Contributed by: John Powers, Vice President, Renewable Energy & Cleantech, Schneider Electric Sustainability Business
Since 2015, the way corporations account for and report their carbon emissions has been guided by the World Resource Institute’s (WRI) GHG Protocol. In recent years, questions have arisen around the efficacy of this guidance, including the role of energy attribute certificates (EACs) to account for emissions from electricity use (Scope 2 emissions). Despite garnering the attention of media around the world, many of the most vocal criticisms of current Scope 2 methodologies are rooted in several fundamental misunderstandings of EACs and their purpose.
To this end, WRI recently underwent a feedback collection process on the GHG Protocol to better understand the needs of users, identify and address gaps in the guidance, and align with best practices and emerging disclosure regulations. We believe the system of emissions accounting should be transparent, be consistent, avoid double-counting, and not be overly complex for calculations or reporting. While it is not the role of the accounting system, the GHG Protocol should nevertheless allow room for voluntary actors to make an impact above and beyond the accounting of carbon, enabling leaders in the marketplace to drive environmental impact or social good and receive credit for their actions without discouraging early entrants into the decarbonization space.
Schneider Electric has ambitious renewable energy and carbon reduction goals and plays a role as the world’s largest advisor and partner to corporate buyers of renewable energy. Our advisory practice is the recognized global leader on corporate renewable energy purchasing and decarbonization. We have a multi-decade track record, backed by the experience of 2,600+ energy and sustainability professionals worldwide. In total, we have advised our corporate clients on more than 350 offsite power purchase agreements (PPAs), representing upwards of 16 GW of new renewable energy across five continents. All this goes to say: we speak from experience and hope to shed light on some common misconceptions about EACs and offer our informed position on the next evolution of the GHG Protocol’s guidance.
The current state of emissions reporting
Currently, there are two main ways of reporting emissions: location-based and market-based. Location-based reporting, while accurate, does not provide private actors with many opportunities to drive the decarbonization of the electricity sector beyond onsite renewables or lobbying local utilities and governments. Market-based reporting, however, allows voluntary action to be acknowledged and credited by recognizing contractual instruments like purchasing power from a wind or solar facility via a PPA. This accounting of zero-carbon electricity generation is done through EACs, which have different names in different regions (e.g., renewable energy credits or RECs in the U.S., guarantees of origin or GOs in Europe, IRECs, TIGRs, LGCs, etc.).
Dive deeper into the differences between market-based and location-based reporting with our Guide to Clean Energy and Emissions Reduction Claims. For more information on EACs, check out our Global Guide to Energy Attribute Certificates.
Misconception #1: That the primary role of EACs is to drive change
One common criticism of EACs is that they have limited potential for driving change, particularly when it comes to unbundled EACs produced from existing wind and solar farms. However, this view misunderstands the role of EACs. The primary role of an EAC is not to drive the growth of renewable energy (although in some cases they may). Rather, their role is fundamentally around carbon accounting – to track and trade the carbon value of electricity produced from renewable sources, ensuring that there is no double-counting. When a wind farm produces one (1) MWh of clean energy, the simultaneous generation of one (1) EAC ensures that only the owner of the EAC can claim the environmental impact of that energy. EACs allow the holder to claim this "zero emission electricity production," making them critical in tracking and trading renewables, and allowing for proper accounting and reporting.
Misconception #2: EACs are supposed to convey “additionality”
Another criticism of EACs is that they do not guarantee that new renewable energy projects would not have been built without them, a concept known as “additionality.” While in many cases this may be true, it is not the role of EACs to provide such guarantees.
To learn more about additionality, we invite you to read our paper on the Role of RECs and Additionality in Green Power Markets.
Many companies do want to go beyond the carbon accounting claim and demonstrate greater impact associated with their renewable energy purchases. There are many ways for such buyers to ensure their renewable energy commitment drives additionality, from signing a long-term power purchase agreement (PPA), to investing in a project via tax equity, to buying expensive EACs from a compliance market that enable a project to get financed.
There are also ways to add impact to a renewable energy commitment outside of additionality, such as:
- Sourcing EACs from the most fossil fuel-intensive power grids (sometimes referred to as “emissionality”)
- Matching renewable energy purchases temporally with when you use energy (“24/7 Carbon Free Energy or CFE”)
- Ensuring that renewable projects promote local biodiversity or economically support disadvantaged communities.
What is critical to understand is that all these claims can be valid ways to show how a voluntary renewable energy buyer can have an impact outside of a carbon reduction claim. The carbon claim, however, remains fundamentally underpinned by the EAC and market-based reporting. Indeed, no organization can make legitimate Scope 2 carbon reduction claims today without either directly reducing usage or retiring EACs.
The power of the market-based approach to emissions reporting to drive decarbonization
Market-based reporting has propelled the corporate PPA market because it allows companies to receive credit for voluntary action. A business can sign a credit-backed long-term offtake agreement that enables the construction of a new wind or solar farm. If the corporate receives the EACs that their PPA project produces as part of the offtake agreement, they can claim Scope 2 emissions reduction thanks to today’s market-based accounting principles (alongside the “additionality” claim that their action was instrumental in adding new renewable energy to the grid). For most businesses considering renewable PPAs, access to these claims of reduced Scope 2 carbon emissions is critical in the decision to move forward.
