Greenhouse gas Protocol 2004

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A Corporate Accounting and Reporting Standard

R E V I S E D E D I T I O N

TheGreenhouseGas Protocol

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INST ITUTE


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GHGProtocolInitiativeTeamJanet Ranganathan WorldResources Institute

Laurent Corbier WorldBusiness Council forSustainableDevelopment

PankajBhatia WorldResources Institute

SimonSchmitz WorldBusiness Council forSustainableDevelopment

PeterGage WorldResources Institute

KjellOren WorldBusiness Council forSustainableDevelopment

RevisionWorkingGroup

BrianDawson&Matt Spannagle AustralianGreenhouseOff ice

MikeMcMahon BP

PierreBoileau Environment Canada

RobFrederick FordMotorCompany

BrunoVanderborght Holcim

FraserThomson InternationalAluminumInstitute

KoichiKitamura KansaiElectricPowerCompany

ChiMunWoo&NaseemPankhida KPMG

ReidMiner NationalCouncil forAirandStreamImprovement

Laurent Segalen PricewaterhouseCoopersJasperKoch ShellGlobalSolutions InternationalB.V.

SomnathBhattacharjee TheEnergyResearchInstitute

CynthiaCummis USEnvironmentalProtectionAgency

ClareBreidenich UNFCCC

RebeccaEaton WorldWildlifeFund

CoreAdvisors

MichaelGillenwater Independent ExpertMelanieEddis KPMG

MarieMarache PricewaterhouseCoopers

RobertoAcosta UNFCCC

Vincent Camobreco USEnvironmentalProtectionAgency

ElizabethCook WorldResources Institute


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Tableof Contents

G U I D A N C ES T A N D A R D




G U I D A N C ES T A N D A R D G U I D A N C EG U I D A N C E

G U I D A N C E

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S T A N D A R D

Introduction TheGreenhouseGas ProtocolInitiative

Chapter 1 GHGAccountingandReportingPrinciples

Chapter 2 Business Goals andInventory Design

Chapter 3 SettingOrganizationalBoundaries

Chapter 4 SettingOperationalBoundaries

Chapter 5 TrackingEmissions OverTime

Chapter 6 IdentifyingandCalculatingGHGEmissions

Chapter 7 ManagingInventory Quality

Chapter 8 AccountingforGHGReductions

Chapter 9 ReportingGHGEmissions

Chapter 10 VerificationofGHGEmissions

Chapter 11 SettingGHGTargets

Appendix A AccountingforIndirectEmissions fromElectricity

Appendix B AccountingforSequesteredAtmosphericCarbon

Appendix C OverviewofGHGPrograms

Appendix D Industry Sectors andScopes

Acronyms

Glossary

References

Contributors


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heGreenhouseGas Protocol Initiative is amulti-stakeholder partnership of

businesses,non-governmentalorgan izations (NGOs),governments,andothers

convenedby theWorldResources Institute(WRI),aU.S.-basedenvironmental

NGO, and the World Business Council for Sustainab le Development (WBCSD), a

Geneva-based coalition of 170 internationa l compan ies. Launched in 1998, the

Initiatives mission is to develop internationa lly accepted greenhouse gas (GHG)

accountingandreporting standards forbusiness and topromote theirbroadadoption.

TheGHGProtocolInitiativecomprises two separatebut linked standards:

GHGProtocolCorporateAccountingandReportingStandard(this document,which

provides a step-by-stepguide forcompan ies touseinquantifyingandreporting their

GHGemissions)

GHGProtocolProjectQuantificationStandard(forthcoming;aguide forquantifying

reductions fromGHGmitigationprojects)

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s with financial accounting and reporting, genera lly acceptedGHG

account ing principles are intended to underpin and gu ide GHG

account ing and reporting to ensure tha t the reported information represents a

faithful, true,and fa iraccount of acompanys GHGemissions.

A

1 GHG Accounting and Reporting Principles

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S T A N D A R D


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GHG accounting and reporting shall be based on thefollowing principles:

R E L E V A N C E Ensure the GHG inventory appropriately reflec ts the GHG emissionsof thecompany and

serves the dec ision-making needsof users both internal and external to thecompany.

C O M P L E T E N E S S Account for and report on all GHG emission sources and activities within thechosen

inventory boundary. Disclose and justi fy any spec ificexclusions.

C O N S I S T E N C Y Useconsistent methodologies to al low for meaningful comparisonsofemissionsover time.

Transparently document any changes to the data, inventory boundary, methods,or any other

relevant factors in the timeseries.

TR A N S P A R E N C Y Address all relevant issues in a factual and coherent manner, based on a clear audit trail.

Disclose any relevant assumptions and make appropriate references to the accounting and

calculation methodologies and data sources used.

A C C U R A C Y Ensure that the quantificat ion of GH G emissions issystematically neither over nor underactual emissions, asfar ascan be judged, and that uncertainties are reduced asfar as

practicable. Achievesuff icient accuracy toenable users to make dec isions with reasonable

assurance as to the integrity of the reported in formation.

C H A P T E R 1 : GHG Accounting and Report ing Princ ipl es 7

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GHG accounting and reporting practices areevolving and are new to many

businesses; however, the principles listed below a re derived in part from

generally accepted financial accounting and reporting principles. They a lso

reflec t theoutcomeof a collaborative process involving stakeholdersfrom

a wide rangeof technical ,environmental, and accounting disciplines.


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C H A PT E R 18

GHG Account ing and Report ing Principles

hese principles are intended to underpin all aspec ts

of GHG accounting and reporting. Their application

will ensure that the GHG inventory constitutes a true

and fair representation of thecompanys GHG emissions.

Their primary function is to guide the implementation of

theGHGProtocolCorporateStandard, particularly whenthe application of thestandards tospec ific issuesor situa-

tions is ambiguous.

RelevanceFor an organizations GHG report to be relevant means

that it contains the information that usersboth

inte

rnal ande

xte

rnal to

the

co

mpany

nee

dfo

r the

irdec ision making. An important aspec t of relevance is the

selec tion of an appropriate inventory boundary that

reflec ts thesubstance and economic reality of the

companys business relationships, not merely its legal

form. Thechoiceof the inventory boundary is dependent

on thecharacteristicsof thecompany, the intended

purposeof information, and the needsof the users. When

choosing the inventory boundary, a number offactors

should beconsidered,such as:

Organizational structures: control (operational

and financial),ownership , legal agreements, joint

ventures,etc.

Operational boundaries: on-site and off-site activities,

processes,services, and impacts

Businesscontext: natureof activities, geographic loca-

tions, industry sec tor(s), purposesof information, and

usersof information

More information on defining an appropriate inventory

boundary is provided in chapters 2, 3, and 4.

CompletenessAll relevant emissionssources within thechosen

inventory boundary need to be accounted for so that a

comprehensive and meaningful inventory iscompiled.

In practi ce , a lack of data or thecost of gathering

data may be a limiting factor. Sometimes it is

tempting to define a minimum emissions accounting

threshold (of ten referred to as a materiality threshold)

stating that a source not exceeding a ce rtain siz ecan beomitted from the inventory. Technically,such a

threshold issimply a predefined and accepted negative

bias in estimates (i .e., an underestimate). Although it

appears useful in theory, the practical implementation of

such a threshold is not compatible with thecompleteness

principleof theGHGProtocolCorporateStandard. In orderto utilize a materiality spec ification, theemissions

from a particular source or activity would have to be

quantif ied toensure they were under the threshold .

However,once emissions ar e quantif ied, most of the

benefi t of having a threshold is lost.

A threshold isof ten used to determine whether an error

or omission is a material discrepancy or not . This is

not thesame as a de minimisfor def ining a complete

inventory. Instead companies need to make a good faith

effort to provide a complete, accurate, and consistent

accounting of their GHG emissions. For cases where

emissions have not been estimated,or estimated at an

insuff icient level of quality, it is important that this is

transparently documented and justi fied. Veri fierscan

determine the potential impact and relevanceof theexclu-

sion,or lack of quality,on theoverall inventory report .

More information on completeness is provided in chap-

ters 7 and 10.

ConsistencyUsersof GHG information will want to tr ack and

compare GH G emissions information over time in order

to identify t rends and to assess the per formance of

the reporting company. Theconsistent applicat ion of

accounting approaches, inventory boundary, and calcula-

tion methodologies isessential to producing comparable

GHG emissions data over time. The GHG information

for all operations within an organizations inventory

boundary needs to becompiled in a manner that ensures

that the aggregate information is internally consistent

and comparableover time. If there arechanges in the

inventory boundary, methods, data or any other factors

affec ting emission estimates, they need to be transpar-

ently documented and justi fied.

More information on consistency is provided in

chapters 5 and 9.

