Latest / PwC's accounting podcast / Talking GHG: Practical insights on measuring scope 2 emissions

Transcript

Talking GHG: Practical insights on measuring scope 2 emissions · PwC's accounting podcast

• 0:00
  SPEAKER_02: Thought leadership from PWC's national office.
• 0:06
  SPEAKER_00: And I would suggest companies take your time, think specifically about what data you have, you know, what kind of uh renewable agreements you have, and what impact they will have on the calculation market base and what's going to be the resulting difference.
• 0:20
  SPEAKER_03: Hello.
• 0:21
  SPEAKER_03: Today we're back talking ESG, continuing our series on the building blocks of greenhouse gas, GHG emissions reporting.
• 0:30
  SPEAKER_03: In today's episode, we're up to step four in the process, measuring GHG emissions, and we'll focus in on scope two emissions.
• 0:38
  SPEAKER_03: That is, indirect emissions from purchase electricity, heat, steam, and cooling.
• 0:43
  SPEAKER_03: This is PWC's Accounting Podcast.
• 0:51
  SPEAKER_03: I'm Heather Horn, and thanks so much for joining us today as we tackle measurement of scope two emissions.
• 0:57
  SPEAKER_03: Scope two measurement brings added challenges compared to measuring scope one emissions, that is, direct emissions, including heightened intricacy in data collection and the use of location-based and or market-based methods for calculating emissions.
• 1:14
  SPEAKER_03: Back with me today is Martin Olewinsky, a national office partner who also leads sustainability engagements, and he's the leader of our global technical working group focused on GHG emissions.
• 1:25
  SPEAKER_03: With him is Chris Osterman, a director in PWC's sustainability practice, who specializes in GHG emissions.
• 1:31
  SPEAKER_03: They'll continue sharing their insights throughout our discussion as the complexity of measurement grows, moving from scope one to scope two.
• 1:39
  SPEAKER_03: With that, here's my conversation with Marchin and Chris.
• 1:43
  SPEAKER_03: Marchin and Chris, welcome back to the podcast for another episode in our series diving into GHG emissions and providing some basics, but as well some hints and tricks for people who have been measuring GHG or involved in sustainability reporting for quite some time.
• 1:59
  SPEAKER_03: Today's topic is all about scope two.
• 2:02
  SPEAKER_03: And before we get into some of the very unique considerations for scope two, Marchin, I thought it'd be helpful to level set and give people the definition of scope two, and then we'll talk about some of the basics before we dive in.
• 2:16
  SPEAKER_00: Yeah, thank you, Heather.
• 2:18
  SPEAKER_00: So scope two emissions are indirect emissions associated with a purchase power, uh electricity, steam, heating, or cooling.
• 2:25
  SPEAKER_00: Um they are indirect because the actual emissions are not generating by reported reporting company.
• 2:32
  SPEAKER_00: They generated by company that that produces electricity, uh steam, heating, or cooling, right?
• 2:38
  SPEAKER_00: So uh that's the key difference between scope one uh and scope two.
• 2:42
  SPEAKER_00: It doesn't occur um uh within the reporting entity, it it occurs outside of a control of reporting entity.
• 2:49
  SPEAKER_00: And um there are two methods of calculating the uh these uh emissions, location base and market base.
• 2:56
  SPEAKER_00: We can cover it later, but I think it's a good start for our listeners to have a kind of overview of what it is.
• 3:01
  SPEAKER_01: I think it's important to point out that the GHG protocol refers to purchase electricity.
• 3:05
  SPEAKER_01: By that they mean all of those indirect emissions sources or energy sources you had just mentioned.
• 3:10
  SPEAKER_01: When they say purchase electricity, they mean purchase steam, purchase cooling, chilled water.
• 3:14
  SPEAKER_01: All of those are universally referred to as purchase electricity within that scope two guidance of GHG protocol.
• 3:20
  SPEAKER_01: Yeah.
• 3:20
  SPEAKER_01: I would agree.
• 3:21
  SPEAKER_03: Yeah.
• 3:21
  SPEAKER_03: And every and people do use purchase electricity as a shorthand, so it's very important not to forget those other sources.
• 3:28
  SPEAKER_03: So, March, and then how about the formula?
• 3:30
  SPEAKER_03: How do you calculate emissions related to scope two?
• 3:33
  SPEAKER_00: So um I think it's important to start with the fact that you know scope two emissions are calculated using indirect calculation methodology.
• 3:40
  SPEAKER_00: So there's no direct measurement.
• 3:42
  SPEAKER_00: By definition, we don't own the emission generating sources, so we don't have uh the reporting entity doesn't have ability to measure those emissions, right?
• 3:50
  SPEAKER_00: They have to rely on this indirect methodologies.
• 3:52
  SPEAKER_00: So when we talk about indirect methodologies, I'm referring our listeners to our podcast about scope one, but it's basically the same calculation uh formula.
• 4:02
  SPEAKER_00: So we start with activity data multiplied by emission factors and multiplied by global warming potential.
