What’s Scope 2 good for? Marc Roston, Alicia Seiger, Abigail Mathieson Oxford Open Climate Change
The Protocol does not allocate emissions in a mutually exclusive and comprehensively exhaustive way—an essential property of a functional accounting system. The Protocol cannot be correct….
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JOURNAL ARTICLE
What’s Scope 2 good for?
Marc Roston, Alicia Seiger, Abigail Mathieson
Oxford Open Climate Change, Volume 4, Issue 1, 2024, kgae011, https://doi.org/10.1093/oxfclm/kgae011
Published:
17 July 2024
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Abstract
The Greenhouse Gas Protocol’s Scope 2 has long been pivotal in addressing electricity's role in emissions, yet its effectiveness in emissions accounting is limited. This paper critiques Scope 2 for its inadequate allocation of electricity-derived emissions and for supporting misleading emissions reduction claims through market-based transactions. The paper investigates alternatives like 24/7 Carbon Free Electricity and Emissions First, noting their improvements over Scope 2, but also their failure to fully address grid embodied emissions. The concept of carbon solvency is introduced as a superior model, compelling firms to align long-term emissions liabilities with carbon removal assets, thus enabling more accurate emissions accounting and investment decisions for grid decarbonization. This approach fosters clearer decision-making, particularly in electricity generation methods with variable upstream emissions, such as hydrogen and biofuels. By redefining net zero within a rigorous, auditable framework, we propose a shift from current practices towards a more accountable and environmentally impactful model.
emissions, carbon accounting, E-Liabilities, E-Assets, carbon solvency, Scope 2, GHG Protocol, embodied emissions, emissions liability management
Issue Section:
Introduction
The Greenhouse Gas Protocol started life as a risk management tool for evaluating the incidence of an expected carbon tax or similar legislative action. In more than two decades since its launch, the Protocol has suffered mission creep: driven by activist demand for measurement and accountability, they pulled the Protocol into an accounting-like role beyond its capacity. Currently, billions of dollars of planned investments and policy prescriptions rely on the Protocol to justify decisions.
Effective global economic transformation away from fossil fuels demands massive investment, as much as $4.3 trillion annually by 2030 [1]. In support of this transition, activists and leading firms race to voluntarily deploy limited resources effectively while awaiting government action or, in some cases, supporting and expanding mandatory compliance actions. A shift from carbon counting to carbon accountability and from agitation to capital allocation requires functional accounting. The limitations of the Protocol as an accounting tool have moved to center stage, hindering progress. The Protocol does not allocate emissions in a mutually exclusive and comprehensively exhaustive way—an essential property of a functional accounting system. Therefore, the Protocol cannot correctly assign responsibility, demand accountability, or accurately inform investment decisions in support of climate goals. Absent a functional accounting system, corporate, national, and international emissions reduction goals and progress evaluation will fall short.
For more than two decades, firms have used the Protocol’s Scope 2 guidance to estimate electricity-derived emissions and inform electricity market transactions and related investment decisions. Recent SEC rule making has concluded that disclosures and oversight in the United States will focus on Scope 1 and Scope 2 emissions, excluding Scope 3 [2]. (Scope 1 includes direct emissions from combustion activities. Scope 2 includes electricity, heating, and cooling. This paper focuses on electricity without loss of generality as the accounting failures of Scope 2 apply to heating and cooling as well.) This bright line between Scopes 1 & 2 and Scope 3 misses the point that the Scopes are not separable and do not accurately attribute emissions. Only Scope 1 emissions enter the atmosphere. Scope 2 underestimates and misattributes direct emissions (i.e. Scope 1) of others in an electricity supply chain. Therefore, decisions designed to reduce Scope 2 emissions risk misallocating limited resources. Rather than repeatedly adjusting and patching flaws in Scopes, firms and governments need to adopt valid accounting as the path to effective climate-positive actions aligned with budgets that span companies, nations, and the globe.
Electricity grids must maintain stability across many sellers with disparate technologies, innumerable buyers with demand variation and divergent incentives, balancing authorities, transmission constraints and regulators. That electricity grids function at all is nothing short of miraculous. Decarbonizing this system requires massive investment and system change that demands sound attribution and allocation based on a solid accounting foundation. Scope 2 does not correctly identify and allocate all electricity-derived emissions, rendering unsuitable information to accurately measure and internalize the greenhouse gas externalities. Scope 2 also supports flawed claims of emissions reductions by allowing for the distinction between market- and location-based measures. Proposed variations to electricity emissions methodologies offer some substantial improvements, but gaps remain.