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mprovingyourunderstand ingof yourcompanys GHGemissions bycompil ing

aGHGinventorymakes goodbusiness sense.Companies f requentlycite the

following fivebusiness goa ls as reasons forcompil ingaGHGinventory:

ManagingGHGrisks andidentifyingreductionopportunities

Publicreportingandparticipationin voluntaryGHGprograms

Participatinginmandatoryreportingprograms

ParticipatinginGHGmarkets

Recognition forearly voluntaryaction

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2 BusinessGoalsand Inventory Design

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Companies generally want their GHG inventory to be

capableof serving multiple goals. It therefore makes

sense to design the processfrom theoutset to provide

information for a variety of di fferent users and

usesboth cur rent and future. TheGHGProtocolCorporateStandardhas been designed as a comprehensiveGHG accounting and reporting framework to provide

the information building blockscapableofserving most

business goals (see Box 1). Thus the inventory data

collec ted according to theGHGProtocolCorporateStandard can be aggregated and disaggregated for

variousorganizational and operational boundaries and

for d ifferent business geographicscales (sta te,country,

Anne

x 1co

untries, n

on-Ann

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untries,

fac

ility,business unit ,company,etc.).

Appendix C provides an overview of various GH G

programsmany of which are based on theGHGProtocolCorporateStandard. The guidancesec tionsofchapters 3and 4 provide additional information on how to design

an inventory for di fferent goals and uses.

ManagingGHG risksandidentifyingreductionopportunitiesCompiling a compr ehensive GHG inventory improves

a companys understanding of itsemissions prof il e

and any potential GHG liability or exposure. A

companys GHG exposure is increasingly becoming a

manage

me

nt issue

in lightof

he

ighte

ne

d sc

rutiny by the

insurance industr y,shareholders, and theemergence of

environmental regulations/policies designed to reduce

GHG emissions.

In thecontext offuture GHG regulations,significant

GH G emissions in a companys valuechain may result in

increased costs (upstream) or reduced sales (down-

stream),even i f thecompany itself is not direc tly subject

to regulations. Thus investors may view significant indi-

rec t emissions upstream or downstream of a companys

operations as potential liabilities that need to be

managed and reduced. A limited focuson direc t emis-

sionsfrom a companysown operations may miss major

GHG risks and opportunities, while leading to a misin-

terpretation of thecompanys actual GHG exposure.

On a more positive note, what gets measured gets

managed. Accounting for emissionscan help ident ify

the most effec tive reduction opportunities. Thiscan

drive increased materials and energy eff iciency as well

as the development of new products and serv ices that

reduce the GHG impactsofcustomersor suppliers. This

in turn can reduce production costs and help differen-

tiate thecompany in an increasingly environmentally

conscious marketplace . Conducting a rigorous GHG

inventory is also a prerequisitefor setting an internal

or public GHG target and for subsequently measuring

and reporting progress.

C H A P T E R 2 Bus iness Goa ls and Inventory Des ign 11

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B O X 1 . Business goals servedby GHGinventories

ManagingGHGrisks andidentifyingreductionopportunities

Identifyingrisks associatedwithGHGconstraints in the future

Identifyingcost effectivereductionopportunities

Sett ingGHG targets,measuringandreportingprogress

Publicreportingandparticipationin voluntary GHGprograms

Voluntary stakeholderreportingof GHGemissions andprogress

towards GHG targets

Reporting togovernment andNGOreportingprograms,

includingGHGregistries

Eco-labellingandGHGcertification

Participatinginmandatory reportingprograms

Participatingingovernment reportingprograms at thenationa l,

regional,orlocallevel

ParticipatinginGHGmarkets

SupportinginternalGHG tradingprograms

Participatinginexternalcapand tradeallowance tradingprograms

Ca lculatingcarbon/GHG taxes

Recognitionforearly voluntary action

Providinginformation to support baselineprotectionand/or

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Publicreportingandparticipationin voluntary GHG programsAsconcernsover climatechange grow, NGOs, investors,

and other stakeholders are increasingly calling for

greater corpora te disclosureof GHG information. They

are interested in the actionscompanies are taking and

in how thecompanies are posit ioned r elative to their

competi tors in theface of emerging regulations. In

response, a growing number ofcompanies are preparing

stakeholder reportscontaining information on GHG

emissions. These may bestand-alone reportson GHG

emissionsor broader environmental or sustainability

reports. For example,companies preparing sustainability

re

po

rts using the

Global R

e

po

rting Initiative

guide

lines

should include information on GHG emissions in accor-

dance with theGHGProtocolCorporateStandard(GRI ,2002). Public reporting can alsostrengthen relation-

ships with other stakeholders. For instance ,companies

can improve their standing with customers and with the

public by being recognized for participating in voluntary

GHG programs.

Somecountries and sta tes haveestablished GHG

registr ies wherecompaniescan report GHG emissions

in a public database. Registr ies may be administered by

governments (e.g., U .S. Department of Energy 1605b

Voluntary Reporting Program), NGOs (e.g., California

Climate Action Registry),or industry groups (e.g., World

Economic Forum Global GHG Registry). Many GHG

programs also provide help tocompaniessetting volun-

tary GHG targets.

Most voluntary GHG programs permit or require the

reporting of direc t emissionsfrom operations (including

al l six GHGs), as well as indirec t GHG emissionsfrom

purchased elec tr icity. A GHG inventory prepared

in accordance with theGHGProtocolCorporateStandardwill usually becompatible with most requirements

(Appendix C provides an overview of the reporting

requirementsof some GHG programs). However,since

the accounting guidelinesof many voluntary programs

are periodically updated,companies planning to partici-

pate are advised tocontact the program administrator

tocheck thecurrent requirements.

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Business Goalsand Inventory Design

C H A PT E R 212

Indirect emissions associated with the consumption of purchased

electricityarearequiredelement of anycompanys accountingand

reporting under the GHG Protocol Corporate Standard. Because

purchasedelectricityis amajor sourceof GHGemissions forcompa-

nies, it presents a significant reduction opportunity. IBM, amajor

information technology company and amemberof theWRIs Green

PowerMarket Development Group,has systematicallyaccounted for

theseindirect emissions and thus identified the significant potential

toreduce them.Thecompanyhas implementeda varietyof strategies

that wouldreduceeither theirdemand forpurchasedenergyor the

GHGin

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One

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pursue therenewableenergymarket toreduce theGHGintensityof its

purchasedelectricity.

IBM succeeded in reducing its GHG emissions at its facility in

Austin,Texas,evenas energyuse stayedrelativelyconstant, through

acontract forrenewableelectricitywith the localutilitycompany,

AustinEnergy.Starting in 2001, this f ive-yearcontract is for 5.25

million kWhs of wind-power per year. This zero emission power

lowered the facilitys inventory bymore than 4,100 tonnes of CO2

compared to the previous year and represents nearly 5% of the

facilitys totalelectricityconsumption.Company-wide, IBMs 2002

total renewable energy procurement was 66.2 million kWh,which

represented 1.3% of its electricity consumption worldwide and

31,550 tonnes of CO2 compared to theprevious year.Worldwide,IBM

purchaseda varietyof sources of renewableenergyincludingwind,

biomass and solar.

Byaccounting for these indirect emissions and looking forassoci-

ated reduction opportunities, IBM has successfully reduced an

important sourceof its overallGHGemissions.

IBM:Theroleofrenewableenergy

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Participatinginmandatory reportingprogramsSome governments require GH G emitters to report their

emissions annually. These typically focuson direc t emis-

sionsfrom operations at operated or controlled facilities

in spec ific geographic jurisdictions. In Europe,facilities

falling under the requirementsof the Integrated

Pollution Prevention and Control (IPPC) Direc tive must

report emissionsexceeding a spec ified threshold for each

of thesix GHGs. The reported emissions are included in

a European Pollutant Emissions Register (EPER), a

publicly accessible internet-based database that permits

comparisonsofemissionsfrom individual facilitiesor

industrial sec tors in different countries (EC-DGE , 2000).

In Ontario, Ontario Regulation 127 requires the

reporting of GH G emissions (Ontario MOE , 2001).

ParticipatinginGHG marketsMarket-based approaches to reducing GHG emissions

ar eemerging in some partsof the world . In most

pl aces, they take theform of emissions trading

programs, although there ar e a number of other

approaches adopted by countries,such as the taxation

approach used in Norway. Trading programscan be

implemented on a mandatory (e.g., theforthcoming

EU E TS) or voluntary basis (e.g., CCX).

Although trading programs, which determinecompliance

by comparing emissions with an emissions reduction

target or cap, typically require accounting only for

direc t emissions, there areexceptions. The UK ETS,for

example, requires direc t entry participants to account

for GHG emissionsfrom the generation of purchased

elec tr icity (DEF RA , 2003). The CCX allows its

members theoption ofcounting indirec t emissions asso-

cia ted with elec tr icity purchases as a supplemental

reduction commitment . Other typesof indirec t emissions

can be more diff icult to veri fy and may presentchallenges in termsof avoiding doublecounting. To

facilitate independent veri ficat ion,emissions trading


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may require participating companies toestablish an

audit trail for GHG information (see chapter 10).

