Mounting pressure from all corporate stakeholders, including customers, employees and investors, is causing more corporations to set - or increase - their greenhouse gas (GHG) reduction targets. These targets often appear in corporate social responsibility reports as phrases like "use 100% renewable energy across operations," "reduce Scope 1 and Scope 2 GHG emissions from global operations by 25% by 2025," or "achieve net-zero carbon emissions by 2050." But what do those commitments mean, exactly, and how can corporations achieve them?
This guide is designed as a 101-level primer for corporate managers who are thinking about setting GHG reduction targets for the first time. We'll describe the three types of emissions as defined by the GHG Protocol and review strategies corporations can take to reduce each type. If you have any questions about this information, LevelTen would be happy to help. You can reach us at info@leveltenenergy.com.
Sources of Greenhouse Gas Emissions
There are many sources of greenhouse gas emissions; some are directly caused by your corporation's operations, while others are caused indirectly by entities in your supply chain.The Greenhouse Gas (GHG) Protocol Corporate Standard classifies GHG emissions into three Scopes:
Scope 1 Emissions
Scope 1 emissions are directly caused by facilities or equipment that your corporation owns or controls. One major source is the burning of fossil fuel to generate heat in manufacturing processes, and another is gas-powered vehicles and equipment that the company owns (more specifically, ones it includes as assets on its balance sheet).
Scope 2 Emissions
Scope 2 emissions are indirect emissions from the generation of purchased energy. Most corporations get the majority of their energy from a public utility, as opposed to generating their own electricity. If the utility gets its energy from "brown power" sources that burn fossil fuels, it will result in emissions. You should check with your utility to see if they can provide you with Scope 2 emissions data.
Scope 3 Emissions
Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the company's value chain, including both upstream and downstream emissions. They can include things like emissions caused by your suppliers, emissions caused by employees commuting to your facilities, and those associated with the transport and processing of waste after your customers dispose of the product.
When setting your goal, it's important to be clear about the type of emissions you are aiming to reduce. The Greenhouse Gas Protocol is an excellent resource when it comes to measuring your current emissions and setting reduction targets. More than 90% of Fortune 500 companies use the GHG Protocol's Corporate Accounting and Reporting Standard to calculate metric tons of greenhouse gas emissions and their efforts to reduce them.
Most corporations start with Scope 1 and 2 emissions, which can be reduced through direct actions taken by the company. Although Scope 3 emissions are more challenging to reduce, for many companies, they represent a majority of overall emissions, so to truly make an impact they should not be ignored.
How to Reduce Scope 1 Emissions
There's a myriad of ways to reduce Scope 1 emissions; the route you take will depend on your budget and your company's appetite for organizational change. Here are a few general strategies:
1. Cut Consumption & Get More Energy-Efficient
Making capital investments in newer, more energy-efficient equipment can lower your operating costs and reduce emissions at the same time. For example, one of the ways The Home Depot was able to achieve its Scope 1 emission reduction goals in 2017 was by installing energy-efficient heating, air-conditioning and ventilation systems in 91 stores.
2. Replace Fossil Fuels with Cleaner Alternatives
Replacing coal boilers with natural gas and upgrading your company's fleet to electric vehicles are just a couple of ways that you can reduce or eliminate your use of fossil fuels in operations. One great example of this is Frito-Lay North America, which is owned by PepsiCo. Frito-Lay maintains more than 150 fully-electric vehicles (EVs), the largest commercial fleet of EV trucks in the US. Since the EV program began in 2010, PepsiCo has eliminated the need for approximately 1.2 million gallons of diesel fuel, equivalent to keeping more than 2,100 passenger cars off the road for a year.
3. Purchase Carbon Offsets
For corporations whose operations don't allow them to eliminate all Scope 1 emissions - even with equipment upgrades - carbon offsets remain an option. A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made by your company. Every ton of emissions reduced results in the creation of one carbon offset. When corporations purchase carbon offsets, the money is used to finance projects that otherwise wouldn't have been built without that investment. Examples of carbon offset projects include forest preservation, energy efficiency projects and landfill methane capture.
There are a variety of brokers that will sell carbon offsets, but since the market is largely unregulated, it's important to do your due diligence before purchasing offsets. Make sure that the projects are certified by independent, third-party GHG Project Certification Programs, which will ensure that the project results in real, verified, enforceable, and permanent reductions. Project Certification Programs include:
- The Gold Standard
- Verra (the Verified Carbon Standard)
- The Climate Action Reserve
- American Carbon Registry
Green-e Climate is an excellent resource for carbon offsets. The organization holds retailers accountable by monitoring how offsets are transacted and advertised in the retail market, protecting both the buyer and the seller.
How to Reduce Scope 2 Emissions
Scope 2 emissions are caused by purchasing energy that is generated by "brown power," or power generated by burning fossil fuels. There are four main approaches to reducing Scope 2 emissions:
- Purchase "unbundled" renewable energy certificates
- Enter into off-site power purchase agreements
- Generate renewable energy on-site
- Participate in Utility Green Tariffs and Utility Green Power Programs
1. Purchase "Unbundled" Renewable Energy Certificates
Renewable energy certificates (RECs), also known as renewable energy credits and tradeable renewable certificates, represent proof that one megawatt-hour of electricity was generated from a renewable energy source and fed into the grid. Purchasing unbundled RECs (meaning that the RECs are not directly attributable to a single renewable energy project), is one way to reduce Scope 2 emissions.