• 4:08
  SPEAKER_00: Uh why this is easier than um the scope one, because the types of activity data are way more limited as compared to scope one, because as we mentioned, we talked about purchase electricity, primarily heating, cooling, and and usually you get this activity data from the same source, utility provider.
• 4:27
  SPEAKER_00: The only difference is yeah, you you might need to request uh uh specific usage data as opposed to dollars that you're paying for.
• 4:34
  SPEAKER_00: Um, but most of utility providers provide companies with both usage data and and amount of money to pay.
• 4:40
  SPEAKER_01: I agree with that.
• 4:41
  SPEAKER_01: I think in some circumstances too, we will see submetering uh available for electricity consumption.
• 4:46
  SPEAKER_01: This will be focused on a lot of our multi-tenant spaces or shared spaces our our clients may have if they are in an office space.
• 4:53
  SPEAKER_01: They may have a submeter for the space that they rent or that they use or the activities that they are part of in that space.
• 5:00
  SPEAKER_01: So it may not be the direct utility provider, it may be a submeter below that utility provider's.
• 5:05
  SPEAKER_03: All right, but either way, you usually will have some type of invoice or something else where you can get that.
• 5:09
  SPEAKER_03: And I guess, Margin, one key point you said uh that this is by nature indirect because you do not own uh the generating facility.
• 5:17
  SPEAKER_03: I mean, someone does own it.
• 5:19
  SPEAKER_03: And so for those companies, then these emissions are scope one.
• 5:23
  SPEAKER_00: Yes, it's important not to because we were getting the some confusion from clients.
• 5:27
  SPEAKER_00: So uh it's important to remember that we're talking about purchased uh electricity.
• 5:32
  SPEAKER_00: So if the reporting entity generates electricity, either this is you know power generator or utility provider, or companies might have some, you know, own gener electricity generator generation sources, emissions associated with this generated electricity would be in scope one.
• 5:48
  SPEAKER_00: So purchased versus self-generated.
• 5:51
  SPEAKER_00: Those are two important concepts, I think.
• 5:53
  SPEAKER_01: These indirect emissions are for the direct benefit of the reporting company.
• 5:57
  SPEAKER_01: So the electricity is generated for that reporting company.
• 6:00
  SPEAKER_03: All right, very helpful.
• 6:02
  SPEAKER_03: Now, one other thing is Martin, when you were describing um the formula for scope two and you were talking about the activity data, you said that this is where scope two is easier than scope one because there's more limited sources for activity data.
• 6:15
  SPEAKER_03: I think it might be the maybe one of the few parts of scope two that's easier, at least for people who are new uh to dealing with GHG emissions, because it's now we're gonna start to get into some of the things that can make scope two more complex, particularly with people who don't have a background dealing with a lot of electricity.
• 6:33
  SPEAKER_03: So, Chris, I'm gonna turn to you.
• 6:35
  SPEAKER_03: Marchin said it so nicely and just almost skipped by the fact that there are two different ways to calculate scope two, location-based and market-based.
• 6:44
  SPEAKER_03: And I think having a fundamental understanding of those methods is key to your GHG reporting.
• 6:50
  SPEAKER_03: So, can you explain?
• 6:52
  SPEAKER_01: Certainly.
• 6:53
  SPEAKER_01: So dual scope reporting is uh one of the concepts within scope two, where we have two separate scopes underneath it, location-based and market-based.
• 7:02
  SPEAKER_01: Location-based being uh a universal definition where all emitters have the same uh activity times the emission factor yields the same emissions.
• 7:13
  SPEAKER_01: It doesn't matter if you are uh a local resident or if you are a very large organization.
• 7:19
  SPEAKER_01: It's the same activity multiplied by the same factor, gives the same emission.
• 7:23
  SPEAKER_01: Market base is that is where things start to get much more complicated.
• 7:27
  SPEAKER_01: It gives the opportunity for reporters to use a supplier-specific factor or an emission reduction tool such as a green energy certificate or a power purchase agreement they can enter into.
• 7:39
  SPEAKER_01: It really makes the accounting for that data custom and tailored to that reporting company with their market-based activities.
• 7:46
  SPEAKER_01: We're gonna go further into what that definition means uh later, but there are, as you were saying, it is makes it quite complex compared to scope one.
• 7:54
  SPEAKER_03: And I think even thinking about then going back to location-based and the source of these emission factors and what that means, I think understanding what that represents is quite important.
• 8:05
  SPEAKER_03: So Marcha, maybe if you want to add in.
• 8:07
  SPEAKER_00: Yeah, I think the uh important element to understand location-based.
• 8:10
  SPEAKER_00: I mean, location-based reflects the you know, um, average emission intensity of the grid where the you know our operations are located, right?
• 8:19
  SPEAKER_00: So that's when you know Chris meant it's kind of the same formula for everybody.
• 8:23
  SPEAKER_00: So it does not really represent any kind of a specific agreements that might be unique to us.
• 8:29
  SPEAKER_00: The the reporting entities have to calculate those emissions using the average grid emission factors based on locations where where their operations happen.