GHG trading programs are li kely to impose additionallayersof accounting spec if icity relating to which

approach is used for setting organizational boundaries;

which GHGs and sources are addressed; how base

years ar eestablished; the typeof calculation method-

ology used; thechoice of emission factors; and the

moni toring and verif icat ion approachesemployed.

The broad participation and best practices incorpora ted

into theGHGProtocolCorporateStandard are li kelyto inform the accounting requirementsofemerging

programs, and have indeed doneso in the past.

Recognitionforearly voluntary actionA credible inventory may help ensure that a corpora-

tionsearly, voluntary emissions reductions ar e

recognized in future regulatory programs. To illustrate,

suppose that in 2000 a company started reducing its

GH G emissions by shif ting itson-site powerhouse boiler

fuel from coal to landfill gas. If a mandatory GHG

reduction program is la ter established in 2005 and it

sets 2003 as the base against which reductions are to

be measured, the program might not allow theemissions

reductions achieved by the green power projec t prior to

2003 tocount toward its target.

However, if a companys voluntary emissions reductions

have been accounted for and registered, they are more

li kely to be recognized and taken into account when

regulations requiring reductions go intoeffec t . For

instance , thesta teof California hassta ted that it will

use its best efforts toensure that organizations that

register ce rti f ied emission results with the California

Climate Action Registry receive appropriateconsidera-

tion under any future internationa l,federa l,or sta te

regulatory program relating to GHG emissions.

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Business Goalsand Inventory Design

C H A PT E R 214

ForTataSteel,Asias first and Indias largest integratedprivate

sector steelcompany,reducingits GHGemissions throughenergy

eff iciency is a key element of its primary business goal: the

acceptabili tyof its product ininternationa lmarkets.Eachyear,in

pursuit of this goal, the company launches several energy eff i-

ciencyprojects andintroduces less-GHG-intensiveprocesses.The

company is also actively pursuing GHG tradingmarkets as a

means of further improving its GHGperformance.To succeed in

theseefforts andbeeligible foremerging trading schemes,Tata

Steelmust have an accurate GHG inventory that includes allprocesses and activities, allows formeaningful benchmarking,

measures improvements,andpromotes crediblereporting.

TataSteelhas developed thecapacity tomeasureits progress in

reducingGHG emissions.TataSteels managers have access to

on-lineinformationonenergyusage,materialusage,wasteand

byproduct generation, and othermaterial streams. Using this

dataand theGHGProtocol calculation tools,TataSteelgenerates

two key long-term, strategic performance indicators: specific

energyconsumption(Gigacalorie/tonneof crude steel)andGHG

inten

sity(tonne

of

CO2equiv

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onne

of

crude

steel).

The

se

indicators arekey sustainab ilitymetrics in the steel sectorworld-

wide,andhelpensuremarket acceptabili tyandcompetitiveness.

Since thecompanyadopted theGHGProtocolCorporateStandard,

trackingperformancehas becomemore structuredand stream-

lined.This systemallows TataSteelquickandeasyaccess toits

GHG inventory and helps the companymaximize process and

material floweff iciencies.

Tata Steel:Developmentofinstitutional

capacity inGHGaccounting and reporting


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WhenFordMotorCompany,aglobalautomaker,embarkedonan

effort to understand and reduce its GHG impacts, it wanted to

track emissions with enough accuracy and detail tomanage

themeffectively.Aninterna lcross-functiona lGHGinventory team

was formed toaccomplish this goal.Although thecompanywas

already reporting basic energy and carbon dioxide data at the

corporate level, amore detailed understanding of these emis-

sions was essential to set and measure progress aga inst

performance targets and evaluate potential participation in

externa l trading schemes.

For severalweeks, the teamworkedoncreatingamorecompre-

hensiveinventory for stationarycombustion sources,andquickly

foundapatternemerging.All toooften teammembers left meet-

ings withasmanyquestions as answers,and the samequestions

kept coming up from one week to the next.How should they

draw boundaries?How do they account for acquisitions and

divest itures? Wha t emission factors should be used? And

perhaps most importantly, how could their methodology be

deemed credible with stakeholders?Although the teamhad no

shortageof opinions, therealso seemed tobenoclearlyright or

wronganswers.

The GHG Protocol Corporate Standard helped answermany of

these questions and the FordMotor Company now has amore

robust GHG inventory that canbecontinually improved to fulfill

its rapidlyemergingGHGmanagement needs.Sinceadopting the

GHG Protocol Corporate Standard, Ford has expanded the

coverageof its publicreporting toallof its brands globally;it now

includes direct emissions from sources it owns or controls and

indirect emissions resulting from the generation of purchased

electricity,heat,or steam.Inaddition,Fordis a foundingmember

of theChicagoClimateExchange,whichuses someof theGHG

Protocolcalculation tools foremissions reportingpurposes.

FordMotorCompany:Experiences

usingtheGHGProtocolCorporateStandard


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For corporate reporting, two distinct approachescan be

used toconsolidate GH G emissions: theequity share and

thecontrol approaches. Companiesshall account for and

report their consolidated GHG data according toeither

theequity shareor control approach as presented below.

If the reporting company wholly owns all itsoperations,

itsorganizational boundary will be thesame whichever

approach is used.1 For companies with joint operations,

theorganizational boundary and the resulting emissions

may diff er depending on the approach used. In both

whol ly owned and joint operations, thechoice of

approach may change how emissions arecategori zed

when operational boundaries areset (seechapter 4).

Equ ity shareapproachUnder theequity share approach, a company accountsfor

GHG emissionsfrom operations according to itsshareof

equity in theoperation. Theequity share reflectseconomic

interest, which is theextent of rights a company has to the

risks and rewardsflowing from an operation. Typically, the

shareofeconomic risks and rewards in an operation is

aligned with thecompanys percentageownership of that

operation, and equity share will normally be thesame as

theownership percentage. Where this is not thecase, the

economicsubstance of the relationship thecompany has

with theoperation alwaysoverrides the legal ownership

form toensure that equity share reflec ts the percentage

ofeconomic interest. The principleofeconomic

substance taking precedent over legal form isconsistent

with international financial reporting standards. The

sta ff preparing the inventory may therefore need to

consult with thecompanys accounting or legal sta ff to

ensure that the appropriateequity share percentage is

applied for each joint operation (see Table 1 for definitions

offinancial accounting categories).

ControlapproachUnder thecontrol approach, a company accountsfor

100 percent of the GH G emissionsfrom operationsover

which it hascontrol. It does not account for GHG emis-

sionsfrom operations in which i t owns an interest but

has nocontrol. Control can be defined in either financia l

or operational terms. When using thecontrol approach

toconsolidate GHG emissions,companiesshall choose

between either theoperational control or financia l

control cri teria.

In most cases, whether an operation iscontrolled by the

company or not does not vary based on whether thefinan-

cia l control or operational control cri terion is used. A

notableexception is theoil and gas industry, which of ten

hascomplex ownership /opera torship str uctures. Thus,

thechoiceofcontrol cri terion in theoil and gas industry

can havesubstantial consequencesfor a companys GHG

inventory. In making thischoice ,companiesshould

take into account how GHG emissions accounting and

reporting can best be geared to the requirementsof

emissions reporting and trading schemes, how i t can be

aligned with financial and environmental reporting,

and which cri terion best reflec ts thecompanys actual

power ofcontrol.

Financial Control. Thecompany hasfinancia l control

over theoperation if theformer has the ability to direc t

thefinancial and operating policiesof the latter with a

view to gaining economic benefitsfrom its activities.2

For example,financia l control usually exists if the

company has the right to the majority of benefitsof the

operation, however these rights areconveyed. Similarly,

a company isconsidered tofinancially control an

operation i f it retains the majority risks and rewards

ofownership of theoperations assets.

Under thiscri terion, theeconomicsubstanceof the

relationship between thecompany and theoperation

takes precedenceover the legal ownership status,so

that thecompany may havefinancial control over the

operation even if it has less than a 50 percent interest

in that operation. In assessing theeconomicsubstance

of the relationship, the impact of potential voting

rights, including both those held by thecompany and

those held by other parties, is also taken into account.