The paper’s first section describes Scope 2 challenges. Scope 2 counts only combustion emissions from the vantage point of the electricity consumer, not an integrated grid. By implication, electricity consumers will likely underinvest in their own emissions reductions. The Protocol’s allowance for location- and market-based estimates compounds those inaccuracies because it conflates emissions that are difficult to measure and allocate but have, in fact, occurred, with hypothetical counterfactual emissions. This approach risks misdirected investments from actions that could reduce actual emissions.
The second section considers two enhanced approaches to electricity-derived emissions. Each approach has substantial advantages over existing Scope 2 emissions counting. The first approach, 24/7 Carbon Free Energyspecifically challenges firms to link market-based emissions transactions and investments to time-sliced electricity-consumption driven emissions [3]. The second approach, Emissions First Partnership, suggests firms optimize investments to maximize emissions avoidance system wide [4]. Both viable approaches emphasize the importance of higher frequency (or shorter measurement interval) emissions calculations than current Scope 2 requires. Each allows for market-based transactions with ambitious but ambiguous impacts. Neither describes a closed system that solves for meaningful net zero claims.
The third section defines carbon solvency in contrast to corporate net zero claims and the related patchwork of legal and regulatory disclosure frameworks based on the Protocol. Carbon solvency requires that firms match long-duration emissions liabilities with carbon removal assets, providing a measurable and parsimonious budget constraint that defines net zero in a voluntary setting, consistent and adaptable to a compliance regime.
The last section provides an overview of implementation, suggesting that the most efficient path to understanding and allocating grid emissions ought to occur at the balancing authority or grid level, where the ability to balance the private and public good characteristics of the electricity and related emissions align most effectively. The conclusion presents both a research path for incentives that align with emissions liability management, and policy recommendations regarding complex (potentially) clean energy systems such as biofuels and hydrogen.
Scope 2
Scope 2 emissions sound straightforward: indirect emissions from electricity generation. The Protocol defines Scope 3 emissions as “indirect emissions resulting from value chain activities” [5]. While indirect emissions from electricity generation fall squarely in “value chain activities,” the Protocol chooses to carve out Scope 2 as a special case. If Scope 2 captured all indirect emissions resulting from purchased electricity, that might be useful accounting. This section identifies missing components to accurate electricity emissions accounting, the Protocol design features that incentivize inaccurate reduction claims and misdirected investments, and two novel approaches to improve on Scope 2 that still fall short.
Scope 2 and Scope 3 Category 3
What does Scope 2 measure? Scope 2 counts only combustion emissions based on end-user estimates from consumed electricity. That definition falls short: the sum of customer estimates based on consumed electricity, even if correctly estimated, excludes all transmission and distribution losses. In the U.S. and India, such estimates would undercount by about 5% and at least 20%, respectively [6, 7]. More accurately, Scope 2 estimates a firm’s emissions under the novel conditions that the firm had onsite generation continuously matched to load, with a fixed emissions factor equal to the grid annual average emissions factor at the firm’s location. (Electricity rate setting incorporates this concept of adjustments for losses. See “Electricity E-liability Implementation” below.)
Scope 3 Category 3 (“S3C3”) defines the complete set of exclusions from Scope 2 that make it an inaccurate measure of electricity-derived emissions. S3C3 estimates the indirect emissions upstream in the electricity supply chain across a range of activities, including everything from fossil fuel extraction to generation facility construction to transmission and distribution infrastructure manufacturing and installation and previously noted transmission and distribution line losses [5].
The Protocol’s distinction between S2 and S3C3 made more sense in the original risk management context but falls short as a capital allocation tool. S3C3 captures what are largely sunk or fixed costs in the short run (e.g. transmission and distribution infrastructure) and difficult-to-measure, higher order emissions (e.g. diesel fuel to move coal from a mine to a power plant.) Planning electricity systems transformation and growth, however, cannot rely on S2 alone. First, the sum across all customers on a grid of estimated S2 will not add-up to the actual emissions of generators on the grid due to transmission and distribution losses. Second, customer estimates do not include embodied emissions in generation, transmission, and distribution systems. More generally, customer-level estimated emissions cannot converge to actual generation emissions. Therefore, efforts to estimate emissions misdirect efforts, when grid operators could report and allocate actual emissions to their customers. Counting S2 emissions might be useful for back-of-the-envelope decisions or disclosures, but it is not a useful tool for accountability. An accountable firm wants to invest appropriately to internalize emissions externalities, or even beyond, fully informed by accurate accounts. Scope 2 underestimates that obligation. Scope 2 plus S3C3 may be closer, but still uses difficult to reconcile estimates. (The Net Zero and Carbon Solvency section below reviews a method for true emissions accounting first described by Kaplan and Ramanna [8] and an approach to accountability described by Roston, Seiger and Heller [9].)