The shaky logic of corporate emission reduction claims

If we could hypothetically measure the GHG emissions to the atmosphere from the operation of a single company, it is unlikely that we would see the same reductions in emissions that the company might be reporting in its annual disclosures. Many emission reduction claims are not additional in the sense that they do not reduce emissions relative to a business-as-usual baseline – at least not in the short term – so a company could take credit for a reduction this year that may have no climate impact for years to come. The question of whether a climate action delivers any additional emission reductions beyond what would have happened anyway – defined as additionality – is not limited to carbon offsets but is pervasive in the decarbonization space.

Energy efficiencies and electrification do lead to additional and immediate emission reductions

Let us say a company weatherizes its buildings, so it is using less natural gas to heat the buildings in the winter and less electricity for air conditioning in the summer. This cuts down the company’s direct (scope 1) emissions from natural gas combustion. Indirect (scope 2) emissions from purchased electricity will also decrease because lower electricity use can translate in almost real-time to less fossil fuel burnt at power plants. Both emission reductions are immediate and additional and would be picked up by our hypothetical measurement system.

If the company replaces some of the fossil fuels it uses in heating and transportation through electrification, that will further reduce its scope 1 emissions while increasing its scope 2 emissions. On balance, electrification generally (though not always) leads to more efficient use of energy and lower overall emissions. These reductions are immediate and additional as well.

Renewable energy purchases open the door to non-additionality

Outside of the direct use of fuels and electricity, emission reductions get trickier. Companies generally cut their scope 2 emissions by buying renewable electricity to compensate for each MWh of grid power consumed and then using market-based accounting to take credit for it. Nearly 44% of all voluntary renewable electricity purchases in the US are in the form of unbundled renewable energy certificates (RECs). These are just the environmental attributes of renewable electricity that has already been produced and sold into the grid, and the emission benefits have already been realized. A company using RECs to cut its scope 2 emissions will have no discernible effect on the GHG emissions entering the atmosphere because there are no additional reductions as a direct result of the purchase.

A recent study estimates that 42% of committed scope 2 emission reductions will not result in real-world mitigation because they depend on RECs. Bloomberg reports that S&P 500 companies bought 32.7 million MWhs of unbundled RECs in 2020, which calls into question the emission reduction claims of major technology and consumer product companies.

Many scope 3 emission reductions are non-additional

The lack of additionality extends to many other emission reduction actions in the scope 3 category which covers the upstream/downstream value chain. Consider a company that is replacing virgin raw materials with recycled materials which have lower life-cycle emissions. If the company increases its purchase of recycled materials, then other buyers in the market will see a lower supply of recycled materials and will have to use more virgin materials in their own products. All of these materials have already been produced and the resulting emissions are baked in, so this change will not result in any detectable reduction in actual emissions at the time that the company takes credit for using the recycled materials.

If a company reduces business travel in order to cut emissions, the same number of airplanes are still going to be flying unless a large number of travelers decide to stop flying. Companies shifting the menus in their on-site cafeterias in favor of plant-based options must confront the fact that emissions-intensive meat production is unlikely to slow down without a mass movement toward meatless foods.

In the short term, the primary effect of a single company changing its purchasing choices is to reallocate a fixed emissions pie across all market participants. If some businesses reduce their carbon footprints, then others will be saddled with higher footprints. Many purchasers acting in concert, however, could change the future production decisions of suppliers and potentially reduce the size of the total emissions pie down the road – but that will require significant market alignment among a large number of market participants which we haven’t seen yet.

The underlying issue

Carbon accounting as practiced today – and systematized by GHG Protocol’s corporate accounting standard – is based on the attributional model and simply aims to allocate existing global emissions to companies (as opposed to the more complex consequential model one might use to answer the question of how global emissions would change as a result of changes to a company’s operation). This vastly simplifies the calculations and aligns with how markets behave in the short term but is rooted in the assumption that total global emissions are unchanged. Attribution is a suitable method for the retrospective allocation of environmental responsibility but not for assessing the impacts of future long-term changes.

In practical terms, attributional accounting fails to capture the difference between immediate and additional emission reductions (such as the scope 1 and scope 2 reductions from efficiencies and electrification) and potential long-term reductions (such as the scope 3 examples above). The standard makes no distinction between these, and the default approach has been to treat all reductions as immediate and additional. Companies using the Science Based Targets initiative (SBTi) are expected to follow this accounting framework, which raises the question of whether the planet is seeing anything close to the reductions they are reporting.

SBTi is beginning to recognize the problems with scope 2 reporting, but there hasn't been any acknowledgement of the issues with scope 3 reporting. Other industry voices are beginning to speak up on the issue of additionality. It is possible to make targeted changes to both scope 2 and scope 3 accounting rules that allow companies to take credit only for emission reductions that can be reasonably shown to decrease global emissions within the reporting year. Other actions that contribute to potential long-term reductions could be reported separately so that companies are recognized for contributing to the collective effort without undermining the credibility of the accounting process.

These changes might not be easy given the long history of GHG Protocol’s well-established standard. But without a more nuanced approach to reporting the impacts of a company’s actions, the logic of emission reduction claims will remain shaky and questionable.

------

Kumar Venkat is the founder and CEO of Climate Trajectories, a company providing climate data services. He previously worked at the forefront of corporate carbon emissions accounting and decarbonization as the CTO of Planet FWD and CEO of CleanMetrics.

This article reflects solely the views and opinions of the authors. The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.