The shaky logic of corporate emission reduction claims

More than a third of the world’s largest companies now have net-zero targets, which generally means they have all committed to cutting emissions in half by about 2030 and then driving their net emissions to zero by 2050. The true climate impacts of these actions will depend on whether the reductions are additional and immediate or potentially in the future. It turns out that the problem of additionality is not limited to carbon offsets but is pervasive in the decarbonization space.

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.

Energy efficiencies and electrification lead to additional and immediate emission reductions

Let us say a company weatherizes all of 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. Right off the bat, that begins to reduce 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 of these 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 from the combustion of the fuels while increasing its scope 2 emissions from purchased electricity. 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.

The theory of change here is that the revenue from REC purchases can help incentivize additional renewable power generation capacity in the future. But the price of RECs in the voluntary market has been highly variable lately and is not significant or reliable enough to drive new capacity, while solar and wind have already become the cheapest options for new electricity generation. If we define additionality in green power markets as the active displacement of fossil fuel based electricity on the grid by new electricity from clean sources as a direct result of the electricity purchase, then unbundled RECs will fail the additionality test.

A company using these RECs to reduce its scope 2 emissions will have no discernible effect on the GHG emissions entering the atmosphere. 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.

Power purchase agreements (PPAs), which are long-term contracts and account for about 30% of voluntary renewable electricity purchases in the US, have a reasonable claim to additionality and are likely to replace existing grid electricity with new renewable electricity faster than business-as-usual. But they can be complex and require significant expertise as well as financial wherewithal to put together.

Another glaring issue with any renewable electricity purchase is that the location and timing of power generation may be very different from the location and timing of power consumption. Matching a MWh of generation by way of a REC (unbundled or obtained through a PPA) to a MWh of consumption — as companies are doing today using market-based accounting — says nothing about the net reduction in emissions as a result of the purchase. Google, one of the largest purchasers of renewable electricity, recognizes that 100% renewable does not mean zero carbon and is working toward 24x7 carbon-free energy.

Many scope 3 emission reductions are non-additional – with some clear exceptions

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.

A similar argument applies to many other emission reduction activities in the value chain. 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 meat production (which can be highly emissions intensive) 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 (this is explicit in the market-based accounting rules for electricity purchases and is implicit in other cases such as material purchases in the value chain). 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.

That said, there are certainly some clear exceptions that do not depend on collective action. If a company works directly with its existing suppliers to reduce emissions in the supply chain and if those suppliers achieve additional and immediate scope 1 and scope 2 reductions, then the company’s scope 3 reductions are additional and immediate as well. This is also the case with downstream emission reductions in the use phase of products as more efficient products replace older designs in the market.

How to strengthen the integrity of corporate emission reduction claims

The GHG Protocol’s scope 2 guidance makes it clear that this widely accepted corporate GHG accounting framework is based on attributional accounting and aims to accurately allocate existing emissions to end users. The basis of both scope 2 and scope 3 accounting is the idea that individual purchases can ultimately drive collective impact through aggregate demand, but there is not necessarily an immediate shrinking of the total emissions pie.

This framework is not designed to fully quantify the real impacts of climate actions taken by a specific company in a given year. However, targeted changes to the accounting rules could significantly enhance the integrity of the emission reduction numbers reported by companies.

Let us start with scope 2 emission reductions. Excluding all unbundled RECs from being used as zero-carbon MWhs on additionality grounds would go a long way toward restoring credibility to scope 2 accounting. Moreover, accurate scope 2 accounting would need to consider the avoided emissions when and where the renewable energy was added to the local grid, and the induced emissions when and where the energy was consumed (for example, using the impact accounting method proposed by WattTime). This improved accounting framework will be able to support additional optimizations such as demand side management.

Moving on to scope 3, companies could continue taking immediate credit for specific types of emission reductions that can be shown to be additional and immediate, such as those related to existing supply chains and product use phases. When it comes to changes in purchasing decisions which can only lead to collective, long-term impact at best, individual companies shouldn’t be able to use the imputed emission reductions from those actions to claim progress toward their emission reduction targets. It would make more sense to report these “emission reductions” separately so that companies can be recognized for contributing to the collective effort without undermining the credibility of the accounting process.

Corporate emissions reporting and reduction strategies are at a critical juncture. As we look at the remainder of this decade as the defining period for emission reductions in order to stay on a 2°C climate trajectory, the question of whether a particular corporate climate action results in an immediate and additional emission reduction or not should be of paramount importance. 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.

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