Thiscri terion isconsistent with international financia laccounting standards; therefore, a company hasfinan-

cia l control over an operation for GHG accounting

purposes if theoperation isconsidered as a group

company or subsidiary for the purposeoffinancia l

C H A P T E R 3 Se t t ing Organizat iona l Boundaries 17

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TA B L E 1 . Financialaccountingcategories

A C C O U N T I N G

C A T E G O R Y

Groupcompanies /

subsidiaries

Associated/

affiliated

companies

Non-incorporated

joint ventures/

partnerships/

operations where

partners havejoint

financialcontrol

Fixedasset

investments

Franchises

F I N A N C I A L A C C O U N T I N G D E F I N I T I O N

Theparent companyhas theability todirect the financialand

operatingpolicies of thecompanywitha view togaining

economicbenefits fromits activities.Normally, this category

alsoincludes incorporatedandnon-incorporatedjoint ventures

andpartnerships overwhich theparent companyhas financial

control.Groupcompanies/subsidiaries are fullyconsolidated,

whichimplies that 100 percent of the subsidiarys income,

expenses,assets,andliabilities are takeninto theparent

companys profit andloss account andbalance sheet,respec-

tively.Where theparents interest does not equal 100 percent,theconsolidatedprofit andloss account andbalance sheet

shows adeduction for theprofits andnet assets belonging to

minorityowners.

Theparent companyhas significant influenceover theoperating

and financialpolicies of thecompany,but does not have finan-

cialcontrol.Normally, this categoryalsoincludes incorporated

andnon-incorporatedjoint ventures andpartnerships overwhich

theparent companyhas significant influence,but not financial

control.Financialaccountingapplies theequity sharemethod

toassociated/affiliatedcompanies,whichrecognizes theparentcompanys shareof theassociates profits andnet assets.

Joint ventures/partnerships/operations areproportionally

consolidated,i.e.,eachpartneraccounts for theirpropor-

tionateinterest of thejoint ventures income,expenses,

assets,andliabili ties.

Theparent companyhas neither significant influencenor financial

control.This categoryalsoincludes incorporatedandnon-

incorporatedjoint ventures andpartnerships overwhich theparent

companyhas neither significant influencenor financialcontrol.

Financialaccountingapplies thecost/dividendmethod to fixed

asset investments.This implies that onlydividends receivedare

recognizedas incomeand theinvestment is carriedat cost.

Franchises are separatelegalentities.Inmost cases, the fran-

chiserwillnot haveequityrights orcontrolover the franchise.

Therefore, franchises shouldnot beincludedinconsolidationof

GHGemissions data.However,if the franchiserdoes haveequity

rights oroperational/financialcontrol, then the samerules

forconsolidationunder theequityorcontrolapproaches apply.

AC CO U NT ING FO R GH G E MIS SIO NS AC C OR D IN G TO

GHGPROTOCOL CORPORATESTANDARDB A S E D O N

E Q U I T Y S H A R E

Equity shareof

GHGemissions

Equity shareof

GHGemissions

Equity shareof

GHGemissions

0%

Equity shareof

GHGemissions

B A S E D O N

F I N A N C I A L C O N TR O L

100%of

GHGemissions

0%of

GHGemissions

Equity shareof

GHGemissions

0%

100%of

GHGemissions

S

T

A

N

D

A

R

D

NOTE : Table 1 is basedonacomparisonof UK,US,Netherlands andInternationa lFinancialReportingStandards (KPMG, 2000).


22/116

hen planning theconsolidation of GHG data, it is

important to distinguish between GHG accounting

and GHG reporting. GHG accounting concerns the

recognition and consolidation of GHG emissionsfrom

operations in which a parent company holds an interest

(either control or equity) and linking the data tospec ific

operations,sites, geographic locat ions, business

processes, and owners. GHG reporting,on theother

hand,concerns the presentation of GHG data in formats

tailored to the needsof various reporting uses and users.

Most companies haveseveral goalsfor GHG reporting,

e.g.,official government reporting requirements,emissions

trading programs,or public reporting (see chapter 2).

In developing a GHG accounting system, a fundamental

consideration is toensure that thesystem iscapableof

mee ting a rangeof reporting requirements. Ensuring

that data arecollec ted and recorded at a suff iciently

disaggregated level, and capableof being consolidated

in variousforms, will providecompanies with maximum

flexibility to mee t a rangeof reporting requirements.

DoublecountingWhen twoor morecompanies hold interests in thesame

joint operation and use different consolidation approaches

(e.g., Company A follows theequity share approach while

Company B uses thefinancial control approach),emissions

from that joint operation could be doublecounted. This

may not matter for voluntary corporate public reporting

as long as there is adequate disclosurefrom thecompany

on i tsconsolidation approach. However, doublecounting

ofemissions needs to be avoided in trading schemes and

certain mandatory government reporting programs.

Reportinggoals andlevelofconsolidationReporting requirementsfor GHG data exist at various

levels,from a spec ific local facility level to a more

aggregated corpora te level. Examplesof driversfor

various levelsof reporting include:

Off icial government reporting programsor certain

emissions trading programs may require GHG data to

be reported at a facility level. In thesecases,consoli-

dation of GHG data at a corporate level is not relevant

Government reporting and trading programs may

require that data beconsolidated within certain

geographic and operational boundaries (e.g., the U .K .

Emissions Trading Scheme)

To demonstrate thecompanys account to wider stake-

holders,companies may engage in voluntary public

reporting,consolidating GHG data at a corpora te level

in order toshow the GH G emissionsof their entire

business activities.

Contracts thatcoverGHG emissionsToclarify ownership (rights) and responsibility (obliga-

tions) issues,companies involved in joint operations may

draw up contracts that spec ify how theownership of

emissionsor the responsibility for managing emissions

and associa ted r isk is distributed between the parties.

Wheresuch arrangementsexist,companies may option-

ally provide a description of thecontractual arrangement

and include information on allocat ion of CO2 rela ted

risks and obligations (see Chapter 9).

Using

the

e

quit

y share

orc

ontr

ola

pproac

hDifferent inventory reporting goals may require different

data sets. Thuscompanies may need to account for their

GH G emissions using both theequity share and the

control approaches. The GHGProtocolCorporateStandardmakes no recommendation as to whether voluntary

public GHG emissions reporting should be based on the

equity shareor any of the twocontrol approaches, but

encouragescompanies to account for their emissions

applying theequity share and a control approach sepa-

rately. Companies need to dec ideon the approach best

suited to their business activities and GHG accountingand reporting requirements. Examplesof how these may

drive thechoiceof approach include thefollowing:

Reflection of commercial reality. It can be argued that

a company that derives an economic profit from a

certain activity should takeownership for any GHG

emissions genera ted by the activity. This is achieved

by using theequity share approach,since this

approach assignsownership for GHG emissionson the

basisofeconomic interest in a business activity. The

control approaches do not always reflect thefull GHGemissions port folioof a companys business activities,

but have the advantage that a company takesfull

ownership of all GHG emissions that it can directly

influence and reduce.

G

U

I

D

A

N

C

E

Set t ing Organizat ional Boundar ies

C H A PT E R 320

W


23/116

Government reporting and emissions trading programs.

Government regulatory programs will always need to

monitor and enforce compliance . Since compliance

responsibility generally fal ls to theopera tor (not

equity holdersor the group company that hasfinancia l

control), governments will usually require reporting

on the basisofoperational control,either through a

facility level-based system or involving theconsolida-

tion of data within certain geographical boundaries

(e.g. the E U E TS will allocateemission permits to the

opera torsofcertain installations).

Liabil ity and risk management. While reporting and

compliance with regulations will most likely continue

to be based direc tly on operational control, the ulti-

matefinancial l iability will of ten rest with the group

company that holds an equity share in theoperation or

hasfinancia l control over i t. Hence ,for assessing risk,

GHG reporting on the basisof theequity share and

financia l control approaches provides a morecomplete

picture. Theequity share approach is likely to result in

the most comprehensivecoverageof liability and risks.

In thefuture,companies might incur liabilitiesfor

GH G emissions produced by joint operations in which

they have an interest, but over which they do not have

financia l control. For example, a company that is an

equity shareholder in an operation but has nofinancia l

control over it might face demands by thecompanies

with a controlling share tocover its requisiteshareof

GH G compliancecosts.

Alignment with financialaccount ing. Futurefinancia l

accounting standards may treat GHG emissions as

liabilities and emissions al lowances/credits as assets.

To assess the assets and liabilities a company creates

by its joint operations, thesameconsolidation rules

that are used in financial accounting should be applied

in GHG accounting. Theequity share and financial

control approaches result in closer alignment between

GHG accounting and financial accounting.

Management information and performance tracking.

For the purposeof performance tracking, thecontrol

approachesseem to be more appropriatesince

managerscan only be held accountablefor activities

under their control.

Cost of administration and dataaccess. Theequity

share approach can result in higher administrative

costs than thecontrol approach,since it can be diff i-

cult and timeconsuming tocoll ec t GHG emissions

data from joint operations not under thecontrol of the

reporting company. Companies ar e li kely to have

better access tooperational data and therefore greater

ability toensure that it mee ts minimum quality

standards when reporting on the basisof control.