• 8:38
  SPEAKER_00: So, you know, um, let's say uh companies located in Texas, they're gonna use the emission, average grid emission factors from ERCOT, right?
• 8:47
  SPEAKER_00: If you locate in California, you're gonna use average grid grid emission factors from California.
• 8:52
  SPEAKER_00: So all the companies with the operating within this location is gonna be using the same emission factors, irrespective of the way they get power, um, versus the market base.
• 9:02
  SPEAKER_00: This is reflective of unique choices you made to acquire power.
• 9:07
  SPEAKER_00: So if you use some you know renewable power arrangements, right, uh, it's gonna be reflected in in your calculation.
• 9:13
  SPEAKER_00: So this factor is gonna be more specific to your company and inactions they're taking.
• 9:18
  SPEAKER_01: I think that's a good point.
• 9:19
  SPEAKER_01: Is it also goes back to what we had discussed in the Scope One podcast about selection of emission factors?
• 9:25
  SPEAKER_01: There is a hierarchy for data selection in both of these uh styles of reporting market base and location base.
• 9:31
  SPEAKER_01: There will you find published emission factors at the country level as well as a regional level.
• 9:36
  SPEAKER_01: You want specificity where it's available.
• 9:38
  SPEAKER_01: So as Martin was mentioning, there's the US has got the grids broken down to different EPA grid e-grid regions, that is more specific than, let's say, just a average U.S.
• 9:47
  SPEAKER_01: factor.
• 9:48
  SPEAKER_01: But when we do international emissions, we often see where it's only at the country level.
• 9:53
  SPEAKER_03: All right, that's helpful.
• 9:54
  SPEAKER_03: And I don't think uh Martin added this, so I will that when he mentioned ERCOT, that's Texas.
• 9:59
  SPEAKER_03: So if you're located in Texas, that that was the emissions he was talking about.
• 10:02
  SPEAKER_03: And where this does get very important very quickly is if you think of a region like Texas, you actually do see a lot of wind and other types of renewable sources where maybe in other parts of the country that what we call, you know, the that mix is different.
• 10:17
  SPEAKER_03: And so if the location of your facilities and using the right factor is very important.
• 10:22
  SPEAKER_00: Yes, because as I mentioned before, it represents the intensity of the grid when you're located.
• 10:28
  SPEAKER_00: And as Grids mentioned, like if you have a big country, that intensity might be different in different parts of uh of a country because of a different level of renewable power generation or coal power generations or natural gas power generations, that impacts the intensity of that grid.
• 10:44
  SPEAKER_00: So having that kind of a specificity in you know where your operations are located and which emission factors for which grid you're using is very important in those calculations.
• 10:53
  SPEAKER_00: So you're still gonna have a different emission uh uh levels for entities operating in different regions.
• 10:59
  SPEAKER_00: It's just it's gonna be, you know, the location base base method is gonna be calculated using the grid, you know, intensity emission factors.
• 11:07
  SPEAKER_01: And it's important to be consistent in your updating of those emission factors annually because that, as we were talking about market-based, that's driving the demand for green power, and that's putting more wind in Texas into the mix, which will then lower that emission factor, that average regional emission factor.
• 11:23
  SPEAKER_01: So it's important to gain that greening of the grid, is what you'll hear a lot of folks talk about in your in your selection of your in your annual emission factor statement.
• 11:32
  SPEAKER_00: Which is another thing, and I know we're jumping back and forth, but I thought what Chris said is is important because oftentimes, as we said, the market base reflects certain certain um uh decisions that you make and unique agreements that you have.
• 11:44
  SPEAKER_00: It doesn't necessarily mean that location base is not taking into account renewable energy.
• 11:49
  SPEAKER_00: It just takes into account renewable energy existing or lower emission type of uh electricity existing within the grid, which is not specifically applicable to you.
• 11:58
  SPEAKER_00: It's like entire grid.
• 11:59
  SPEAKER_00: So as grids are getting uh cleaner, you know, uh reporting entities are gonna you know show the reduction in their scope to emissions, uh, but they don't they cannot do much except for maybe moving operations to clean their grid.
• 12:13
  SPEAKER_00: But if they stuck in the in in the geographical region, they fully depend on what the market is doing taken as a whole.
• 12:20
  SPEAKER_03: Yeah, and I think this is one of the areas where as uh an accountant and someone doing sustainability reporting, you know, sometimes it's relatively easy to almost look at this as a mathematical exercise, right?
• 12:32
  SPEAKER_03: So you take your activity data, you find the right e-grid factors if you're in the US, then you, you know, and you do your math.
• 12:40
  SPEAKER_03: And then that's that you just report some number.
• 12:42
  SPEAKER_03: And I do think this is a a place where it actually is very important for people to dig in and get at least some basic understanding.
• 12:50
  SPEAKER_03: And I know listening to this may sound a bit like some mumbo jumbo that Chris and Martin were just talking about, particularly if you're not familiar.
