GHG Protocol Corporate Standard: A Vital Component in the Corporate Sustainability Puzzle

Importance of GHG Accounting

Life on planet Earth is reeling under the tremendous pressure of climate change. Mankind is running a race against time to limit the rise in global average temperature to below 1.5°C above pre-industrial levels to avoid a climate catastrophe. The primary reason for this situation is the rapid expansion of industrial activities over the past few decades. Companies all over the world are now under regulatory pressure to reduce their GHG emissions by adopting environmentally sustainable business practices. They are investing considerable efforts and huge amounts of money to build environmentally friendly technologies and tweak their operations to reduce GHG emissions. Reduction in GHG emissions makes the companies resilient to climate change and more efficient in the long run. Additionally, companies making sustainability an inherent part of their operations will attract cheaper finance capital in future.

Accounting for GHG Emissions (Carbon Accounting) is a significant activity in companies' efforts to achieve environmental sustainability. It is widely recognized that improvement in any area begins with measurement and monitoring. The same goes for GHG emissions. GHG accounting gives a true and fair account of the GHG emissions of the companies. It helps companies to track and report their emissions, set emission reduction targets, meet statutory emission caps, and participate in various voluntary market mechanisms to trade their GHG emission reductions. GHG Protocol Corporate Standard is the most widely used standard in the world by companies to account for GHG emissions. In India, GHG emissions are to be reported in the Business Responsibility & Sustainability Reporting (BRSR Report) under the National Guidelines for Responsible Business Conduct (NGRBC) Principle 6 disclosures. As per the SEBI guidance, companies need to use the GHG Protocol Corporate Standard for reporting their GHG emissions information.

GHG Protocol Corporate Accounting Standard

Glossary of important terms in the Corporate Standard

Snapshot of the Greenhouse Gases identified by the United Nations

* IPCC Sixth Assessment Report
# There are many variants of HFC and PFC with varying GWPs and average lives.

This standard was developed through a multi-stakeholder partnership convened by the World Resources Institute (WRI), the United States and the World Business Council for Sustainable Development (WBCSD), Switzerland, in 2001. It provides guidance to companies for preparing, reporting and managing their GHG inventory in a transparent and consistent manner. It also makes available various sector-specific toolkits for emission calculations for general use. It applies the concepts of organisational and operational boundaries to calculate and categorize a company's GHG emissions, ensuring the relevance and completeness of the reported information.

Concept of Organisational Boundary

The organisational boundary consists of all the operations, facilities, factories and offices which the company determines to consolidate in its GHG accounting exercise. This boundary is determined based on any one of the two approaches described below. Companies select one approach and apply it consistently.

1. Equity Share approach

If the company uses this approach to determine its organisational boundary, the emissions of all such companies/operations are attributed to the company based on its equity share participation in them. For example, Company A holds 40% equity shares in Company B. The total emissions of Company B were 10,000 tCO₂e for the FY 2023-24. Under the equity approach, Company A will need to account for 4000 tCO₂e (40% of 10,000) in its GHG inventory. Company B shall show 6000 tCO₂e in its GHG inventory.

The equity-based approach is more aligned with financial accounting principles. Emissions are accounted for based on the share of economic benefits.

1. Control Approach

Under this approach, the company includes in its organisational boundary all such entities/operations over which it has control. Control can be either financial or operational in nature. The company is required to consolidate 100% of the emissions of all such companies/operations.

1. Financial Control: A company is said to have financial control over another entity/operation when it influences the financial decisions (through voting rights) and has a share of the economic benefits of the entity/operation. For example, Company A holds 40% equity shares in Company B and exercises financial control. The total emissions of Company B were 10,000 tCO₂e for the FY 2023-24. Now, Company A will need to account for 10000 tCO₂e (100% of 10,000) in its GHG inventory. The same will be the case even if the Company holds 10% equity shares in Company B.
2. Operational Control: A company is said to have operational control over another entity/operation when it has the authority to form and implement its operating policies irrespective of its financial control over such company/operation. For example, Company A does not have ownership in franchisee B. However, Company A has operational control of franchisee B. The total emissions of franchisee B were 1,000 tCO₂e for the FY 2023-24. Company A will include 1,000 tCO₂e emissions of franchisee B in its GHG inventory.