Completenessof reporting. Companies might find it

di ff icult to demonstratecompletenessof reporting

when theoperationa l cont rol crit erion is adopted,

since there are unlikely to be any matching recordsor

listsof financial assets to veri fy theoperations that

ar e included in theorganizational boundary.


G

U

I

D

A

N

C

E

In theoilandgas industry,ownershipandcontrol structures are

often complex. A group may own less than 50 percent of a

ventures equity capital but have operationa l control over the

venture.On theotherhand,in some situations,agroupmayhold

amajorityinterest ina venturewithout beingable toexert opera-

tional control, for example, when aminority partner has a veto

voteat theboardlevel.Becauseof thesecomplexownershipand

control structures,RoyalDutch/Shell, a global group of energy

andpetrochemicalcompan ies,has chosen toreport its GHGemis-

sions on thebasis of operationalcontrol.Byreporting 100 percent

of GHGemissions fromall ventures underits operationalcontrol,

irrespective of its share in the ventures equity capital, Royal

Dutch/Shell can ensure that GHG emissions reporting is in line

with its operational policy including its Health, Safety and

EnvironmentalPerformanceMonitoringandReportingGuidelines.

Using theoperationalcontrolapproach, thegroupgenerates data

that is consistent,reliable,andmeets its quality standards.

RoyalDutch/Shell:

Reportingonthebasis ofoperationalcontrol


24/116

G

U

I

D

A

N

C

E

Set t ing Organizat ional Boundar ies

C H A PT E R 322

F I G U R E 1 . Definingtheorganizationalboundary ofHollandIndustries

H OL L A N D

IN D U STR IES

H O LL A ND

SW ITZER L A ND

H O LL A ND

A ME R IC A

K A H U NA

C H E MICA LS

BG B

(50% O W NED )

IR W

(75% O W NED )

Q UIC KFIX

N A L L O

S Y NTA L

100%

100%100%

83%

100%

100%

33 .3%

100%

33 .3%

43%

100%

100%

56%

0%

0%

0%

0%

0%E qu i ty share

O peratio nal con tro l

F inancia lcon tro l

41 .5%

0%

50%

62 .25%

100%

100%

A N I L L U S TR AT I O N :

TH E E Q U I T Y S H A R E A N D C O N TR O L A P P R O A C H E S

Holland Industr ies is a chemicals group comprising

a number of companies/joint ventures acti ve in the

production and marketing ofchemicals. Table 2 outlines

theorganizationa l str uctureof Holland Industr ies and

shows how GHG emissionsfrom the various wholl y

owned and joint operations are accounted for under

both theequity share and control approaches.

In setting itsorganizational boundary, Holland

Industr iesfirst dec ides whether to use theequity or

control approach for consolidating GHG data at the

corpora te level. It then determines which operations at

thecorpora te level mee t itsselec ted consolidation

approach. Based on theselec ted consolidation approach,

theconsolidation process is repeat ed for each lower

operational level. In this process, GHG emissions ar e

first apport ioned at the lower operational leve l

(subsidiaries, associa te, joint ventures,etc.) before theyareconsolidated at thecorporate level. Figure 1 pres-

ents theorganizational boundary of Holland Industr ies

based on theequity share and control approaches.


25/116


G

U

I

D

A

N

C

E

In this example,HollandAmerica(not HollandIndustries)holds

a 50 percent interest inBGBanda 75 percent interest inIRW.If

theactivities of HollandIndustries itself produceGHGemissions(e.g.,emissions associatedwithelectricityuseat theheadoff ice),

then theseemissions shouldalsobeincludedin theconsolidation

at 100 percent.

N O T E S

1

The termoperationsis usedhereas ageneric term todenoteanykindof business activity,irrespectiveof its organ izationa l,gover-nance ,orlega l structures.

2 Financialaccounting standards use thegeneric termcontrol forwhatis denotedas financialcontrolin this chapter.

TA B L E 2 . HollandIndustries -organizational structureandGHG emissions accounting

W HO LL Y

O WN ED A N D

JO INT

O PE R AT IONS

OF HO LL A N D

HollandSwitzerland

HollandAmerica

BGB

IRW

KahunaChemicals

QuickFix

Nallo

Syntal

LE GA L

STR U CTU R E

A N D P A RTNER S

Incorporatedcompany

Incorporatedcompany

Joint venture,

part

ners

hav

ejoint f inancialcontrolotherpartnerRearden

SubsidiaryofHollandAmerica

Non-incorporatedjoint venture;partners havejoint f inancial

control; twootherpartners:ICTandBCSF

Incorporatedjointventure,otherpartnerMajox

Incorporatedjointventure,other

part

nerN

aguaCo.

Incorporatedcompany,subsidiaryofErewhonCo.

EC O NO MIC

INTE RE ST

H EL D B Y

H O LL A N D

IN D USTRIES

100%

83%

50%byH

olland

America

75%byHollandAmerica

33.3%

43%

56%

1%

C O NTR O L

OF

O P ER AT IN G

P OL IC IE S

HollandIndustries

HollandIndustries

Rearden

HollandAmerica

HollandIndustries

HollandIndustries

Nallo

ErewhonCo.

TR E ATMENT IN

HO LL A N D IND U STR IES

F IN A NCIA L AC CO U NTS

( SEE TAB LE 1 )

Whollyowned subsidiary

Subsidiary

viaHollandAmerica

viaHollandAmerica

Proportiona llyconsolidatedjoint venture

Subsidiary

(HollandIndustries hasfinancialcontrol sinceit treats QuickFixas asubsidiaryinits f inancialaccounts)

Associatedcompany(HollandIndustries does

not

hav

efinancial

con

trolsinceit treats Nalloas an

Associatedcompanyinitsfinancialaccounts)

Fixedasset investment

E MISS IONS A CC O UNTED FO R A ND R EP OR TED

B Y H OLL A ND IN DU STR IE S

EQ UITY SH A R E

A PP R O AC H

100%

83%

41.5%

(83%x 50%)

62.25%

(83%x 75%)

33.3%

43%

56%

0%

C O NTR O L AP PR O AC H

100% foroperationalcontrol

100% forfinancialcontrol



0% for

opera

tional

con

trol

50% for financialcontrol(50%x 100%)




33.3% for

financialcontrol








26/116

S

T

A

N

D

A

R

D

24

fteracompanyhas determinedits organizationa lboundaries in terms

of theoperations tha t it owns orcontrols, it then sets its operationa l

boundaries. This involves identifying emissions assoc iated with its operations,

catego

rizing

them

as

direc

tand

indi

rec

tem

iss

ions,

and

choosing

the

scope

of

account ingand reporting forindirec t emissions.

A

4 Setting Operational Boundaries

G U I D A N C E

S T A N D A R D


27/116

For effec tive and innovative GHG management ,setting

operational boundaries that arecomprehensive with

respec t to direc t and indirec t emissions will help a

company better manage thefull spec trum of GHG risks

and opportunities that exist a long its valuechain.

Direct GHGemissions areemissionsfrom sources that

areowned or controlled by thecompany.1

Ind irect GHGemissions areemissions that are a

consequence of the activitiesof thecompany but occur

at sourcesowned or controlled by another company.

What isclassified as di rec t and indirec t emissions is

dependent on theconsolidation approach (equity share

or cont rol) se lec ted for setting theorganizationa l

boundary (see chapter 3) . Figure 2 below shows the

relationship between theorganizational and operational

boundariesof a company.

IntroducingtheconceptofscopeTo help delineate direc t and indirec t emission sources,

improve transparency, and provide utility for di fferent

typesoforganizations and different typesofclimate poli-

cies and business goals, three scopes (scope 1,scope

2, and scope 3) are defined for GHG accounting and

reporting purposes. Scopes 1 and 2 arecarefully defined

in thisstandard toensure that twoor morecompanies

will not account for emissions in thesamescope. This

makes thescopes amenablefor use in GHG programs

where doublecounting matters.

Companiesshall separately account for and report on

scopes 1 and 2 at a minimum.

Scope 1:DirectGHG emissionsDi rec t GHG emissionsoccur from sources that

ar eowned or control led by thecompany,for example,

emissionsfrom combustion in owned or cont roll ed

boilers, furnaces, vehicles,etc.; emissionsfrom chemical

production in owned or controlled processequipment.

Direc t CO2 emissionsfrom thecombustion of biomass

shall not be included in scope 1 but reported separately

(seechapter 9).

GH G emissions not covered by the Kyoto Protocol,e.g.

CFCs, NOx ,etc.shall not be included in scope 1 but may

be reported separately (seechapter 9).

Scope 2:Electricity indirectGH Gemiss ion sScope 2 accountsfor GHG emissionsfrom the genera-

tion of purchased elec tr icity2 consumed by thecompany.