• 12:58
  SPEAKER_03: But I do think understanding this will help from a reporting perspective, helps from a disclosure perspective.
• 13:05
  SPEAKER_03: And it also helps if you think about a company that's thinking about reduction goals, really understanding what these calculations are doing, I think is critically important.
• 13:13
  SPEAKER_00: Well, well, maybe there's one more thing to mention, which kind of may be obvious to me and Chris and you header, but not necessarily for all the listeners.
• 13:19
  SPEAKER_00: But I want to say it explicitly that both calculation methods are gonna result in different scope two emissions for the same company.
• 13:26
  SPEAKER_00: So that's important.
• 13:27
  SPEAKER_00: And most of the reporting frameworks require reporting both of those, you know, uh scope two emissions calculated using both methodologies.
• 13:35
  SPEAKER_00: So for the users of this data, you're gonna see difference between, and it's important also to understand what drives this difference.
• 13:42
  SPEAKER_00: As we mentioned, market-based represents specific, you know, activities taken by the company to reduce their emissions, which is they can do it by signing their renewable purchase power agreements or buying renewable energy certificates or other attributes instruments that results in that this market-based emissions to be lower, right?
• 14:02
  SPEAKER_00: Because obviously they naturally using more green renewable, lower kind of a electricity source, right?
• 14:08
  SPEAKER_00: So it's kind of a it's really important for entities first to understand how to do these calculations, what data to use, because those calculations are gonna show the difference.
• 14:17
  SPEAKER_00: And you know, uh depending on what actions you take, and this difference might be important for users of this information to your stakeholders, regulators, you name it.
• 14:25
  SPEAKER_03: So, Marcha, maybe one point of clarification there.
• 14:27
  SPEAKER_03: You mentioned that if someone is buying renewable power, they are using the renewable power, but that's not the way the electricity grid works.
• 14:36
  SPEAKER_03: So can you explain?
• 14:37
  SPEAKER_00: Yeah, it's it's a good question, right?
• 14:38
  SPEAKER_00: Because you know, I keep using the term using, using, using, but like in real life, most of the companies acquiring electricity from the grid, right?
• 14:45
  SPEAKER_00: So, irrespective of what type of power purchase arrangements they have, the electricity comes from the same grid that all the other companies within that vicinity or geographical location.
• 14:55
  SPEAKER_00: So, you know, term of using electric, you know, a renewable power might be a little bit misleading.
• 15:00
  SPEAKER_00: Um so basically, um market-based uh calculation methodology allows companies to take credit for those arrangements they that they have.
• 15:10
  SPEAKER_00: So um they still use the same power like everybody else, but if they you know uh arranged have a purchase power arrangement or buy renewable energy certificates from um uh renewable sources, they can reflect those actions in their calculation, uh market uh market-based calculations.
• 15:28
  SPEAKER_00: But you're right, they're not technically using unless they directly connect it to the generating facilities, which is not that common when you think about it.
• 15:34
  SPEAKER_03: Yeah, I mean we do see that, but again, it's not that common.
• 15:37
  SPEAKER_01: Aaron Powell Yeah, it's the GSG protocol defines the ability to you use here's that word again uh uh an unbundled energy certificate if as long as it's generated within the same market, and that market is commonly defined in the US as the contiguous United States.
• 15:55
  SPEAKER_01: So that's where that concept of having a plant on the East Coast and using a certificate that is purchased for energy from California comes from.
• 16:03
  SPEAKER_00: So, Chris, you mentioned in in your uh comments, uh you use the word bundled, unbundled uh power.
• 16:09
  SPEAKER_00: Should we explain it to listeners what what what we're really talking about?
• 16:12
  SPEAKER_00: I mean, we I think we're taking for granted we understand what it is, but some people listening to our podcast and dealing with scope two calculations for the first time might not have a full understanding of what we're talking about.
• 16:20
  SPEAKER_01: Aaron Powell Certainly.
• 16:21
  SPEAKER_01: I fully acknowledge that this space is full of acronyms, full of common words that are very second nature to you and I and uh may need a little bit of extra explanation.
• 16:31
  SPEAKER_01: So when we talk about a bundled and unbundled EAC uh environmental attribute credit, also can be termed to be a guarantee of origin or a rec.
• 16:40
  SPEAKER_01: That concept of a bundled uh energy credit is when the power and the green attribute are delivered together.
• 16:47
  SPEAKER_01: So you're gonna get a kilowatt of electricity that was from a green source from your power company.
• 16:52
  SPEAKER_01: That is a bundled attribute.
• 16:54
  SPEAKER_01: When you unbundle it, you are taking those two things apart.
• 16:58
  SPEAKER_01: The kilowatt of electricity is being delivered to the recipient, and that environmental attribute is then being taken off of it, that green part is sold separately.
• 17:08
  SPEAKER_01: It's an unbundled from the unit of energy.
• 17:12
  SPEAKER_01: The same exists for a power purchase agreement.
• 17:14
  SPEAKER_01: A power purchase agreement is a direct agreement between the reporting company and its power supplier.
