The current standards have served their purpose, but it’s time to evolve to Accounting 2.0
Corporate emissions accounting standards and aligned recognition programs have encouraged many large corporations to invest in more renewable electricity. However, the drive towards a zero-carbon electric grid requires more than kilowatt hours of wind and solar. To enhance the emissions impact of these zero-carbon electricity purchases, it matters where the renewable energy is located and whether the timing of the zero-carbon electricity matches the timing of electricity demand.
That’s why this week, Green Strategies and The NorthBridge Group, with support from Clean Air Task Force, released a new report, Modernizing How Electricity Buyers Account and are Recognized for Decarbonization Impact and Climate Leadership. The recommendations in this report encourage fundamental changes to the accounting rules used to calculate “Scope 2” emissions from electricity purchases as specified in the Greenhouse Gas Protocol – the standard used by companies around the world to report their greenhouse gas emissions – as well as the initiatives that recognize corporate climate leadership.i These new accounting rules (let’s call them Accounting 2.0) would encourage corporations, institutions, and other large electricity buyers to better align their procurement and investments to maximize carbon reduction impact, better account for the timing and location of their electricity consumption, and consider both the variable and the firm and dispatchable zero-carbon solutions needed to reach net-zero electricity goals — thereby harnessing the power of electricity consumers to decarbonize the electric grid.
Accounting 1.0 – What it has done well, and where it has fallen short
Over the last decade, large energy buyers committed to 100% renewables have had an important impact on the supply of renewable energy. According to the Clean Energy Buyer Alliance’s (CEBA) tracker, large businesses signed deals for over 11 GW of new renewable energy in 2021, up from 1.2 GW in 2014, the year CEBAii started tracking deals. This is equivalent to nearly 40% of total U.S. capacity additions in 2021. Buyer procurement of renewable electricity has catalyzed the marketplace, and it can do even more if the mechanisms for recognizing buyer decarbonization impact are properly aligned.
Buyer procurement and goals for sourcing clean electricity are bolstered by the GHG Protocol accounting standards and its rules for quantifying emissions and recognizing steps to reduce them. But current rules do not require buyers to evaluate the carbon reduction impact of their procurement, do not differentiate between transactions having relatively high and relatively low carbon reduction impact, and enable buyers to report reduced (or even zero) Scope 2 inventories even when they continue to consume considerable grid-supplied fossil generation. For example, current rules treat the purchase of renewable energy credits (RECs) from far away grids the same as when a buyer contracts for renewable energy or other zero-carbon energy that can be physically delivered to serve the company’s load and aligns with the timing of the company’s power demand. Under the current accounting standard, eligible renewable energy purchases could come from any part of the country and at any time of the year, encouraging investments in the lowest cost options. In the United States, this could mean more solar energy generation in the desert Southwest during the day, and more wind energy in the Plains at night, but not necessarily where it is most beneficial to reduce carbon emissions or when it is needed to match the timing and location of a company’s consumption.
Investments in renewable energy are having a major impact on energy intensity during certain times of day—especially mid-day when the sun is shining. However, in the United States, unabated fossil energy continues to deliver 60% of the power consumed. Moreover, even in states and regions with extensive renewable energy, there are many hours of the day that are supplied with unabated fossil energy (Figure 1). Achieving a fully decarbonized grid in all places and at all times requires decreasing this fossil reliance while deploying new clean generation resources.
Figure 1. Renewable Energy Supplies 100% of Electricity in California (Around 3 pm, April 30, 2022)iii
There are also larger multi-week and seasonal gaps that low-cost, intermittent renewable energy would be unable to meet, resulting in ongoing electricity generation from unabated fossil energy. A strategy that encourages buyers to match 100% renewable energy with their consumption on an annual basis at the lowest cost locations and producing energy at any time during the year, as allowed and indeed rewarded by the current GHG Protocol accounting standards, may reach 100% clean energy on paper, but does not do so in reality.
Accounting 2.0 — How updated procurement standards can maximize climate impact
Accounting 2.0 standards must do more to encourage buyers to adopt the kind of portfolios needed to achieve a decarbonized grid. This begins by recognizing and rewarding carbon impact. Certain buyers want to have impact by contracting with or investing in projects on relatively carbon intensive grids. Others want to support emerging zero-carbon technologies, which could achieve considerable long-term impact if commercialized, while others want to enable new infrastructure like transmission. Still others want to match their demand with clean electricity at all times and all locations. This means tracking:
- Anticipated carbon reductions arising from buyer transactions, whether or not tied to the location and timing of a buyer’s consumption; and
- How well a buyer is decarbonizing the electric supplies that it relies on where and when it consumes electricity (i.e., the extent to which zero-carbon electricity purchases from within the consumer’s regional electric grid match the location and timing of a buyer’s consumption).
Notably, the 2.0 accounting system should still track purchases of out-of-region renewable energy or other out-of-region zero-carbon electricity investments, but in doing so, it should also seek to estimate the emissions reductions achieved. This would appropriately recognize electricity consumers that support zero-carbon investments in carbon-intensive power grids, thereby enhancing the emissions impact.
With a 2.0 accounting system underpinning Scope 2 reporting of emissions from purchased electricity, it becomes possible to track how well electricity consumers are actually (not just on paper) reducing the emissions associated with their own electricity purchases. In this way, accounting 2.0 shifts the focus of Scope 2 reporting away from kilowatt hours of renewable energy generation and puts it squarely on accurately quantifying emissions, the stated purpose of greenhouse gas accounting.
Perhaps more importantly, a 2.0 accounting system — and aligned recognition programs — will send new signals to electricity consumers: rather than simply rewarding the purchase of sufficient (low-cost) renewables to cover power demand, consumers would now be rewarded for progress towards purchasing zero-carbon electricity to meet demand during all times of day and over all days of the year. This would encourage more investments in and contracts with firm carbon-free energy resources that can reliably deliver electricity on a 24/7 basis, year-round. These resources range from generation sources such as geothermal to hydrogen peaking turbines, as well as nuclear energy and fossil energy systems that include carbon capture and storage. It would also encourage investments in technologies like demand-management and energy storage capable of backing off electricity demand during times when the grid is supplied by unabated fossil resources or shifting over-supply of zero-carbon electricity to displace unabated fossil resources.
By changing the accounting system, large electricity consumers would be encouraged to make the investments needed to accelerate commercialization and cost reduction of technologies needed to support zero-carbon grid, thereby more effectively harnessing their buying power and ushering in a new and more effective era of corporate climate action. It’s time for leading corporations, standards organizations, recognition programs, and financial watchdogs to recognize the need for change and work with us to make it a reality.
i According to the GHG Protocol website, ‘[i]n 2016, at least 92% of Fortune 500 companies responding to CDP used GHG Protocol directly or indirectly through a program based on GHG Protocol.” https://ghgprotocol.org/companies-and-organizations
ii In 2014, CEBA was known as REBA, the Renewable Energy Buyer Alliance.
iii Sommer, Lauren. (2022). California just ran on 100% renewable energy, but fossil fuels aren’t fading away yet. Weekend Edition Saturday. NPR.