Purchased elec tr icity is defined aselec tr icity that is

purchased or otherwise brought into theorganizational

boundary of thecompany. Scope 2 emissions physically

occur at thefacility whereelec tr icity is generated.

Scope 3:OtherindirectGHG emissionsScope 3 is an optional reporting category that allows

for the treatment of al l other indirec t emissions. Scope

3 emissions are a consequenceof the activitiesof the

company, but occur from sources not owned or

controlled by thecompany. Someexamplesofscope 3

activities areextraction and production of purchased

materials; transportation of purchased fuels; and useof

sold products and serv ices.

C H A P T E R 4 Se t t ing Opera t ional Boundaries 25

S

T

A

N

D

A

R

D

F I G U R E 2 . Organizationalandoperationalboundaries ofacompany

Paren t C om pan y

C om pany A

Ship fleet

Leasedbuilding Direct andindirect emissions

Car fleetPower

generationunit

Leased factoryOwned/

Controlled

building

Owned/

Controlled

building

C om pany B C ompany C Co mpany D

O

R

G

AN

I

Z

AT

I

O

N

AL

B

O

U

N

D

AR

I

ES

O

P

ER

AT

I

O

N

AL

B

O

U

N

DA

R

I

E

S

}

}


28/116

n operational boundary defines thescopeof direct

and indirect emissionsfor operations that fall within

a companysestablished organizational boundary.

Theoperational boundary (scope 1,scope 2,scope 3) is

dec ided at thecorporate level a fter setting theorganiza-

tional boundary. Theselected operational boundary is then

uniformly applied to identify and categori ze direct and

indirect emissions at each operational level (see Box 2).

Theestablished organizational and operational bound-

aries together constitute a companys inventory boundary.

Accountingandreportingon scopesCompanies account for and report emissionsfrom

scope 1 and 2 separately. Companies may further

subdivideemissions data within scopes where this aids

transparency or faci l itatescomparability over time.

For example, they may subdivide data by business

unit/facility,country,source type (stationary combustion,

process, fugitive,etc.), and activity type (production

ofelec tr icity,consumption ofelec tr icity, generation or

purchased elec tr icity that issold toend users,etc.).

In addition to thesix Kyoto gases,companies may also

provideemissions data for other GHGs (e.g., Montreal

Protocol gases) to givecontext tochanges in emission

levelsof Kyoto Protocol gases. Switching from a CFC

to HFC,for example, will increaseemissionsof Kyoto

Protocol gases. Information on emissionsof GH Gsother

than thesix Kyoto gases may be reported separately

from thescopes in a GHG public report .

Together the three scopes provide a comprehensive

accounting framework for managing and reduc ing

di rec t and indirec t emissions. Figure 3 provides an

overview of the re lationship between thescopes and

the activities that genera te direc t and indirec t emissions

along a companys valuechain.

A company can benefit from eff iciency gains throughout

the valuechain. Even without any policy drivers,

accounting for GHG emissions along the valuechain may

reveal potential for greater eff iciency and lower costs

(e.g., the useoffly ash as a clinker substitute in the

manufactureofcement that reduces downstream emis-

sionsfrom processing of wastefly ash, and upstream

26

Set t ing Operat ional Boundar ies

C H A PT E R 4

G

U

I

D

A

N

C

E

B O X 2 . Organizationalandoperationalboundaries

Organ izationX is aparent company tha t has fullownershipandfinancial control of operations A and B, but only a 30% non-

operatedinterest and no f inancia lcontrolinoperationC.

Setting Organizational Boundary: X would decide whether to

account forGHGemissions byequity shareor financialcontrol. If

thechoiceis equity share,XwouldincludeAandB,as wellas 30%

of Cs emissions. If the approach chosen is financial control, X

would count onlyA andBs emissions as relevant and subject to

consolidation. Once this has been decided, the organ izationa l

boundaryhas beendefined.

SettingOperationalBoundary:Once theorgan izationalboundary

is set,X thenneeds todecide,on thebasis of its business goals,

whether to account only for scope 1 and scope 2, or whether to

includerelevant scope 3 categories forits operations.

Operations A,BandC(if theequityapproachis selected)account

for theGHGemissions in the scopes chosenbyX,i.e., theyapply the

corporatepolicyindrawingup theiroperationalboundaries.

F I G U R E 3 . Overviewof scopes andemissions across a valuechain

SCOPE 2INDIRECT

CO2 SF6 N2OCH4 PFCsHFCs

SCOPE 1DIRECT

SCOPE 3INDIRECT

PURCHASEDELECTRICITY

FOROWNUSE

COMPANYOWNED

VEHICLES

FUELCOMBUSTION

PRODUCT

USE

OUTSOURCEDACTIVITIES

CONTRACTOROWNED

VEHICLES

WASTEDISPOSAL

EMPLOYEEBUSINESSTRAVEL

PRODUCTIONOF

PURCHASEDMATERIALS

A

Adopted

fr

om

NZBCSD

,

2002


29/116

emissionsfrom producing clinker) . Even ifsuch win-

win opt ions ar e not available, indirec t emissions

reductions may still be morecost effec tive to accomplish

than scope 1 reductions. Thus accounting for indirec t

emissionscan help identi fy where to al locate limited

resources in a way that maximizes GHG reduction and

return on investment.

Appendix D lists GH G sources and activities along the

valuechain by scopesfor various industry sec tors.

Scope 1:DirectGHG emissionsCompanies report GHG emissionsfrom sources they own

or control asscope 1. Direc t GHG emissions are princi-

pally the result of thefollowing typesof activities

undertaken by thecompany:

Generation of electricity, heat, or steam. Theseemis-

sions result from combustion offuels in stationary

sources,e.g., boilers,furnaces, turbines

Physicalor chemical processing. 3 Most of theseemis-

sions result from manufactureor processing ofchemicals

and materials,e.g.,cement, aluminum, adipic acid,

ammonia manufacture, and waste processing

Transportation of materials, products, waste, and

employees. Theseemissions result from thecombus-

tion offuels in company owned/controlled mobile

combustion sources (e.g., trucks, trains,ships,

airplanes, buses, and cars)

Fugitiveemissions. Theseemissions result from inten-

tional or unintentional releases,e.g., equipment leaks

from joints,seals, packing, and gaskets; methane

emissionsfrom coal mines and venting; hydrof luoro-

carbon (HFC) emissions during the useof refrigerationand air conditioning equipment; and methane leakages

from gas transport .

S A L E OF O W N -G E N E R ATE D E L E C TR I C I TY

Emissions associa ted with thesaleofown-genera ted

elec tr icity to another company are not deducted/netted

from scope 1. This treatment ofsold elec tr icity isconsis-

tent with how other sold GHG intensive products are

accounted,e.g., emissionsfrom the production ofsold

clinker by a cement company or the production ofscrap

stee l by an iron and stee l company are not subtracted

from their scope 1 emissions. Emissions associa ted with

thesale/transfer ofown-genera ted elec tr icity may be

reported in optional information (seechapter 9).

Scope 2:Electricity indirectGHG emissionsCompanies report theemissionsfrom the generation of

purchased elec tr icity that isconsumed in itsowned or

controlled equipment or operations asscope 2. Scope 2

emissions are a spec ial category of indirect emissions. For

many companies, purchased electr icity representsoneof

the largest sourcesof GHG emissions and the most signifi-

cant opportunity to reduce theseemissions. Accounting

for scope 2 emissions allowscompanies to assess the risks

and opportunities associated with changing electr icity and

GHG emissionscosts. Another important reason for

companies to track theseemissions is that the information

may be needed for some GHG programs.

Companiescan reduce their useofelectricity by investing

in energy efficient technologies and energy conservation.

Additionally,emerging green power markets4 provide

opportunitiesfor somecompanies toswitch to less GHG

intensivesourcesofelectricity. Companiescan also install

an efficient on siteco-generation plant, particularly if it

replaces the purchaseof more GHG intensiveelectricity

from the grid or electricity supplier. Reporting ofscope 2

emissions allows transparent accounting of GHG emis-

sions and reductions associated with such opportunities.

I N D I R E C T E M I S S I O N S

A S S O C I AT E D W I TH TR A N S M I S S I O N A N D D I S TR I B U T I O N

Elec tr ic utility companiesof ten purchaseelec tr icity from

independent power genera torsor the grid and resell it to

end-consumers through a transmission and distribution

(T&D) system.5 A port ion of theelec tr icity purchased

by a utility company isconsumed (T&D loss) during its

transmission and distribution toend-consumers (see Box 3).

Consistent with thescope 2 definition,emissionsfrom the

generation of purchased electr icity that isconsumed

during transmission and distribution are reported in

scope 2 by thecompany that ownsor controls the T&D

operation. End consumersof the purchased electr icity do

not report indirect emissions associated with T&D losses

in scope 2 because they do not own or control the T&D

operation where theelectr icity isconsumed (T&D loss).