• 17:19
  SPEAKER_01: It can contract for green energy, which be bundled and delivered directly to that reporting company.
• 17:26
  SPEAKER_01: There's also a virtual power purchase agreement where you can enter into a long-term contract where that energy will be separated from that green attribute and you're purchasing just the green attribute associated with that.
• 17:37
  SPEAKER_00: Yeah, and I think it's important to understand, I mean, that the reason for those complications, and let's let's face it, those are complications, uh, or because this whole nature of electricity, right?
• 17:48
  SPEAKER_00: That you can't really separate electricity.
• 17:51
  SPEAKER_00: Everybody, uh most of the companies are buying electricity from the same grid, and it's really difficult to say which electron is green or renewable versus which one is you know from fossil fuels.
• 18:01
  SPEAKER_00: So, you know, um we have that system that has been introduced to that allows companies to track those what we call you refer to as a green attribute and take credit for them in their market-based calculations.
• 18:14
  SPEAKER_00: And by doing this, we're basically avoiding double counting, right?
• 18:18
  SPEAKER_00: So you cannot have uh first of all, you can track who actually acquired those certificates, but also you you avoid double counting for some elements, right?
• 18:26
  SPEAKER_01: Correct.
• 18:26
  SPEAKER_01: And there's a whole hierarchy of how to track that and retire it.
• 18:29
  SPEAKER_01: We'll talk about in a little while.
• 18:31
  SPEAKER_03: Okay.
• 18:31
  SPEAKER_03: Also, for our listeners' benefit, if um your head is swimming now, again, I highly encourage you to dig in and understand to what extent your company is using these instruments, because not only are they important from a sustainability accounting perspective, but actually there's quite a lot of financial accounting that also um is associated with these.
• 18:51
  SPEAKER_03: So again, you need to uh uh to understand that.
• 18:53
  SPEAKER_03: All right.
• 18:54
  SPEAKER_03: So then with all of that said, let's move back into some of the details to how we do these calculations.
• 18:58
  SPEAKER_03: And one thing, Martin, that you said up front was that dealing with this activity data is easier, but it's still not easy.
• 19:05
  SPEAKER_03: And so, Chris, I know you've seen some of these challenges, so can you um share some of that?
• 19:10
  SPEAKER_01: So some of the difficulties that that come out of this is knowing who is responsible for which part of this and where your indirect emissions lie.
• 19:18
  SPEAKER_01: So we had mentioned earlier that that definition of purchased electricity includes purchased heat, purchased cooling, other activities within a space, and dependent on your boundary definition changes how you are going to account for those pieces of data.
• 19:34
  SPEAKER_01: Um we often see in practice is folks will take what they estimate to be uh natural gas used for heating in a in a leased space and put it into their scope one, where that's not actually a true way to account for it.
• 19:48
  SPEAKER_01: It's actually a scope two emission and should be used in a calculated in your scope two emissions.
• 19:53
  SPEAKER_03: So thanks for that, Chris.
• 19:55
  SPEAKER_03: And I think it's important to keep in mind.
• 19:56
  SPEAKER_03: And then, Martin, you touched on this earlier, but I think it's something we need to dive a little deeper into is the selection of the emission factors and which emission factors to use.
• 20:06
  SPEAKER_03: So can you re-ground us and then tell us some of the things companies need to think about?
• 20:11
  SPEAKER_00: Yeah, so when as we mentioned, like we're gonna approach this for two different methodologies separately.
• 20:15
  SPEAKER_00: Let's start with location-based.
• 20:16
  SPEAKER_00: As we mentioned, companies calculated scope to emissions using location-based methodology or gonna be using the you know, average grid emission factors for the specific locations when their operations are you know located.
• 20:29
  SPEAKER_00: Um, it's important to understand the geographical locations of those um of those operations because depending on the country, region, availability of those, you know, uh average grid emission factors for that specific location might be limited.
• 20:43
  SPEAKER_00: So, as Chris mentioned, US has a pretty kind of a um good source of emission factors whereby they're available at a grid level, different regions or subregions level.
• 20:54
  SPEAKER_00: But when you go to look at other countries, they may only be available at a country level, right?
• 20:58
  SPEAKER_00: So, so this is kind of an important element when you're making the calculations, what is the source of emission factors, what is the availability, and some of them might be more detailed versus you know, some of them might be more kind of uh general, right?
• 21:11
  SPEAKER_00: And you follow pretty much the same kind of uh um thought process about selecting or electing emission factors as we discuss in our scope one.
• 21:19
  SPEAKER_00: Uh, you you think about the same things, what's availability, what's the reliability of the source, do you use those factors consistently period over period, or are you updating those factors periodically?
• 21:30
  SPEAKER_00: The one thing which is I think worth mentioning, because a lot of countries are constantly upgrading their grid, or I mean put more renewable generation, those emission factors can change for certain locations year over year as their the grids become more green uh each year.
• 21:49
  SPEAKER_00: So you know it's even more important for scope two to you know very frequently look at uh you know updated emission factors because some locations can be you know changing those factors.