When you purchase RECs, you make it possible for more clean energy projects to supply power to the grid in which they operate. Grid operators want to buy the cheapest power possible; since energy from wind and solar plants is often less expensive than energy from coal-burning plants, the operator usually prefers to buy from those renewable sources, and not from "brown power" sources. Therefore, by purchasing RECs, you are effectively contributing to a reduction of carbon emissions by reducing brown power on the grid.
You can purchase RECs directly from renewable energy project developers and through brokers/third parties. RECs can be bought and sold multiple times, but in order to claim that you are reducing Scope 2 emissions, you must buy RECs that haven't been purchased before, and you must "retire" those RECs, which means that you hold them forever and don't sell them to anyone else. Green-e provides a list of projects that sell RECs that are certified by the organization, which means that they have not been sold more than once or claimed by more than one party.
One example of this is Procter and Gamble, which purchases Green-e certified RECs to match 100% of the electricity used to make Herbal Essences shampoo and conditioner, as well as 100% of their company headquarters.
NOTE: Carbon Offsets are not RECs, and RECs are not Carbon Offsets. RECs are specifically used to reduce Scope 2 emissions; they cannot be used to claim offsets for Scope 1 or 3 emissions.
2. Off-Site Power Purchase Agreements
Purchasing RECs is an expense…and that's it. Another way to acquire RECs is through an off-site power purchase agreement (PPA), which offers the opportunity to acquire "bundled" RECs and hedge your energy costs at the same time.
With off-site PPAs, you are guaranteeing that a renewable energy project developer will receive a specific price - the PPA price - for their energy. This enables them to get the financing that they need to build their project.
Once the project is built, the developer will receive one REC for every megawatt hour that it generates and sells. The developer will then transfer those RECs to your company; the amount transferred depends on how many megawatt hours you've agreed to purchase under the terms of the PPA.
Since the RECs are tied to the project, they are considered "bundled" RECs. Many companies require that their bundled REC purchases also meet a generally accepted definition of "additionality" - i.e., resulted in the construction of a renewable energy project that would not have been possible without your investment. This "additionality" can be important to many stakeholders, and its why many organizations choose to participate in PPAs vs. purchasing unbundled RECs.
Off-site PPAs come in two forms: physical and virtual. The differences are complicated, but essentially, in a physical PPA, energy flows from a renewable energy project through the electric grid to your company's facilities; in a virtual PPA (often called a financial PPA), the energy flows to the grid, not to your facilities - it's merely a financial contract. For more information on the differences between each type of PPA, check out 4 Questions to Ask Before Choosing a Physical or Virtual Power Purchase Agreement.
Both types of power purchase agreements offer the opportunity to hedge energy costs:
- With physical PPAs, you agree to pay the developer a fixed price for the energy you receive for the length of the contract. This can protect you from rising energy prices by reducing how much energy you purchase from your utility at the wholesale market price.
- With virtual PPAs, the developer will sell the energy to their regional Independent System Operator (ISO) at the floating market price. If the market price is higher than the PPA price, the developers will cut you a check for the difference. If the market price is lower than the PPA price, you'll owe them for the difference. If energy prices rise, you'll get a higher bill each month from your utility - depending on how your retail energy contract is structured -- but you could also earn more from your PPA. In this way, PPAs enable you to hedge energy costs. In the best-case scenario, you'll earn revenue from the deal, in a bad case, you'll pay more money than you would have elsewhere to acquire RECs.
The amount you pay for a power purchase agreement (of any kind) could be less than what you would spend to get the same number of RECs elsewhere, and they offer the ability to hedge energy costs and make claims of "additionality."
The outcome of a PPA really depends on the project's performance and energy market economics. That's why it's critical to choose an energy advisor that specializes in PPAs and can run deep market analytics to find a project, or portfolio of projects, that meets your REC goals and appetite for risk. This is LevelTen Energy's specialty; if you're interested in power purchase agreements, let's talk!
Examples of companies that have used power purchase agreements to obtain RECs include Bloomberg, Cox Enterprises, Gap Inc., Salesforce and Workday, which teamed up to procure 42.5 megawatts of solar power through a new type of aggregation deal.
3. Generate Renewable Energy On-Site
One way to reduce the amount of power you purchase from your utility is to generate clean power yourself. A few famous examples of this include Apple's corporate headquarters, which features a 17-megawatt onsite rooftop solar installation, and the Tesla Gigafactory, which will draw all of its power from solar panels on the roof, plus geothermal heat and wind, once it is completed.
Most companies don't have the internal resources or expertise to install and maintain power generating equipment on their property, which is why they use on-site power purchase agreements (PPAs). With an on-site PPA, a third party will develop, build and operate the equipment that is installed on your company's property, and the energy will be fed to your electrical system.
