The Future of Carbon Accounting: GHG Emissions Scopes in Mission-Critical Power

The concentration of Greenhouse Gases (GHG) in the earth's atmosphere has risen dramatically since the pre-industrial era (Figure 1) and it is widely accepted that anthropogenic – or human - activities such as the burning of fossil fuels and land clearance for agriculture are behind this growth. 

This increase in GHG concentrations has led to a steady rise in global temperatures and an increasing frequency of extreme weather events, alerting the world to the need for global action to track and reduce GHG emissions. The United Nations Framework Convention on Climate Change (UNFCCC) came into force in 1994 with the goal of preventing "dangerous human interference with the climate system". As climate science has evolved and more data has become available, more countries have signed up to the UNFCCC and the convention now has almost universal membership with 198 participating countries.

This article reviews the standards and processes behind the measurement and reporting of GHG emissions – known as carbon accounting – and discusses the obligations of businesses when reporting their GHG emissions.

More effort is required to reduce global emissions 

The ASEAN nations were all participants in the historic Paris Agreement of 2015, in which 194 countries, plus the European Union (EU), pledged to "substantially reduce global GHG emissions to hold global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change."

A pre-COP28 report from UN Climate Change, however, found that national climate action plans are not sufficient to meet the goals of the Paris Agreement and that all parties must do more if the worst impacts of climate change are to be avoided. The ASEAN region alone faces a gap of around 400 MtCO2e between the current forecasted 2030 emissions and the reductions unconditionally pledged in Paris. In other words, the region will need to reduce emissions by a further 11% compared to its current trajectory, a difficult task for countries striving to balance emissions reductions with much-needed economic growth.

As a result, and as the impact of extreme weather events frequently makes the headlines, governments around the world are reviewing their commitments to climate change measures and renewing their GHG emission targets. As part of these renewed commitments, efforts are focusing on the frameworks for measuring and reporting on GHG emissions and on the disclosure legislation to which businesses must comply.

But how are GHG emissions consistently measured, and what mechanisms exist to hold governments, along with their businesses and citizens, accountable for their commitments?

Carbon Accounting

The field of carbon accounting has emerged to bring accuracy and consistency to the processes used by organizations when measuring their GHG emissions. As more countries report their emissions, consistent metrics and collection methods become crucial and several standards have evolved to ensure consistency of the reported data, including:

The Science Based Targets Initiative (SBTi), a collaboration between CDP, UNGC, WRI and WWF, provides organizations with a climate science-based methodology for determining GHG reduction targets. The SBTi reported that, as of the end of 2021, 2,253 companies across 70 countries and 15 industries, had approved emissions reduction targets using SBTi methodologies.

Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol provides a framework for measuring and managing GHG emissions. It is the most common global standard for carbon accounting, adopted by all types of organizations in both public and private sectors and over 90% of Fortune 500 companies report their emissions using this framework. 

The GHG Protocol classifies GHG emissions into three different scopes (Figure 2). 

Figure 2: The GHG Protocol categorizes an organization's emissions into 3 scopes 
Source: GHG Protocol: Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Scope 1: Emissions are GHG emissions directly produced by the organization itself. For a gensets manufacturer such as Rehlko, for example, the emissions from the production and testing of the generators as well as company-owned vehicles would be categorized under Scope 1.

Scope 2: Emissions cover any purchased utilities that a company must acquire to power its business operations. These emissions include electricity, steam, heat, and cooling required to operate the organization's facilities and equipment. Scope 2 emissions are considered indirect GHG emissions generated offsite by the company's energy providers and reveal a company's ability to conserve energy, upgrade efficiency, and acquire renewable energy products to reduce its operational carbon footprint.

The difference between Scope 1 and Scope 2 emissions is that the latter are emitted by the energy providers instead of the company itself, but both are necessary to operate the business facilities and equipment. Scope 1 and Scope 2 emissions are similar, however, since the reporting company can directly control its operations, by changing its operational scopes, improving the energy efficiency of its processes and equipment, or choosing cleaner energy suppliers. 

Scope 3: Emissions cover any GHG emissions resulting from activities not captured in either Scope 1 or Scope 2 emissions throughout the life cycle of products or services provided by an organization. These include the company's indirect GHG emissions from both upstream and downstream activities. Examples of upstream emissions include all cradle-to-gate emissions related to the raw and processed materials purchased by the company. This includes resource extraction, manufacturing and processing, and distribution up to the point of receipt by the reporting company organization. It also includes business travel, employee commuting, and emissions from any least assets. Downstream examples include gate-to-grave emissions from the use and operation of products sold by the company, distribution, and disposal of these products once they reach the end-of-life, as well as emissions from any franchises and downstream leased assets. 

