Once-in-a-decade opportunity for corporate climate standards
By Benjamin Rizzo and Brad Schallert
Amidst economic and political headwinds that challenge clean technology deployment, the role of voluntary corporate climate action has become more critical than ever. The Greenhouse Gas Protocol (GHGP) and the Science Based Targets initiative (SBTi), the two standards most widely used by companies to account for and report their climate action, are undergoing major updates. This presents a rare “once-in-a-decade” opportunity to create a system that maximizes both corporate accountability and the real-world impact of climate investments.
For the last decade, these standards have held companies accountable for the emissions from their value chains by ensuring companies meticulously report and pursue emissions reductions. However, while seemingly reasonable, the accounting systems created by GHGP and SBTi have arguably stifled companies from making larger-scale, more impactful investments beyond their direct operational boundaries. This is limiting immediate emission reduction impact in a moment when we need to encourage companies to invest more in climate action and take climate investment decisions faster.
One of the major opportunities for the standards to amend their guidance to enable greater mitigation investment and impact is in Scope 3 (supplier and downstream value chain partner emissions). Scope 3 emissions often represent over 90% of a company’s total carbon footprint.
These are particularly difficult to address as the majority of these emissions, in many cases nearly two-thirds, originate from Tier 2 and deeper suppliers, where a company has limited visibility and direct influence.
We have a moment right now to evolve the standards to better maximize both accountability and impact. One of the most significant areas for improvement is how we account for and recognize corporate investment in the energy transition.
The innovation: Introducing Energy Transition Credits (ETCs)
A powerful new tool has been developed to meet this challenge: the Energy Transition Credit (ETC). ETCs aim to drive and accelerate investment in clean energy systems in emerging economies through high-integrity carbon credits generated from emission reductions in the power sector.
ETCs provide a pathway for companies to decarbonize electricity markets where they have operations of supply chains and where they don’t. Even if a company has the option to invest in electricity mitigation within their value chains, ETCs will often be the most impactful emissions mitigation instrument. In all of these cases, ETCs could be paired with electricity emissions on a “like-for-like” basis to drive global decarbonization of the electricity sector.
ETCs address key challenges carbon credits have faced in the past related to things like additionality and leakage. The benefits of these next- generation carbon credits provide the potential for significant climate impact.
For the energy sector, ETCs represent a next-generation tool built for today’s evolving standards that can demonstrate more direct and verifiable impact. Standard setters at the GHGP have highlighted that robust additionality will be a key requirement for future climate claims. High-quality ETCs are specifically designed to meet this higher bar, as their value is based on the verifiable action of retiring a coal plant that would not have happened otherwise.
Furthermore, unlike other instruments primarily denominated in megawatt-hours, ETCs represent a more holistic intervention, designed to address leakage (ensuring emissions don’t simply shift elsewhere) and incorporate critical social components like support for a just transition for workers and communities. (See also the crediting methodology VM0052 Accelerated Retirement of Coal-Fired Power Plants Using a Just Transition and Key Elements of a Sectoral Crediting Standard for the Energy Transition Accelerator.)
The challenge: A gap in today’s climate accounting rules
Despite their potential, the full power of instruments like ETCs is being held back by a gap in current accounting rules. The “GHG Inventory” is designed to report a company’s greenhouse gas footprint using attributional accounting. High-impact, system-level investments like ETCs — which use consequential accounting to measure the real-world change from an investment — have no formal home within this inventory.
They are reported as “Outside-the-Scopes,” a category that standard setters often consider irrelevant for meeting climate targets. This structure unintentionally discourages companies from making the most impactful investments in grid decarbonization because there is no clear, recognized way to account for them in their attributional inventory.
The solution: A clear path to unlock corporate investment
The GHGP Secretariat has already indicated that it intends to create a new consequential accounting ledger in its future updated Scope 2 guidance (referred to as the “Impact Statement”). This would be separate from the Scope 2 market-based inventory ledger.
Winrock and Climate Advisers believe that GHGP should and will create a separate Impact Statement ledger for Scope 3 too to capture emissions reduction interventions that don’t fall cleanly within an attributional inventory. These new ledgers would run parallel to the traditional attributional inventory and serve as the designated, transparent home for companies to report their investments in high-integrity, consequential instruments like ETCs.
To ensure this new ledger is credible and builds market trust, the GHGP should not reinvent the wheel. It should align the quality requirements for the Impact Statement with established high bars for integrity, such as the Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles. This would ensure that only the highest quality instruments are reported, giving companies the confidence to invest.
Creating new accounting ledgers is great, but only if they enable companies to make the claims they need to justify investing in climate action—specific greenhouse gas target achievement claims. SBTi allowing high-quality instruments recorded in Scope 2 and 3 Impact Statements, like ETCs, to be counted will be transformative for clean energy markets and decarbonization of the electricity sector.
A call for clarity and action
We have a powerful tool in ETCs to drive the energy transition where it matters most to lower global emissions. But this will occur only if the GHGP and particularly SBTi incentivize companies to drive real world impact. To unlock the billions in corporate investment needed to accelerate climate action, we need two things:
- For the GHG Protocol: To formally establish and implement two separate Impact Statements for both Scope 2 and Scope 3 market-based instrument reporting, with quality requirements aligned to high-integrity standards like the ICVCM’s Core Carbon Principles.
- For the SBTi: To take the crucial next step and accept high-quality interventions reported in these new Scope 2 and Scope 3 Impact Statements as a valid contribution towards companies’ science-based targets.
By taking these steps, the world’s leading climate standards can unleash a new wave of corporate climate investment and move us toward solving the planetary crisis at hand.
Benjamin Rizzo is carbon director at Climate Advisers; Brad Schallert is director of Sustainability Services at Winrock International.