The company that owns and operates the equipment will sell you the energy at a price that is agreed upon in the PPA. If there's any energy left over, the operator will sell it to the utility, although the mechanics of this agreement will vary from state-to-state. An on-site PPA eliminates the upfront cost of acquiring and installing the equipment, and places maintenance responsibilities on the operator. They typically last 10 to 30 years.
Not all facilities are ideal for on-site renewable energy generation, and for companies that use a lot of power, it can be difficult to avoid all Scope 2 emissions through on-site PPAs. That's why many companies use off-site power purchase agreements (or a combination of both on-site and off-site) to meet their emission reduction goals.
4. Participate in Utility Green Tariffs and Utility Green Power Programs
Power purchase agreements can only be made with clean energy projects located in deregulated markets. If you would like to reduce emissions in a regulated market, utility green tariff and green power programs may be an option; check with your utility to see what they may offer. Both types of programs enable you to receive RECs, which you can use to reduce Scope 2 emissions.
Utility Green Tariffs
Green tariff programs allow you to buy renewable electricity from a specific clean energy project through a special utility tariff rate. According to EPA.gov:
Under a green tariff, utilities supply the organization with up to 100 percent renewable power from projects either owned by the utility or contracted with independent power producers in the local grid or utility region. Green tariff programs vary though in the exact mechanism which the utility uses to procure green power on behalf of the organization. Some programs allow customers to choose a "market-based rate"-ie. to peg their electric rate to the wholesale electricity market price. Other programs let the organization engage directly with the renewable generation project, encouraging competitive project selection and ensuring new renewable energy capacity is brought onto the grid. In other programs, the utility facilitates the organization's green power purchase through a type of power purchase agreement, called a "sleeved PPA," where the utility essentially passes a physical power purchase agreement that it has signed with a renewable energy project along to the consumer.
Utility Green Power Programs
With a green power product, you'll pay a premium price for electricity from your utility company. It appears as an extra line item on your electric bill to support an "off-the-shelf" renewable electricity product, which often is a mix of renewable energy resources. These are often shorter-term commitments and the renewable energy resource mix used to generate the green power can be intermittently changed by the utility.
How to Reduce Scope 3 Emissions
Scope 3 emissions are the emissions that your company is responsible for outside of its own operations-from the goods you purchase from suppliers to the disposal of the products you sell. According to the GHG Protocol, the majority of total corporate emissions come from Scope 3 sources.
Collecting data on Scope 3 emissions is one of the biggest barriers to being able to set and achieve emission reduction goals. To help corporations measure Scope 3 emissions, the GHG Protocol has developed the Scope 3 Standard, which enables users to account for emissions from 15 categories of Scope 3 activities, both upstream and downstream of their operations.The Scope 3 framework also supports strategies to partner with suppliers and customers to address climate impacts throughout the value chain.
Recently several corporations have made headlines for their efforts to reduce Scope 3 emissions. On April 11, 2019, Apple announced a near doubling of its suppliers that have committed to using 100 percent renewable energy for their work connected to the tech giant, bringing the total to 44 companies. Apple said it has expanded outreach and education for its suppliers on procuring renewables and uses a "Clean Energy Portal" designed to help them find solar and wind resources.
Walmart is another example of a company taking great strides to reduce Scope 3 emissions. In 2017 the company launched an initiative called Project Gigaton, which challenged its suppliers to cut more than 1 billion metric tons of greenhouse gas emissions out of their operations by 2030. On April 10, 2019, Walmart announced that participating suppliers have conserved a whopping 93 million metric tons of emissions through a combination of energy efficiency, renewable energy and sustainable packaging projects since the initiative's launch.
Even if you're not yet ready to tackle Scope 3 emissions, it's prudent to start working on an accounting approach to estimate the overall Scope 3 footprint of your value chain. Given that Scope 3 emissions represent the majority of corporate emissions, they're going to come under increasing scrutiny from investors and other stakeholders.
Ready to Get Started?
Here are some additional resources that will help you tackle Scope 1, 2 and 3 emissions.
Scope 1 Emissions & Reporting Standards:
- Greenhouse Gas Protocol: GHG Emission Calculation Tools
- EPA Center for Corporate Climate Leadership: Direct Fugitive Emissions from Refrigeration, Air Conditioning, Fire Suppression, and Industrial Gases
- Sustainability.gov: Federal Greenhouse Gas Accounting and Reporting Guidance
Scope 2 Emissions:
- EPA.gov: Offsets and RECs: What's the Difference?
- Greenhouse Gas Protocol: Scope 2 Guidance
- LevelTen Energy: Renewable Energy Procurement Platform
Scope 3 Emissions:
- Greenhouse Gas Protocol: Corporate Value Chain (Scope 3) Standard
- GreenBiz: How General Mills, McDonalds and Kering are setting credible, courageous sustainability goals
- Greentech Media: Apple Greens Supply Chain With More 100% Renewables Commitments
Still reading? Let's chat. LevelTen Energy can help answer your questions, or at least point you in the right direction.
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