The control approach enables better tracking and administering emission reduction initiatives. It is important to note that the choice of approach for setting organisational boundaries has a significant impact on the overall GHG inventory and its interpretation.

Concept of Operational Boundary

Operational boundary helps in delineating the sources of GHG emissions into direct and indirect operations. Setting this operational boundary helps companies to understand the composition of their GHG inventory. This, in turn, helps identify GHG risks and opportunities that the company has to manage.

Scope 1 Emissions

GHG emissions directly attributed to the sources owned by the company or within the control of the company are categorised as Scope 1 emissions. In other words, these are emissions from the operations within the organisational boundary of the company. Reduction of these emissions is managed by the company with internal efforts. Scope 1 emissions are further categorised into four sources:

1. Stationary Emissions: These emissions are generated on the consumption of fuels in sources that are stationary and in continuous operations in the company. Example: Captive Boilers or DG Sets consuming diesel, furnaces and ovens consuming coal or LPG or CNG, etc. The emissions generated from stationary sources are calculated by determining the quantity and type of fuel consumed by the source during the period, multiplied by the relevant emission factor for the fuel consumed.
2. Mobile Emissions: These emissions are generated from the consumption of fuels in sources that are moving around. Example: diesel/CNG trucks, forklifts used for material handling, company-owned cars and buses running on petrol/diesel for employee commuting or business travel. The emissions generated from mobile sources are calculated by ascertaining the quantity and type of fuel consumed by the vehicles, distance travelled by the vehicle and model year of the vehicle. Carbon dioxide and methane emissions are calculated based on the type of fuel and its relevant emission factor. Nitrous oxide emissions are calculated based on the distance travelled and the relevant emission factor for the vehicle model.
3. Process Emissions: Certain production/chemical processes themselves generate GHG. Example: aluminium smelting and ammonia manufacturing. The emissions generated in the process are calculated based on direct measurement or stoichiometric calculations, or using the relevant activity data and emission factors for the process.
4. Fugitive Emissions: These are intentional or unintentional emissions generated from all other sources. Primarily, they consist of emissions due to leakages of fuels, for e.g., leakage of methane from coal mines, leakage of refrigerants from air conditioning and refrigeration equipment in the company. The calculation of fugitive emissions is determined by the type of fuel/refrigerant, leakage quantity and the relevant emission factors.

Scope 2 Emissions

GHG emissions indirectly attributed to the company due to the purchase of electricity, steam, heat or cooling for its operations from sources outside its organisational boundary are categorised as Scope 2 emissions. Here, the actual emissions happen at the energy generation facility as a consequence of the consumption of energy within the company. Reduction of these emissions is managed by the entity by reducing their energy consumption and by entering specific contracts with the energy generation facilities for the type of energy purchased (from renewable/non-renewable sources). We will restrict our discussion to electricity. Electricity is purchased from three sources, viz:

1. From the Grid: It is the most common source of purchased electricity, where electricity is supplied from a shared electricity distribution network (grid), which in turn sources it from a power generation facility that consumes fossil fuels for the generation of electricity. Therefore, the consumption of electricity is directly proportional to the consumption of fossil fuels at the generation facility, and therefore, the attribution of indirect emissions.
2. From Contractual Agreements: In many cases, companies enter contracts with power generation facilities for direct supply of power to their premises. In such cases, the power generation facility issues energy attribute certificates (containing emissions data) for the power attributable to the purchasing company.
3. Renewable Sources: Many companies are now buying Renewable Energy Certificates or having solar panels installed in their company premises for street lighting, office and township lighting. The emissions from such renewable sources are nil.

The calculation of Scope 2 emissions for electricity purchased is calculated from the number of units of electricity consumed (from utility meters) under each category, multiplied by the –

1. grid average emission factor of the region/country for the period, based on availability (location-based method) or,
2. emission factors in the energy attributes certificates from the power generation facility (market-based method) or,
3. zero, for electricity sourced from renewable sources or the purchase of Renewable Energy Certificates.

The Standard has made reporting for Scope 1 and Scope 2 mandatory.