G

U

I

D

A

N

C

E

B O X 3 . Electricity balance

Purchasedelectricity consumed

by theutility company duringT&D

+

Purchasedelectricity consumed

by endconsumers

G E N E R AT E D

E L E C TR I C I T Y =


30/116


31/116

from scope 3. Company E reports indirec t emissions

associa ted with theconsumption ofelectr icity purchased

from thecompany Dsco-generation unit under scope 2.

For more guidance ,see Appendix A on accounting for

indirec t emissionsfrom purchased elec tr icity.

Scope 3:OtherindirectGHG emissionsScope 3 isoptional , but it provides an opportunity to be

innovative in GHG management. Companies may want to

focuson accounting for and reporting those activities that

are relevant to their business and goals, and for which they

have reliable information. Sincecompanies have discretion

over which categories they choose to report ,scope 3 may

not lend itself well tocomparisons acrosscompanies. This

section provides an indicative list ofscope 3 categories

and includescasestudieson someof thecategories.

Someof these activities will be included under scope 1 if the

pertinent emission sources areowned or controlled by the

company (e.g., if the transportation of products is done in

vehiclesowned or controlled by thecompany). To determine

if an activity falls within scope 1 or scope 3, thecompany

should refer to theselected consolidation approach (equity

or control) used in setting itsorganizational boundaries.

Extraction and production of purchased materials

and fuels6

Transport-rela ted activities

Transportation of purchased materialsor goods

Transportation of purchased fuels

Employee business travel

Employeescommuting to and from work

Transportation ofsold products

Transportation of waste

Elec tr icity-rela ted activities not included in scope 2

(see Appendix A)

Extraction, production, and transportation offuels

consumed in the generation ofelec tr icity (either

purchased or own generated by the reporting company)

Purchaseofelec tr icity that issold to an end user

(reported by utili ty company)

Generation ofelec tr icity that isconsumed in a T&D

system (reported by end-user)

Leased assets,franchises, and outsourced activities

emissionsfrom such contractual arrangements are

only classified asscope 3 i f theselec ted consolidation

approach (equity or control) does not apply to them.

Clarificat ion on theclassificat ion of leased assets

should beobtained from thecompany accountant (see

sec tion on leases below).

Useofsold products and services

Waste disposal

Disposal of waste genera ted in operations

Disposal of waste genera ted in the production of

purchased materials and fuels

Disposal ofsold products at theend of their life

A C C O U N T I N G FO R S C O P E 3 E M I S S I O N S

Accounting for scope 3 emissions need not involve a

full-blown GHG l ifecycle analysisof all products and

operations. Usually it is valuable tofocuson oneor two

major GHG-generating activities. Although it is diff i-

cult to provide generic guidance on which scope 3

emissions to include in an inventory,some genera l steps

can be articulated:


G

U

I

D

A

N

C

E

As Scope 1emissions = 20t

emission factor

= 0.2 t/MWh

100 MWh 100 MWh 95 MWh

emission factor

= 0.2 t/MWh

emission factor

= 0.2 t/MWh

Bs OptionalInformation= 20t Cs Scope 3 emissions = 19t Ds Scope 3 emissions = 1t

Cs Scope 2emissions = 1t

Ds Scope 2emissions = 19t

GeneratorA End-userDElectricityTraderB

UtilityCompany C

F I G U R E 4 . GHG accountingfromthe saleandpurchaseofelectricity


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1. Describe the valuechain. Because the assessment of

scope 3 emissions does not require a full lifecycle

assessment , it is important,for thesakeof transparency,

to provide a general description of the valuechain and

the associa ted GHG sources. For thisstep, thescope 3

categories listed can be used as a checkl ist. Companies

usually facechoiceson how many levels up- and down-

stream to include in scope 3. Consideration of the

companys inventory or business goals and relevanceof

the variousscope 3 categories will guide thesechoices.

2. Determinewhich scope 3 categoriesare relevant. Only

some typesof upstream or downstream emissionscate-

gories might be relevant to thecompany. They may be

relevant for several reasons:

They are large (or believed to be large) relative to the

companysscope 1 and scope 2 emissions

They contribute to thecompanys GHG risk exposure

They are deemed critical by key stakeholders (e.g.,

feedback from customers,suppliers, investors,or

civil society)

There are potential emissions reductions that could be

undertaken or influenced by thecompany.

Thefollowing examples may help dec ide which scope 3

categories are relevant to thecompany.

Iffossil fuel or elec tr icity is required to use the

companys products, product use phaseemissions may

be a relevant category to report . This may beespe-

cially important if thecompany can influence product

design attributes (e.g., energy eff iciency) or customer

behavior in ways that reduce GH G emissions during

the useof the products.

G

U

I

D

A

N

C

E

Set t ing Operat ional Boundar ies

C H A PT E R 430

F I G U R E 5 . Accountingofemissions fromleasedassets

Pare n t C om pany

C om pany A

Scope 1 Scope 1 Scope 2 Scope 3

Leasedcarfleet

(selectedconsolidation

criterionapplies)

Leasedbuilding

(selectedconsolidation

criterionapplies)

Leasedcarfleet

(selectedconsolidationcriterion

does not apply)

C om pany B

O

R

G

AN

I

Z

AT

I

O

N

AL

B

O

U

N

D

AR

I

E

S

O

P

ER

ATI

O

N

AL

B

O

U

N

DA

R

I

E

S

}

}

As amajor transportationandlogistics companyinnorthernEurope,DHLExpress Nordic serves large loads and special transport needs

as wellas worldwideexpress packageanddocument deliveries and

offers courier, express, parcel, systemized and specialty business

services.Throughparticipationin theBusiness Leaders Initiativeon

ClimateChange, thecompany found that 98 percent of its emissions

in Sweden originate from the transport of goods via outsourced

partner transportation firms.Eachpartneris required,as anelement

of the subcontract payment scheme, toenterdataon vehicles used,

distance traveled, fueleff iciency,andbackgrounddata.This datais

used tocalculate totalemissions viaa tailoredcalculation tool for

outsourced transportationwhichgives adetailedpictureof its scope

3 emissions.Linkingdata to specificcarriers allows thecompany to

screenindividualcarriers forenvironmentalperformanceandaffect

decisions basedoneachcarriers emissions performance,which is

seen through scope 3 as DHLs ownperformance.

Byincluding scope 3 andpromotingGHGreductions throughout the

value cha in, DHL Express Nordic increased the relevance of its

emissions footprint, expanded opportunities for reducing its

impacts andimprovedits abili ty torecognizecost savingopportu-

nities.Without scope 3, DHL Express Nordic would have lacked

muchof theinformationneeded tobeable tounderstandandeffec-

tivelymanageits emissions.

S C O P E

Scope 1

Scope 2

Scope 3

Total

E M I S S I O N S ( tC O 2 )

DHLNordicExpress:Thebusiness casefor

accountingforoutsourcedtransportation services

7,265

52

327,634

334,951


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34/116


35/116


36/116

34

ompa nies oft en undergo sign if ican t structura l changes such as

acqu isit ions,divestments ,andmergers.Thesechanges wil la ltera

companys historica lemissionprof ile,makingmean ingfulcompa risons over

t imediff icult. Inorder toma inta inconsistencyover t ime,or inotherwords,

to ke ep compa r ing li ke with li ke , h ist or ic emiss ion da ta wil l ha ve to

bereca lculated.

C

Tracking EmissionsOver Time

G U I D A N C E

S T A N D A R D

5

S

T

A

N

D

A

R

D


37/116

Companies may need to track emissionsover time in

response to a variety of business goals, including:

Public reporting

Establishing GHG targets

Managing risks and opportunities

Addressing the needsof investors and other stakeholders

A meaningful and consistent comparison ofemissions

over time requires that companiesset a per formance

datum with which tocomparecur rent emissions. This

per formance datum is referred to as the base year 1

emissions. For consistent tracking ofemissionsover

time, the base year emissions may need to be recalcu-

la ted ascompanies undergosignificant str uctural

changessuch as acquisit ions, divestments, and mergers.

Thefirst step in tracking emissions, however, is theselec-

tion of a base year.

Choosingabase yearCompaniesshall choose and report a base year for which

veri fiableemissions data are available and spec ify their

reasonsfor choosing that particular year.

Most companiesselec t a single year as their base year.

However, it is also possible tochoose an averageof

annual emissionsover severa l consecutive years. For

example, the U .K . ETS spec ifies an averageof

19982000 emissions as the reference point for tracking

reductions. A multi-year average may help smooth out

unusual fluctuations in GHG emissions that would make

a single year s data unrepresentativeof thecompanys

typical emissions prof ile.