• 22:00
  SPEAKER_00: Quite significantly.
• 22:01
  SPEAKER_00: So that's location based calculations.
• 22:05
  SPEAKER_00: When you look at a market-based calculations, like additional twists, you know, so let as you remember, we said this is the calculation using those, you know, uh energy attribute certificates.
• 22:17
  SPEAKER_00: So you're reflecting, you know, those in your calculations.
• 22:20
  SPEAKER_00: So the key point there is to have a you know good understanding what instruments do you have and how to imp how they impact in your calculations, right?
• 22:28
  SPEAKER_00: So how many recs do you have, what type of renewable power purchase agreements do you have, because that that's gonna impact um uh your calculations.
• 22:36
  SPEAKER_00: And you know, it's really important that those instruments of a high are of a high quality, right, Chris?
• 22:41
  SPEAKER_01: Yes.
• 22:41
  SPEAKER_01: I think it's important to highlight, Margin, that uh GHG protocol and ESRS both focus on a quality criteria associated with the use of EACs or power purchase agreements around there's a rigorous uh due diligence process in retiring those credits and that making sure that they're of high quality for the user.
• 23:00
  SPEAKER_01: I think another thing that's important to focus on too, Margin, is as we are changing this voluntary to regulatory space, that may also change which emission factors one selects.
• 23:10
  SPEAKER_01: It may be more prescriptive as new regulations come out, that you may no longer just be able to use a country-level factor.
• 23:17
  SPEAKER_01: You may have to use a more prescribed emission factor that that goes along with that regulatory body.
• 23:23
  SPEAKER_03: All right, and and Chris, a key point here that I think is important um to highlight is the use of these quality criteria.
• 23:29
  SPEAKER_03: And you mentioned the fact that um both companies reporting under the GHG protocol and ESRS are required to follow these in the market-based method.
• 23:39
  SPEAKER_03: And specifically, they're outlined in the GHG protocol.
• 23:42
  SPEAKER_03: And I'm gonna come back to you with a question on those.
• 23:44
  SPEAKER_03: And then they're also um the then ESRS references the criteria that are outlined.
• 23:51
  SPEAKER_00: Yeah, and I think uh one thing that we I think we we skipped so far, it's mentioning the IFR sustainability disclosure standards.
• 23:57
  SPEAKER_00: Um, the one important difference is those standards do not require dual reporting, so they only require uh reporting entities to report location-based scope to emissions and disclosed any kind of those uh instruments separately.
• 24:10
  SPEAKER_00: So no market-based calculations required, but companies have to disclose the nature and the quality of those instruments that they use in their efforts to reduce the emissions.
• 24:20
  SPEAKER_03: Right.
• 24:20
  SPEAKER_03: So since they're disclosing it, they don't necessarily have to consider these criteria, although they may want to before entering into these contracts.
• 24:28
  SPEAKER_03: But Chris, anything you would highlight then specific to the criteria or other best practices when you're dealing with renewable energy certificates, EACs, or any of the other names that you can call these?
• 24:39
  SPEAKER_01: Aaron Powell I think the important thing to think about with the quality criteria is that it's designed to prevent double counting and greenwashing.
• 24:46
  SPEAKER_01: It's to make sure that a attribute is used and retired by one company and one company only.
• 24:51
  SPEAKER_01: It's not double, triple sold.
• 24:53
  SPEAKER_01: It prevents, it's designed to prevent double counting, greenwashing, fraudulent activity.
• 24:59
  SPEAKER_01: That it's it's it's to protect the purchaser as much as it is the user of that data.
• 25:04
  SPEAKER_01: That gives the user of the data confidence that it was used appropriately, and it gives the reporting company confidence that they per they use their money to purchase a quality certificate.
• 25:15
  SPEAKER_00: And I, Heather, what is important to mention, because of the nature, inherent natures of this uh of this instrument, so as Chris mentioned before, they can be uh acquired in a variety of ways, and it's not like buying the power.
• 25:28
  SPEAKER_00: You buy separate instruments, either bundled with PPA or unbundled with PPA.
• 25:32
  SPEAKER_00: So all those quality criteria related to the tracking of those instruments, making sure that you know they're properly tracked, um, that they were kind of issued in proximity or geographical proximity of where you consume the energy, they were issued, you know, with a similar vintage to where because again, when you think of it, they oftentimes have nothing to do with the actual power that you're generating, right?
• 25:54
  SPEAKER_00: So you can buy those instruments which were generated, let's say, before your, you know, um the period when you when you consume energy, sometimes even after uh they could be uh acquired from locations which is really distanced to from your operations.
• 26:08
  SPEAKER_00: That's why you have those quality criteria.
• 26:10
  SPEAKER_00: They're designed to ensure that those instruments represent, you know, they're as close or represent as closely as possible the nature of energy or consumption of electricity in a place where when you consume it, right?
• 26:24
  SPEAKER_00: So uh, and as Chris said, the double for me, double counting and then greenwashing is the most um the most important because we have a variety of those instruments in different countries.