Scope 3 Emissions

GHG emissions indirectly attributed to the company by all activities in its value chain (except scope 2) beyond its organisational boundary are categorised as Scope 3 emissions. This represents the total of scope 1 and scope 2 emissions of the value chain partners of a company. Reduction of these emissions is challenging because the company practically has little or no control over the operations of its value chain partners. Reduction of scope 3 emissions is managed by the entity by tweaking its value chain activities, leveraging its position to enter into contracts with value chain partners with specific clauses to meet the GHG emission reductions. They are categorised into the following sources, viz:

• Purchasing goods and services: Emissions attributed to the activity of purchasing capital goods, materials, fuels and services.
• Transport and distribution related activities: Emissions attributed to the activity of inward and outward goods transport and warehousing services, employee commute, business travel, etc.
• Loss in power transmission: Emissions attributed to the loss of electricity during transmission of electricity from the grid/power generation facility to the company premises (before its actual consumption).
• Leased Assets, franchises and outsourced activities: Emissions attributed to the operations of leased assets, franchises and job-workers involved in further processing of sold goods.
• Usage and recycling of sold goods: Emissions attributed to the use of the goods sold by the company by the consumers over their lifetime, and recycling of such goods after their useful life.
• Waste Disposal: Emissions attributed to the activity of disposal of the goods sold by the company after their useful life and disposal of waste generated from operations/usage.
• Investments: Emissions attributed to the investments that are invested in activities with GHG emissions.

Scope 3 emissions form a major portion of the GHG inventory of any company.

Accounting for Scope 3 emissions is undertaken by companies for activities that have significant GHG emissions and have a potential for emission reduction. They are calculated based on supplier-specific primary data from the value chain or recognised secondary data (industry average databases). The Standard has kept reporting of Scope 3 emissions as optional.

Significance of Emissions Factors

It is quite evident from the discussion till now that the two important aspects of GHG Emission calculations are activity data and emission factors. Emission factor is the amount of GHG generated for one unit of the activity. It converts the activity data into GHG emissions data. It is generally more accurate for calculating CO₂ emissions than other GHGs. Similarly, it is more accurate for stationary and mobile sources than for others. The most commonly used source for emission factors is the Intergovernmental Panel on Climate Change (IPCC) database. Understanding the use of appropriate emission factors is pivotal to the activity of GHG accounting. There are 3 kinds of emission factors:

1. Combustion Emission Factors: These are attributable to the combustion of a unit of a specific fuel/electricity. For example, the emission factor of diesel is 0.0023 tCO₂/litre (notional). This means that the combustion of 1 litre of diesel generates 0.0023 tCO₂ emissions. Similarly, the emission factor of electricity consumed from the electricity grid is 0.030 tCH₄/GWh (notional), indicating that the consumption of 1 GWh of electricity generates 0.03 tCH₄ emissions. Combustion emission factors are generally used in calculating scope 1 and scope 2 emissions, where the activity data is readily available.
2. Life Cycle Emission Factors: These factors depict the GHG emissions of a specific product over its lifetime (raw material to end of life). For example, the life cycle emission factor of a 2024 model 6MT diesel truck is 0.2 kgCO₂e/MT/km (notional). This is a calculated figure based on the estimated GHG emissions by the truck in its lifetime, divided by the average distance (loaded) travelled by it in its lifetime. Life cycle emission factors are generally used for arriving at scope 3 emissions for transportation-related activities.
3. Cradle to Gate Emission Factors: This is a part of the life cycle emission factor, which captures the GHG emission of a specific product from raw material to its point of sale only. For example, the cradle to gate emission factor of a battery is 3 kgCO₂e/kg (notional). This is a calculated figure based on the estimated GHG emissions from the extraction of raw materials for the battery, the manufacturing process and all activities up to the exit of the battery from the factory gate. Cradle to gate emission factors are generally used for arriving at scope 3 emissions for purchased goods and services.

Conclusion

GHG Protocol Corporate Standard advocates five principles for GHG accounting, viz. relevance, completeness, transparency, accuracy and consistency. The application of these principles ensures a true and fair presentation of the GHG inventory. On the surface, GHG emission calculation appears to be a simple exercise of multiplying the activity data by the emission factors. However, it needs diligence in determining the threshold for activity data collection, careful application of emission factors and prudent use of proxy data to fill the gaps in the GHG inventory. Once the company has a reliable GHG inventory on record, the standard can be used for tracking the emissions over time, verification of the GHG emissions and setting GHG targets. GHG Protocol Corporate Standard is indeed a vital component in the sustainability puzzle for companies.