A company's Scope 3 emissions can significantly exceed its Scope 1 and 2 emissions, typically making up over 70 percent of total emissions across all sectors. In order to set a meaningful emissions reduction target, companies must also account for Scope 3 emissions. These indirect emissions are usually the most difficult for a company to quantify and reduce, However, proactively allocating resources to measure and track Scope 3 emissions not only brings holistic insights into a business's environmental impacts but can also help businesses prepare for the rapidly growing mandates on carbon disclosure at a global scale.

Evolving Climate Regulations and Disclosure Standards 

As the focus on emissions increases, a growing number of countries are requiring businesses to report on their environmental impact – and implement measures to reduce it. All members of the UNFCCC are required to report their GHG emissions annually to the United Nations (UN). Each country has implemented regulations requiring businesses to report on their environmental impact – and to outline measures to reduce it. 

Several influential global bodies have been set up to provide support and guidance to businesses on their climate-related disclosures, including:

The CDP: An international nonprofit organization set up to help companies and cities meet their carbon disclosure obligations.

Over 9,600 organizations, responsible for around 20% of global GHG emissions, disclosed through CDP in 2020, giving the CDP the world's most comprehensive database of environmental data. As an accredited observer to the UNFCCC, insights from the CDP database play a key role in tracking progress towards the goals of the Paris Agreement.

The Global Reporting Initiative (GRI): A global, independent, standards organization that has developed best practices for sustainability reporting.

GRI standards cover topics including biodiversity, waste, emissions, equality, health and safety, and tax. More than 10,000 organizations use GRI standards in over 100 countries and a recent study showed that a significant majority of ASEAN companies (85%) use them, ranging from Singapore (99%) to Vietnam (65%)

The Task Force on Climate-Related Financial Disclosures (TCFD): Created by the Financial Stability Board (FSB) to develop recommendations on the climate change information that companies should disclose to investors. TCFD recommendations are gaining widespread recognition as the gold star of climate reporting and are currently followed by around 16% of companies in the ASEAN region.

Importance of Accounting for Scope 3 Emissions

Disclosure of Scope 3 is not yet compulsory in most regions, but this is changing as the focus on emissions reduction targets grows.

Companies operating in Europe will have to report on their Scope 3 emissions from 2025 onwards under the recently revised Corporate Sustainability Reporting Directive (CSRD). 

In the USA, the Securities and Exchange Commission (SEC) is in the process of ratifying its proposed Climate-Related Disclosure Standards (CRDS), which will require publicly traded companies to disclose their GHG emissions, including Scope 3 emissions.

Also, the state of California has recently signed into law two climate-related disclosure bills that significantly impact companies doing business in the state. The first of these bills requires certain companies to disclose their Scope 1, 2 and 3 emissions, while the second mandates disclosure of climate-related financial risks, in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

GHG reporting requirements are variable across Southeast Asia as the region catches up with global disclosure practices. In 2022, an initiative from ASEAN Exchanges — a collaboration between seven exchanges across Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam — aimed to improve the consistency and comparability of Environmental, Social and Corporate Governance (ESG) data in the region by defining a set of voluntary reporting metrics.

While Scope 3 disclosure is not yet compulsory, a recent study showed that larger companies in the region are taking the lead on GHG reporting, with almost 20% reporting rates for Scope 3 upstream emissions in Singapore and Thailand.

This is consistent with the wider picture, where less than 30% of companies globally disclose meaningful data for Scope 3 emissions. 

Improving accounting accuracy and identifying reduction opportunities are equally critical to limiting global temperature rise

Carbon accounting has become more sophisticated as pressures to reduce emissions grow, and global standards such as the GHG Protocol improve accuracy and consistency in measuring GHG emissions.

For ASEAN nations, the transparency enabled by these evolving accounting mechanisms highlights energy-inefficient organizations and processes and enables the deployment of alternative, greener options.

While accounting for Scope 3 emissions will give a true picture of a company's carbon footprint, it is important not to lose sight of the overall goal – emissions reduction.

Implementing a fit-for-purpose Scope 3 accounting framework can consume significant time and resources and will necessarily evolve over time, with shifting regulations and supply chains.

It is critically important that the ongoing quest for improved accounting accuracy does not take priority over the urgent need to identify and accelerate aggressive emissions strategies.

Both sets of activities must proceed in parallel.

Looking ahead, Rehlko remains committed to working collaboratively with all customers on carbon reduction strategies to help them keep their businesses running in the most environmentally friendly way possible.

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