• 26:33
  SPEAKER_00: So having the high quality and following those criteria is really critical, in my opinion.
• 26:38
  SPEAKER_01: Retirement also is very important in that list that you were mentioning there.
• 26:41
  SPEAKER_01: Retirement is that it's attributed to the reporting company and it's retired one time only to prevent the double, triple, quadruple sale of that.
• 26:49
  SPEAKER_03: Yes, I was gonna chime in with that one and as well the other one is I think this vintage is very important.
• 26:55
  SPEAKER_03: And you know, even in the quality criteria, there is some flexibility in terms of the period you can use.
• 27:02
  SPEAKER_03: But really, ideally, if you think about it, you would be buying certificates that are actually generating power at the exact same time that you are gener are using power.
• 27:11
  SPEAKER_03: And so the closer that you can match the period of generation to the period of your electricity use, the higher quality you're reporting.
• 27:18
  SPEAKER_01: That really highlights the benefit of a bundled power agree purchase uh agreement or an EAC as opposed to an unbundled.
• 27:26
  SPEAKER_03: Yes, agree.
• 27:27
  SPEAKER_03: All right.
• 27:27
  SPEAKER_03: Obviously, listeners, we are very passionate on this topic.
• 27:31
  SPEAKER_03: All of us have lots of points of view.
• 27:33
  SPEAKER_03: I think, Marchin, you did touch on this, but I think just to get it all in one place, I um we should talk briefly about reporting, and we've hit it a few times, but given the some of the subtlety here, I think it's important to cover it here, and then I'll I'll go to you guys for some final thoughts.
• 27:48
  SPEAKER_03: So, Marchin.
• 27:50
  SPEAKER_00: Yeah, so as I mentioned, um it's amazing.
• 27:53
  SPEAKER_00: The first point which frameworks require dual reporting.
• 27:57
  SPEAKER_00: So GEGD protocol requires reporting of uh scope two emissions under both methods, ESRS requires the reporting of scope two emissions under both methods.
• 28:06
  SPEAKER_00: As I mentioned, IFRS sustainability standards only require the uh location base.
• 28:11
  SPEAKER_00: And then we come to the SEC rule.
• 28:13
  SPEAKER_00: It's interesting because SEC rule does not prescribe any of those methods, right?
• 28:17
  SPEAKER_00: So uh it's up to company uh to select which methods they um uh they will you know report.
• 28:24
  SPEAKER_00: Uh technically they can even report the third method.
• 28:28
  SPEAKER_00: I don't know what would that be.
• 28:29
  SPEAKER_00: So we expect most of the company is going to be you know reporting either one of them or two, right?
• 28:35
  SPEAKER_00: But the SEC rules kind of are flexible, give companies flexibility of selection.
• 28:39
  SPEAKER_03: Yeah, and to be clear, the SEC rules do require a company to elect a protocol or standard, which would suggest that there's not full flexibility or margin.
• 28:50
  SPEAKER_03: So there is flexibility, but I think we would really expect that a company is either going to pick one method or the other.
• 28:56
  SPEAKER_03: Or both.
• 28:56
  SPEAKER_03: Or both.
• 28:57
  SPEAKER_03: Yes.
• 28:57
  SPEAKER_03: Yes.
• 28:58
  SPEAKER_03: I think from a quality of reporting point of view, we probably would say both would be the higher quality reporting.
• 29:03
  SPEAKER_03: Trevor Burrus, Jr.
• 29:03
  SPEAKER_00: Yeah, because it it also from company's perspective, it it better demonstrates the efforts the company are taking to reduce emissions, right?
• 29:11
  SPEAKER_00: Uh which for a lot of companies, scope two is uh you know, uh is a big component of their of their emissions.
• 29:17
  SPEAKER_00: So showing the you know their actions they're taking to reduce emissions, it might be very important, a lot of reporting, isn't it?
• 29:23
  SPEAKER_03: Trevor Burrus, Jr.
• 29:23
  SPEAKER_03: Yeah, although to then I think a company could think about the approach under the ISSB standards as well, using location-based and then describing your contractual instruments, I think could have achieved that same objective.
• 29:35
  SPEAKER_00: Yes, I would agree.
• 29:36
  SPEAKER_03: All right.
• 29:37
  SPEAKER_03: So a lot to say there, but maybe before we wrap things up, and Chris, I'll start with you this time.
• 29:42
  SPEAKER_03: Any thoughts for companies dealing with scope two emissions?
• 29:46
  SPEAKER_03: Again, I think this can get very complicated quickly.
• 29:49
  SPEAKER_03: So a lot to think about.
• 29:51
  SPEAKER_01: There is a lot to think about.
• 29:52
  SPEAKER_01: There are a lot of rules that that govern scope two emissions.
• 29:55
  SPEAKER_01: I think don't get overwhelmed, is what I would say about this.
• 29:58
  SPEAKER_01: Is that though we've we've we're passionate about it, we've talked about it, there is a lot of detail.
