FEATURE: Greenhouse Gas Protocol revisions could rattle environmental markets

Environmental commodity markets could be in for a shock as the Greenhouse Gas Protocol -- the global standard-setter on carbon emissions accounting -- prepares to revise its rules.

The organization's guidance is used by almost all entities that report emissions. Its rules have created a booming market for environmental certificates bought by companies to bolster green credentials, mostly related to renewable power.

But that could soon change.

With a heated debate about the effectiveness of those certificates, the protocol is in the process of updating its rules on how companies report Scope 1, 2, and 3 emissions, and has been seeking feedback in a survey closing March 14.

Scope 1 covers emissions from sources directly controlled by an entity; Scope 2 indirect emissions from bought power, heat, or cooling; and Scope 3 covers other value chain emissions.

A major point of contention is over what is known as market-based accounting -- a system that allows companies to meet emissions targets by making contractual agreements or by buying environmental certificates. The system is currently used in Scope 2 reporting and allows the use of renewable energy certificates.

With a live debate around the use of the method for Scope 1 and Scope 3 emissions, other certificates -- such as those for renewable natural gas, hydrogen, green steel, or sustainable aviation fuel – face an uncertain future.

Tighter rules

While certificates values have been on a long-term uptrend, boosted by strong corporate interest, sceptics question their additionality -- a term that describes the extent to which buying a certificate contributes to new renewables that would not otherwise exist.

That concern has led some to say the Greenhouse Gas Protocol should tighten rules on their use in emissions reporting.

"There will be some form of additionality requirement for market-based Scope 2, and that will reduce demand for non-additional RECs, and increase interest in RECs with additionality, and power purchase agreements," said Matthew Brander, senior lecturer in carbon accounting at University of Edinburgh Business School.

"I think the best option would be to not have market-based accounting within GHG inventories, but instead to have separate consequential reporting of the changes caused by company actions, including [emissions] reductions caused by buying RECs, if and when RECs do cause reductions," Brander said.

It was unlikely that the protocol would scrap market-based accounting altogether, and it should instead opt for tighter rules, according to Simone Accornero, CEO of Flexidao, a renewable energy software company.

"They should implement clear constraints on geographical boundaries. Right now, you can buy certificates from anywhere. In Europe, lots of certificates come from Norway. Electricity has some physical constraints and this needs to be acknowledged," Accornero said.

An industry push to make time-stamped certificates and match supply and demand in close to real time should also be supported, Accornero said.

"We believe the goal should be hourly accounting. This is not possible for every company all over the world so there should be a grace period [until it is mandatory]."

Certificates industry fights back

Faced with an existential threat, certificates organizations have hit back, and say tighter rules would hinder support for green technologies.

"Renewable energy markets based on EACs (Energy Attribute Certificates) clearly support additionality, help to accelerate the energy transition, and cut emissions by displacing fossil fuels. Every purchase of renewable energy attributes provides additionality," the RECS energy certificates association said in a position paper.

Proposed changes to guidance that would tighten rules on biomethane certificates has also prompted a strong response, with industry publishing a joint letter objecting to the changes signed by more than 50 companies, including Centrica, Shell, and TotalEnergies.

"The approach undermines the emerging market for biomethane certificates, which has been funding new anaerobic digestion infrastructure and is capable of tracking biomethane through a gas grid. This market has shown that, with effective eligibility criteria, certificates can fund the production of additional green gas -- breaking the sector's current reliance on government support -- and drive biogas growth to its full potential," they said in the letter.

Eye on voluntary carbon

While current emissions reporting standards are separate from guidance on voluntary carbon, the protocol calls out offsets as an example market-based instrument in its survey and asks respondents if they should be used in calculating Scope 3 emissions.

If the market-based approach is extended to cover Scope 3 emissions, or if guidance on reporting those emissions is changed, voluntary carbon could be impacted, industry watchers say.

The voluntary carbon market is undergoing a significant transition, with a renewed focus on integrity and quality initiatives.

Besides standardization, the value and depth of information around carbon credits also need to improve and evolve, and the revisions to the protocol will help in formulating these mechanisms.

The need for quality standards is pivotal, as the credibility of carbon credits and some forest conservation projects have come under fire in several media reports.

The Integrity Council for the Voluntary Carbon Market will introduce high-integrity carbon credit labels in the third quarter of 2023, and it will publish its final Core Carbon Principles (CCPs) in March to create a more transparent, liquid, high-integrity voluntary carbon market. Meanwhile, the Voluntary Carbon Markets Integrity Initiative (VCMI) is reworking a draft consultation aimed at bringing integrity to corporate claims made about the use of carbon credits.