The ability for corporates to act in this way also has significant implications for the speed of the global clean energy transition. Under current emissions accounting guidance, forecasts indicate that corporate contributions could drive a substantial portion of the renewable power built in this decade. According to analyses conducted by IHS Markit, corporate PPAs could drive up to 20% of all utility-scale renewable energy power additions through 2030. But, if market-based emissions reporting were overturned or fundamentally changed preventing corporate buyers from taking credit for those emissions reductions, almost none of those PPAs would happen.
From our many years of experience advising on these deals, it has become extremely clear that most companies will not commit the time, expense, or financial risk of signing a PPA if they are unable to count it towards their GHG reporting. Furthermore, businesses may not be willing or able (due to financial or project availability reasons) to solely pursue direct PPAs that are geographically adjacent to their operations. Without market-based reporting, many potential buyers would decline to sign a PPA at all.
What do we do about the Scope 2 guidance?
Those calling for reform to the GHG Protocol guidance, understandably, point to the desire to drive more impact with decarbonization actions. There are generally three camps that those calling for reform fit into.
No more unbundles EACs
Some have suggested that we should devalue or entirely throw out existing Scope 2 accounting rules that permit claims associated with unbundled EACs. The argument is that the ability to procure unbundled market instruments, such as EACs, allows businesses to “buy their way out of” making actual emissions reductions or transforming operations to be more energy efficient. Interestingly, that has been a complaint about EACs since their inception – yet more renewable energy markets are open today than ever before, driven in no small part by the availability of EACs as a signal for greater market development. It is ironic to make this argument, as we have seen in the last few years that demand is finally building to a place where even unbundled EACs can have significant impact. Case in point: GO prices in Europe have witnessed record highs in 2022 and 2023, creating situations where EAC prices (bundled or unbundled) are make-or-break in the economic decision of whether to build, invest, or buy the offtake of a renewable energy project.
Given EACs are fundamentally an accounting instrument, if we want corporations to drive greater impact or additionality, we should develop incentives to do so separate from the accounting methodology.
Buying unbundled EACs is the way nearly every voluntary buyer of renewable energy gets started. Taking such aggressive action against EACs as eliminating them from the GHG Protocol guidance would alienate entire segments of the market, including those companies embarking on their decarbonization journey, organizations that are either too small or too risk-averse to participate in the PPA market, or those located in regions that do not offer deregulated energy choice.
24/7 CFE-based accounting
Others would advocate for updating the accounting methodology to only reward renewable energy generation that perfectly matches the end-user's load profile in time and location (24/7 CFE). This is an admirable outcome and one that will be increasingly needed as power grids near 80-100% renewable energy penetration. However today, most grids are a long way from that moment, and there remain huge barriers to tracking and reporting both usage and generation down to the minute. One could also argue that it is the fundamental role of utilities and grid balancing authorities to ensure a reliable grid mix and provide incentives to smooth out intermittent energy sources as we approach 100% renewable. So, while we applaud companies who are leading the way in this area, we fear that a total overhaul of Scope 2 guidance to only recognize 24/7 CFE would have a chilling effect on corporate adoption of renewables.
Finally, there is a group that would support an updated Scope 2 methodology that considers the relative carbon intensity of the grid on which the renewable energy is produced. This too is an admirable way to look at supporting renewables, and some of our clients use grid intensity as a guiding principle when deciding where to sign PPAs. That said, the accurate tracking of the emissions profile of a particular grid at a particular time is not realistic for many power grids around the world. If the entire Scope 2 methodology adopted this method, it could lead to even greater confusion, gray area, and a loss of credibility in the system. It is far more straightforward to count the MWhs produced in a zero-carbon manner via EACs and to ensure that only one buyer has claim to each MWh.
We believe there is a path forward that lets what is working, work, while allowing ambitious actors to go faster and get credit for it.
- Preserve market-based emissions reporting, on a one MWh to one EAC basis, regardless of time of day or location. This current system is clearly working to allow motivated end-users to drive real decarbonization of the electricity sector today.
- Add a layer of legitimate “extra credit” claims that allow interested parties and market leaders to make credible claims and get credit for impact criteria beyond emissions reduction, carving out a method to set apart those that are going above-and-beyond without disparaging smaller, less profitable, or less sophisticated buyers. This could include options like support for biodiversity or socially favorable projects, 24/7 CFE, emissionality, or additionality.
- Focus criticism on companies, governments, or individuals who are doing nothing. Attacking early actors or market leaders for imperfect solutions only discourages others from doing anything at all. We can meet each buyer where they are and encourage progression along the decarbonization journey by shining the spotlight on the laggards or bad actors, rewarding the leaders, and celebrating those setting their first carbon reduction target or buying their first unbundled EAC.
No matter the outcome of the GHG Protocol revision, Schneider Electric stands by our clients – both large and small – in their unique pursuits for emissions reduction and sustainability impact. We look forward to continuing to partner with corporates, NGOs, and other market influencers to explore how we can drive deeper impact and positive change through the procurement of renewable energy, while allowing all market participants to act in a way that suits their current reach and ability.
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