• 30:04
  SPEAKER_01: I think that when you distill it down, it is still just as Martin had described earlier, it's an activity data multiplied by a factor, multiplied by a global warming potential, giving you an emission.
• 30:14
  SPEAKER_01: I think if you don't get too mired down into all those details that we talked about, you can still overcome this alphabet soup that we've talked about here.
• 30:23
  SPEAKER_03: All right, very helpful.
• 30:24
  SPEAKER_03: Martin, how about you?
• 30:26
  SPEAKER_00: Well, but also don't simplify that because um as we we've been working with clients uh across a few years, there was initially the tendency to say, well, this method should be the same, so the numbers will be the same.
• 30:38
  SPEAKER_00: Oftentimes it will not, they not, you know, you really have to, when you do the market-based calculation, you have to spend a little bit more time thinking about those quality criteria.
• 30:46
  SPEAKER_00: So and I would suggest companies take your time, uh think specifically about what data you have, you know, what kind of uh renewable agreements you have and what impact they will have on a calculation of market base and what's gonna be the resulting difference.
• 31:00
  SPEAKER_00: Because it interesting enough, sometimes that both, you know, market base can result in higher emissions.
• 31:05
  SPEAKER_00: But we're not gonna go into details there, but uh I'm just trying to say like let's not oversimplify that.
• 31:10
  SPEAKER_00: I mean, uh take your time, understand the the uh specifics of each method, and that which would require you to have a good understanding of type of activities and data available at your corporate at your company.
• 31:23
  SPEAKER_03: Yeah, and I think maybe from my point of view, I'm gonna go back to the comment I made during the podcast, is that I cannot encourage uh people enough to try to dig in and understand this.
• 31:35
  SPEAKER_03: I think the terminology does get easier and the concepts get easier the the more you do try to understand.
• 31:41
  SPEAKER_03: I also would say that in our sustainability reporting guide, chapter seven, there are um some good examples that show the calculation using the location-based and the market-based method.
• 31:52
  SPEAKER_03: March and Chris worked very hard on those examples.
• 31:55
  SPEAKER_03: It shows for both the US and uh in the UK, EU.
• 31:59
  SPEAKER_03: And so, again, if you want to see the impact, I encourage companies to check that out.
• 32:04
  SPEAKER_00: Yeah, and one last thing that I should have said and I forgot, and so like sorry to jump in again.
• 32:09
  SPEAKER_00: The very important element of that would be for companies to really understand their electricity systems across the globe globe, especially when they operate in multiple jurisdictions.
• 32:18
  SPEAKER_00: Because it's for me and Chris, it's easier to talk about the United States.
• 32:21
  SPEAKER_00: We understand our grid, we understand REC system, what type of arrangements, but really, depending on your locations in different kinds of uh uh jurisdictions, those instruments can take different forms.
• 32:32
  SPEAKER_00: They can be named differently.
• 32:35
  SPEAKER_00: The mechanism to track them and retire them might be different.
• 32:39
  SPEAKER_00: They might be representative of slightly different attributes.
• 32:42
  SPEAKER_00: So it's really crucial as well to understand.
• 32:45
  SPEAKER_00: And you know, I was surprised by some of that stuff myself.
• 32:48
  SPEAKER_00: I presume everything works like the United States, right?
• 32:50
  SPEAKER_00: And I know it's not the best place to be able to do it.
• 32:52
  SPEAKER_03: Especially for someone from Poland.
• 32:54
  SPEAKER_00: Yes, I don't I don't want to go there, but uh but like they read there are really differences, and even simple terminology can be confusing.
• 33:01
  SPEAKER_00: And uh, so it's really important for companies to understand the nature of those systems on the of those instruments across the globe before they start doing the calculations.
• 33:09
  SPEAKER_03: Yeah, 100% agree.
• 33:10
  SPEAKER_03: And obviously, listeners, um, again, there's a lot of information out there, and so check out our guide as the starting point.
• 33:17
  SPEAKER_03: And with that, Chris Martin, such a pleasure to talk to both of you.
• 33:20
  SPEAKER_03: Thanks so much for joining me today.
• 33:22
  SPEAKER_01: Thanks, Frankes.
• 33:24
  SPEAKER_03: That's our show for today.
• 33:26
  SPEAKER_03: Tune in next week for more fresh episodes so that you never miss any of our audio content.
• 33:32
  SPEAKER_03: Follow the PWC Accounting Podcast wherever you listen to your podcasts.
• 33:37
  SPEAKER_03: And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com.
• 33:46
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 33:50
  SPEAKER_03: Thanks for tuning in.
• 33:57
  SPEAKER_02: This podcast is brought to you by PWC, All Rights Reserved.
• 34:02
  SPEAKER_02: PwC refers to the U.S.
• 34:04
  SPEAKER_02: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network.
• 34:10
  SPEAKER_02: Each member firm is a separate legal entity.
• 34:12
  SPEAKER_02: Please see www.pwc.com slash structure for further details.
• 34:19
  SPEAKER_02: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.