.
When NOT to double count
While some double counting is intentional and valuable, it is important to understand when to avoid double counting.
Double counting emissions within a single company inventory
While double counting the same emissions across different companies happens by design in carbon accounting, double counting emissions within one company’s inventory should be avoided whenever possible.
For example, if a company is already accounting for the emissions of generating their purchased electricity in scope 2 based on the kWh of electricity, they shouldn't also estimate the emissions from spending money on electricity in their scope 3 (purchased goods & services) footprint, even if the purchase of that same electricity shows up in their expense data alongside their other purchased goods and services.
Similarly, if a company knows both the amount they spent on a purchased good and the physical quantity they purchased of that good, there are GHGP-approved methods of estimating the good’s embodied emissions either piece of information. However, they should not estimate emissions using both methods and then add the results together, as they would then be double counting the embodied emissions of that same good twice in their same inventory.
Double counting emission reduction credits & carbon offsets
If one company reduces its emissions and another entity counts those reductions as offsets, this is problematic. For example, if a forest project is counting carbon sequestration and a company is also counting those as offsets for its emissions, it creates a scenario where actual emissions in the atmosphere are higher than what's being reported.
If a company sells its emission reductions as carbon offsets or credits, it’s crucial not to double-count those reductions in its own inventory. Once a reduction credit is sold, the selling company no longer has the claim to that reduction.
In conclusion, double counting of emissions in scope 2 and 3 emissions is not a flaw, but a deliberate strategy to understand the complex web of influences on emissions throughout the value chain.
Climate & ESG News Roundup
TNFD releases final framework on nature-related disclosure
The Taskforce on Nature-related Financial Disclosures (TNFD) unveiled a comprehensive framework at Climate Week NYC, addressing risks tied to the natural world. This culmination of two years of development responds to the demand from investors and regulators for enhanced transparency regarding companies' impact on nature and biodiversity. Aligned with TCFD recommendations and consistent with ISSB standards, the TNFD framework signifies a significant leap in businesses' ability to disclose exposure to nature-related issues, as noted by co-chair David Craig. The ISSB commended the TNFD's achievement, emphasizing the harmony between their finalized recommendations and ISSB Standards, both rooted in TCFD architecture. The TNFD's final recommendations are the product of extensive global engagement, involving market players, scientific organizations, and stakeholders, garnering input from over 1,200 institutions.
“Nature provides irreplaceable services to societies and businesses. I applaud the TNFD’s efforts in publishing today a framework that can be utilised to identify, assess, manage, and disclose dependencies and impacts on nature, as well as risks and opportunities for organisations,” said President Emmanuel Macron.
The TNFD has put forth a comprehensive framework consisting of four key areas of recommended disclosures.
- Governance: organizations are advised to explain the board’s and management's roles in overseeing and managing nature-related impacts, risks, and opportunities, as well as their engagement with stakeholders, particularly Indigenous Peoples and Local Communities.
- Strategy: companies should outline their identified nature-related dependencies, impacts, and risks over different time horizons, and how these factors influence their business model, value chain, and financial planning.
- Risk & Impact Management: companies need to describe the processes employed for identifying, assessing, prioritizing, and monitoring nature-related aspects.
- Metrics and Targets: organizations are encouraged to disclose the metrics used to assess and manage nature-related risks and opportunities, as well as set and report on targets and goals related to these factors. This framework provides a comprehensive approach for businesses to address their interactions with the natural environment in a systematic and transparent manner.
EU advances directive to ban general and offsetting-based green product claims
The EU Parliament and Council have reached a provisional agreement on a set of rules aimed at safeguarding consumers from deceptive sustainability claims and greenwashing practices. The agreement comes in response to a 2020 study by the Commission revealing that over half of green claims by EU companies were vague or misleading, with 40% being entirely unsubstantiated. The new rules, set to be in effect by 2026 pending formal approval, will ban broad environmental claims like "climate neutral" or "eco" unless companies can substantiate them with evidence of genuine environmental performance. Additionally, claims founded on emissions offsetting, often used to assert carbon neutrality, will be prohibited, along with sustainability labels not endorsed by approved certification schemes. This development positions the EU as a global leader in combating misleading environmental claims, reinforcing transparency and consumer protection.
Events You Can't Miss
- Mark your calendars for the NACD Summit in Washington D.C. from October 8-11th, 2023. The most influential minds in governance gather to advance board effectiveness at this event. This will be a unique opportunity to engage in exclusive networking opportunities and learn from industry thought leaders on the most important topics for boards. Persefoni is a proud longtime partner of NACD. Register now.
- Join Persefoni and Climate Impact X for a webinar where we’ll dive deeper into how the ISSB will help accelerate the global drive toward more transparent and reliable corporate emissions disclosures, and what companies can do to stay ahead of the curve and navigate the transition to a decarbonizing economy effectively. ‘ISSB in Focus: Preparing for a New Era of Regulatory and Market Expectations’ on October 17th will join Emily Pierce, Chief Global Policy Officer (Persefoni), Genevieve Soh Head at Platforms & Ecosystems Climate Impact X (CIX), and Cedric Chong, Senior Sales Director, Singapore (Persefoni) for an Asia-Pacific markets-focused conversation on climate disclosure. Register now.
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