Aug-2024

Carbon advisory in EMEA

Why failing to accurately track Scope 1, 2, and 3 emissions is the biggest threat to decarbonisation. Accurate data is key.

Daniel Carter
Wood

Article Summary

In the race to decarbonise, the world stands at a crossroads where the path chosen now, be it proactive or reactive, will determine the success or failure of combating climate change.

Since the Paris Agreement in 2015, nations across the globe have embraced targeted carbon legislation in a united effort to incentivise decarbonisation road mapping across all industries (McKinsey & Co, 2021). The US has introduced the 45Q tax credit (IEA, 2023), which reduces the cost and risk associated with investing in clean energy technology. In addition, the EU has implemented the Carbon Border Adjustment Mechanism (CBAM) (European Commission, 2023) to encourage cleaner industrial production in non-EU countries. Governments around the world are creating an ever-evolving assortment of climate-combatting laws that many believe will be the linchpin in major decarbonisation.

However, despite this sharp increase in efforts being made to reduce emissions on a macro level, time after time companies fall short of making effective deep cuts to their carbon footprint. Ineffective emissions tracking is most likely the reason for this, with many mapping out decarbonisation strategies that see them running before they can walk. Ultimately, you cannot manage what you cannot measure, and with countless numbers of stakeholders involved throughout the industrial value chain, it can become easy to lose oversight of how much carbon is truly being emitted.

Operators need to fully understand the policy landscape and their carbon baseline before defining objectives and targets for decarbonisation through benchmarking, assessing market impacts and considering policy and corporate strategy. They then need to review and map assets to enable the development of decarbonisation pathway scenarios. Wood has developed a process that considers the company’s substitution, capture, offsetting, and reduction options to evaluate (SCORE) and deliver an effective decarbonisation pathway that meets each business’s needs (Wood, 2023). The method can be implemented into single or multiple assets, to a client’s full asset portfolio, or across a specific geography or region using an evaluation assessment of opportunities. This means that no matter what stage a company is at, there is always a pathway forward to reduce its carbon footprint.

The pathway to successfully decarbonising is not linear and will vary from one company to the next; therefore, taking early action will be key to implementing a sustainable strategy and not falling at the first hurdle.

How can a carbon market encourage decarbonisation?
Most nations across the globe have adopted carbon legislation in the hope of significantly diminishing their carbon footprint. According to climate scientists, global carbon dioxide (CO₂) emissions must be cut by as much as 85% by 2050 to stop a temperature increase of 2˚C above pre-industrial levels (IPCC, 2018).

The World Bank estimates that carbon pricing schemes now cover about half of the emissions for regions that use such mechanisms (World Bank, 2023). Designed as an instrument that captures the external costs of greenhouse gas (GHG) emissions – the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise – and ties them to their sources through a price, usually in the form of a price on the CO₂ emitted.

Emissions do and will continue to increasingly impact the balance sheet with the growing development of carbon pricing, whether through emissions trading systems or carbon taxes. The objective here is to shift the burden onto emitting operators and developers. A carbon price also stimulates clean technology and market innovation, fuelling new, low-carbon drivers of economic growth.

Therefore, carbon markets, designed as systems for buying and selling carbon credits or permits, are expected to play a critical role in creating economic incentives for reducing emissions and promoting the adoption of low-carbon technologies. The global landscape of policy development supporting carbon reduction and storage technologies such as carbon capture utilisation and storage (CCUS) is as diverse as it is complex. Initiatives such as the Inflation Reduction Act (IRA) in the US and the European Union Emissions Trading System (EUETS) are beginning to offer tax incentives and generate carbon credits that broadly incentivise decarbonisation investments. These policies are crucial as they set the stage for a more proactive approach to decarbonisation.

What do we mean by ‘tracking emissions’?
The GHG Protocol provides the most widely recognised accounting standards for GHS and categorises GHG emissions into three scopes. Scopes 1, 2, and 3 are the accounting standards most companies and governmental bodies use to measure direct and indirect carbon emissions. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the purchase and use of electricity, steam, heating, and cooling. Using the energy, an organisation is indirectly responsible for releasing these GHG emissions. Scope 3 includes all other indirect emissions that occur in the upstream and downstream activities of an organisation. Accurately reporting these emissions has become a legal requirement in some countries, such as the UK, where the largest companies must include data for Scopes 1 and 2 in their annual reports.

Scope 3 emissions are typically when most organisations lose track of their carbon impact; however, accurately tracking this data is critical for precisely measuring a company’s carbon footprint. Despite the complexity of cutting Scope 3 emissions, more companies are promising to do so. Nearly 240 companies have signed up for the Science Based Targets initiative – an independent organisation promoting climate action in the private sector (Science Based Targets, 2023). Ninety-four per cent of these companies say they will reduce emissions linked to their customers and suppliers (McKinsey & Co, 2021). However, despite the enthusiasm of these companies to keep track of Scope 3 emissions, this task is easier said than done. Ensuring the correct mechanisms are in place to collate this data is crucial. Even once an accurate prediction of baseline emissions is in hand, it still does not mean that mapping out a decarbonisation strategy will be an easy feat.

Could a single carbon accounting system be the answer?
Globally, the pace of policy development in support of carbon abatement schemes varies significantly. Currently, the global carbon accounting mechanism sits as a patchwork of different standards and protocols, each stitched together with no cohesive design. Discovering how a company can work these policies to its advantage and ultimately gain better oversight of its carbon footprint will require a proactive approach to decarbonisation.

In the EU, the CBAM legislation came into effect this year, covering the import of certain cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen products. It effectively sets a price on the GHG emitted from the production of these products, aligning it with EU GHG reduction goals, preventing ‘carbon leakage’, and levelling the playing field for EU and non-EU producers. Targeting direct and indirect emissions associated with the production of EU-imported goods, the legislation has been hailed by many as a shining example of how to pressure producers into taking immediate action to decarbonise. However, it is becoming increasingly evident that a standardised form of measuring carbon intensity is needed to ensure these policies remain effective. Today, there is no single means or measure to account for carbon globally.