The inventory base year can also be used as a basisfor

setting and tracking progress towards a GHG target in

which case it is referred to as a target base year (see

chapter 11).

Recalculatingbase yearemissionsCompaniesshall develop a base year emissions recalcu-

lation policy, and clearly articulate the basis and

context for any recalculations. If applicable, the policy

shall sta te any significance threshold applied for

deciding on historicemissions recalculation. Significance

threshold is a qualitative and/or quantitativecri terion

used to define any significant change to the data, inven-

tory boundary, methods,or any other relevant factors.

I t is the responsibility of thecompany to determine

the significance thr eshold that triggers base year

emissions recalculation and to disclose it . I t is the

responsibility of the veri fier toconfirm thecompanys

adhe

re

nce

to

its thresh

old p

olic

y. The

fo

llowing

c

ases

shall trigger recalculation of base year emissions:

Structural changes in the reporting organization that

have a significant impact on thecompanys base year

emissions. A str uctural change involves the transfer

ofownership or control ofemissions-generating activ-

it iesor operationsfrom onecompany to another.

While a singlestr uctural change might not have a

significant impact on the base year emissions, the

cumulativeeffec t of a number of minor str uctural

changescan result in a significant impact. Structural

changes include:

Mergers, acquisit ions, and divestments

Outsourcing and insourcing ofemitting activities

Changes in calculation methodology or improvements

in the accuracy ofemission factorsor activity data

that result in a significant impact on the base year

emissions data

Discovery ofsignificant errors,or a number ofcumu-

lativeerrors, that arecollec tively significant .

In summary, base year emissionsshall be retroactively

recalculated to reflec t changes in thecompany that

would otherwisecompromise theconsistency and rele-

vanceof the reported GHG emissions information. Once

a company has determined i ts policy on how it will recal-

culate base year emissions, it shall apply this policy in a

consistent manner. For example, it shall recalculatefor

both GHG emissions increases and decreases.

C H A P T E R 5 Tr acking Emiss ions Over Time 35

S

T

A

N

D

A

R

D


38/116

elec tion and recalculation of a base year should

relat e to the business goals and the particular

context of thecompany:

For the purposeof reporting progress towards volun-

tary public GHG targets,companies may follow the

standards and guidance in thischapter

A company subjec t to an external GHG program may

faceexternal rules governing thechoice and recalcu-

lation of base year emissions

For internal management goals, thecompany may

follow the rules and guidelines recommended in this

document,or it may develop i tsown approach, which

should befollowed consistently.

Choosingabase yearCompaniesshould choose as a base year theearliest rele-

vant point in timefor which they have reliable data.

Someorganizations have adopted 1990 as a base year in

order to beconsistent with the Kyoto Protocol. However,

obtaining reliable and veri fiable data for historical base

yearssuch as 1990 can be very challenging.

If a company continues to grow through acquisit ions, it

may adopt a policy that shif tsor rolls the base year

forward by a number of years at regular intervals.

Chapter 11 contains a description ofsuch a rolling

base year, including a comparison with thefixed base

year approach described in thischapter. A fixed base

year has the advantageof al lowing emissions data to be

compared on a like-with-like basisover a longer time

period than a rolling base year approach. Most emis-

sions trading and registry programs require a fixed base

year policy to be implemented.

G

U

I

D

A

N

C

E

Track ing Emiss ionsOver Time

36

F I G U R E 6 . Base yearemissions recalculationforanacquisition

BaseYear IncreaseinProduction

GammaAcquires C

1 2 3

CompanyGammaconsists of twobusiness units (AandB).Inits baseyear(yearone),eachbusiness unit emits 25 tonnes CO2.Inyear two,

thecompanyundergoes organ icgrowth,leading toanincreaseinemissions to 30 tonnes CO2 perbusiness unit,i.e., 60 tonnes CO2 in

total.Thebaseyearemissions arenot recalculatedin this case.At thebeginningof year three, thecompanyacquires production facili tyC

fromanothercompany.Theannualemissions of facilityCinyearonewere 15 tonnes CO2,and 20 tonnes CO2 inyears twoand three.The

totalemissionof companyGammainyear three,including facilityC,are therefore 80 tonnes CO2.Tomaintainconsistencyover time, thecompany recalculates its base year emissions to take into account the acquisition of facili ty C.The base year emissions increase by

15 tonnes CO2the quantity of emissions produced by facili ty C inGammas base year. The recalculated base year emissions are

65 tonnes CO2.Gammaalso(optiona lly)reports 80 tonnes CO2 as therecalculatedemissions foryear two.

25

25

30

30

30

20

20 2015

30

25

15

20 20

25

30

30

30

30

Figures reportedinrespectiveyears

G

AM

MA

EMI

S

S

I

O

N

S

RecalculatedFigures

Facil ityC

Unit B

Unit A

1 2 3

C H A PT E R 5

S

Facil ityCemissions


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Significancethresholds forrecalculationsWhether base year emissions are recalculated depends

on thesignificanceof thechanges. The determination of

a significant change may require taking into account the

cumulativeeffec t on base year emissionsof a number

of small acquisit ionsor divestments. TheGHGProtocolCorporate Standa rdmakes nospec ific recommenda-tions as to what constitutes signif icant . However,

some GHG programs dospec ify numeri cal significance

thresholds, e.g., the California Climate Action

Registr y, where thechange threshold is 10 percent of

the base year emissions, determined on a cumulative

basisfrom the time the base year isestablished.

Base yearemissionsrecalculationfor structuralchangesStructural changes trigger recalculation because they

merely transfer emissionsfrom onecompany to another

without any changeofemissions released to the atmos-

phere,for example, an acquisit ion or divestment only

transfersexisting GHG emissionsfrom onecompanys

inventory to another.

Figures 6 and 7 illustrate theeffec t ofstructural

c

hanges and th

e

applic

at ion

ofthisstandard

on r

ec

alc

u-lation of base year emissions.

Timingofrecalculations for structuralchangesWhen significant structural changesoccur during the

middleof the year, the base year emissionsshould be

recalculated for theentire year, rather than only for the

remainder of the reporting period a f ter thestructural

changeoccurred. This avoids having to recalculate base

year emissions again in thesucceeding year. Similarly,

current year emissionsshould be recalculated for the

entire year to maintain consistency with the base year

recalculation. If it is not possible to make a recalcula-

tion in the year of thestr uctural change (e.g., due to


G

U

I

D

A

N

C

E

F I G U R E 7 . Base yearemissions recalculationforadivestment


BetaDivests C

1 2 3

25

25

25

30

30

30

30

30

30

30

25

25

30

30

30

30

Figures reportedinrespectiveyearsRecalculated figures

Unit C

Unit B

Unit A

1 2 3

CompanyBetaconsists of threebusiness units (A,B,andC).Eachbusiness unit emits 25 tonnes CO2 and the totalemissions for the

companyare 75 tonnes CO2 in thebaseyear(yearone).Inyear two, theoutput of thecompanygrows,leading toanincreaseinemissions

to 30 tonnes CO2 perbusiness unit,i.e., 90 tonnes CO2 in total.At thebeginningof year three,Betadivests business unit Candits annual

emissions arenow 60 tonnes,representinganapparent reductionof 15 tonnes relative to thebaseyearemissions.However, tomaintain

consistencyover time, thecompanyrecalculates its baseyearemissions to takeintoaccount thedivestment of business unit C.Thebase

yearemissions areloweredby 25 tonnes CO2 thequantityof emissions producedby thebusiness unit Cin thebaseyear.Therecalcu-

latedbaseyearemissions are 50 tonnes CO2,and theemissions of companyBetaare seen tohaverisenby 10 tonnes CO2 over the three

years.Beta(optionally)reports 60 tonnes CO2 as therecalculatedemissions foryear two.

B

ET

AEM

I

S

SI

O

N

S


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NorecalculationfororganicgrowthordeclineBase year emissions and any histori c data are not

recalculated for organic growth or dec line. Organic

growth/dec line refers to increasesor dec reases in

production output,changes in product mix, and closures

and openingsof operating units that areowned or

controlled by thecompany. The rationa lefor this is

that organic growth or dec line results in a changeof

emissions to the atmosphere and therefore needs to be

counted as an increaseor dec rease in thecompanys

emissions prof il eover time.


F I G U R E 8 . Acquisitionofafacility thatcameintoexistenceafterthebase yearwas set


TetaAcquires C

1 2 3

25

20

25

30

30

30

15

30

25

25

30

15

30

30

20

30

Figures reportedinrespectiveyears Recalculated figures

Facil ityC

Unit B

Unit A

1 2 3

CompanyTetaconsists of twobusiness units (AandB).Inits baseyear(yearone), thecompanyemits 50 tonnes CO2. Inyear two, the

company

Documents

Greenhouse gas Protocol 2004