Many conversations about reducing greenhouse gas emissions include the popular adage, “you can’t manage what you don’t measure.” There is, however, another common adage among corporate sustainability professionals that is often overlooked: “if it doesn’t count, we won’t do it.”
To better understand how potential changes to “Scope 2” greenhouse gas emission reduction target-setting and accounting may affect real-world corporate decision making, as well as global emissions reductions and energy access, Energy Peace Partners (EPP) ran an AI-based simulation.
Corporations make business decisions based on market incentives, available budgets, approved strategies, and available solutions. As it relates to corporate sustainability, the incentives that drive decisions are shaped primarily by the Science Based Targets Initiative (SBTi) and the Greenhouse Gas Protocol (GHG Protocol), which respectively provide frameworks for greenhouse gas emission reduction-related target setting and for greenhouse gas inventory accounting.
SBTi and GHG Protocol guidance on “Scope 2” greenhouse gas emission reduction target-setting and accounting are both currently going through multi-year revision processes that include extensive stakeholder engagement. These revisions represent a major opportunity to get incentives right in order to drive the maximum amount of corporate financial support for clean energy projects—in electrified and under-electrified countries alike—to ultimately achieve the greatest total emissions reductions to the atmosphere. However, these revisions—including various formal proposals, such as those from GHG Protocol that will soon be available for public comment—could also lead to a weakening of the incentives and feasibility for companies to continue supporting clean energy.
In the simulation, we had five generic companies from different sectors—one from big tech, fashion, finance, food and beverage, and small retail—go through a three-round game. Each company had a typical global electricity use and associated Scope 2 emissions profile, pre-established clean energy target, approved strategy and budget, limited electricity use data, and a selection of potential clean energy procurement options from which to choose. The collective goal of the game for all companies: to achieve the maximum amount of greenhouse gas emission reductions to the atmosphere while following SBTi and GHG Protocol guidance, using available solutions in voluntary markets, and staying within their approved strategy and budget.
Each round in this three-round simulation entailed a change to current SBTi and GHG Protocol guidance to evaluate different options that are currently under consideration in the respective revision processes:
Current state: In Round 1, the five companies made their clean energy selection based on the existing SBTi and GHG Protocol guidance.
24/7 hourly deliverability requirement introduced: In Round 2, SBTi and GHG Protocol introduced new requirements to only procure hourly clean energy matching their real-time electricity use.
Hourly requirement removed and avoided emissions impact encouraged: In Round 3, SBTi and GHG Protocol removed the hourly requirements from Round 2 and instead introduced new recommendations for companies to a) account for the marginal emissions impact of clean energy projects and b) allow for the procurement of clean energy from projects located outside traditional “market boundaries” that drive greater marginal emissions impact. Marginal emissions impact reflects the consequences of decisions on the actual greenhouse gas emissions intensity of a market. Procuring clean energy from a more emissions-intensive market would achieve a greater marginal emissions impact because it helps displace more polluting resources.
In all three rounds, each company received an additional challenge to further consider real-world situations that arise and play a role in corporate decision making, such as a supply chain shock, regulatory shock, stakeholder disruptions, and others.
The results: the simulation showed significantly greater expected global emission reductions during Round 3 versus Rounds 1 and 2. Because marginal emissions impact became an official option in corporate emissions reporting only in Round 3, the five companies were newly incentivized to support projects that reduce electricity-related emissions based on marginal emissions impact and, where applicable, outside their conventional market boundary. Teams in Round 3 could thus optimize their procurement budgets to support projects that deliver the greatest decarbonization impact bang-for-the-buck, including projects in underserved and under-electrified communities.
Round 2 resulted in the lowest amount of avoided emissions from the power sector to the atmosphere, largely because teams had fewer options to choose from that would “count” as well as less available budget after significant additional budget they had to allocate to hourly modeling and accounting-related work.
The simulation suggests that current revisions under consideration to “Scope 2” in the SBTi Corporate Net-Zero Standard and GHG Protocol Corporate Standard for Scope 2 should prioritize approaches that include the following components:
Provide clear guidance on impact-based out-of-market procurement to enable global optimization strategies for avoided emissions and increased clean energy access.
Explicitly incentivize high-impact procurement in underserved and under-electrified countries where clean energy can displace highly-polluting diesel generators and charcoal burning.
Minimize compliance costs in voluntary markets to help maximize procurement resources that companies have available for clean energy, while maintaining a system of verifiable, attributable environmental claims through energy attribute certificates.
This simulation offers insights about how these Scope 2 frameworks create incentives that play a central role in determining the clean energy procurement decisions that companies make. It also highlights the benefit of integrating marginal emissions impact and more flexible, impact-based out-of-market procurement into Scope 2 accounting. More broadly, the simulation shows how the corporate target-setting and accounting frameworks that SBTi and GHG Protocol represent can either enable or constrain the strategies that companies adopt and procurement decisions they make. These corporate strategies and decisions will determine real-world outcomes that reflect how quickly and efficiently both power sector decarbonization in electrified countries and clean energy leapfrogging in underserved and under-electrified countries occur.
What “counts” thus really does matter.
Like any simulation, there are limitations related to the assumptions, variables, and considerations employed as well as the key conclusions to be drawn. For example, the simulation didn’t consider wider market dynamics as to how decisions by companies outside of the five participating in this simulation might impact the results.
EPP welcomes feedback on this simulation and encourages others to build on and refine simulations like ours. By clarifying how the respective SBTi and GHG Protocol Scope 2 revisions processes affect corporate decision making, the stakeholders who will determine the final outcomes of these revision processes can better understand the real-world implications of the choices they make.
You can access the full report summarizing EPP’s AI-based simulation, upon written request to EPP via email. Please also contact EPP with any questions or inquiries to collaborate with us on expanding this timely research.