Carbon accounting of green gas certificates in limbo – what’s happening?
The role of tradable certificates for ‘green gas’ procurement was pulled into focus following the publication of the GHG Protocol’s ‘Land Sector and Removals Guidance’ in September last year. This underlined that green gas certificates cannot be used to reduce scope 1 emissions in corporate carbon accounting, having been allowed up until 2020. This was a shock for organisations whose net zero plan or business is reliant on green gas certificates. Some are lobbying for the old rules to be reinstated and a review is underway. Directly supplied biomethane e.g. via a dedicated pipeline or in compressed form, is not affected, the accounting rules are clear for that.
What’s the background to the problem?
GHG Protocol Scope 2 Guidance first published in 2015 specifically allowed companies to use green gas certificates as a means to count gas consumption delivered through shared pipelines as zero in their scope 1 inventory. More precisely, Annex B said that companies can do so if they have the ‘contractual instruments’ specifying the gas supply as ‘biogas’ or ‘biogenic’ (such as biomethane from an Anaerobic Digestion plant), which also meet the Scope 2 Quality Criteria listed in the guidance. In short, it treated biomethane certificates in a similar fashion to the market-based part of dual reporting of electricity emissions, where both location-based (grid average) and market-based (tariff specific) emissions are reported.
In 2020, the Scope 2 Guidance was updated to remove this specific reference in anticipation of the creation of more detailed Land Sector and Removals guidance. Then in September 2022, the Land Sector guidance was published in draft form for consultation. Part 2 Appendix B of this specifically prohibits the use of biomethane certificates: “Biomethane certificates or credits cannot be used to adjust scope 1 emissions resulting from the combustion of gas (in company owned/controlled sources) delivered via a common carrier pipeline”. Although the guidance is in draft form, it is causing uncertainty in the biomethane market.
Why was the guidance changed?
The 2015 guidance covering biomethane was an awkward mix of scope 1 and scope 2 accounting concepts. Scope 1 is defined as direct emissions from sources owned or operated by a company i.e. from what they burn or otherwise release to atmosphere, such as refrigerants. If a company burns gas from a predominantly natural gas network, it is releasing molecules of fossil carbon. A contractual instrument doesn’t change that physical fact. So to allow biomethane certificates to claim zero emissions from natural gas consumption contradicts the definition of scope 1.
The previous guidance also undermines the integrity of GHG emission reporting as a whole. Unless the emissions factor used by everyone else on the network is increased to adjust for a company’s zero emission claim (the so called ‘residual emissions factor’, to draw a parallel with the dual reporting used for renewable electricity) then there will be double counting of the avoided emissions provided by the biomethane. While the market is small, this is a minor problem. But as the biomethane market grows it becomes a more material issue.
Furthermore, not all biomethane is equal. The overall climate and nature impacts of biomethane production varies depending on the input feedstocks, with organic waste/residues being best and intensively-farmed energy crops competing with food production being the worst. Often a blend of feedstocks is used within the same facility, which may change over time. This should be captured in a company’s scope 3 reporting. However not all companies report scope 3 emissions and those that do often struggle to obtain robust emission factors for their specific biomethane supply chain. The Land Sector and Removals Guidance currently being developed is meant to provide robust methodologies for these calculations.
Finally, there is the concept of additionality, which similarly has been a long running problem with scope 2 GHG reporting for renewable electricity, undermining confidence in that market and leading to accusations of greenwashing. If the biomethane facility is financed based on revenue streams from production subsidy like the UK Green Gas Support Scheme, what difference has a corporate purchase made to the energy mix? Is it correct to claim zero emissions from natural gas combustion off the back of certificate purchases? This and other issues have prompted the GHG protocol to undertake 'a process to determine the need and scope for additional guidance' for the market-based accounting approach in general. This process has now begun (See 'What's going to happen next?' below).
Why has the change caused such a stir?
Actors across the biomethane value chain are impacted by the current uncertainty on how green gas certificates are represented in corporate GHG inventories. The uncertainty has come at a time just when the market for biomethane was set to take off.
On the supply side, producers of biomethane stand to lose revenue from selling biomethane certificates to companies that purchase them specifically seeking to reduce their reported GHG emissions. On the demand side, companies lose an attractive decarbonisation option. They are likely to have to look to potentially more expensive and disruptive options to meet their net zero targets, e.g. electrification of thermal processes. Traders stand to lose an environmental commodity to trade. Finally, policy makers seeking to increase the share of biomethane for energy security and climate reasons might see the growth of biomethane markets slow and thus face calls for more subsidies to achieve their aims.
What does the SBTi and CDP say?
Many companies’ GHG inventories are used to report on progress to net zero targets or to feed into peer ranking initiatives, such as CDP. So, the guidance of the Science Based Targets Initiative (SBTi), who validate the targets of many of the world’s largest companies, and CDP matter.
The SBTi refer to the GHG Protocol for carbon accounting questions and appear to be enforcing the rule disallowing the use of green gas certificates to reduce scope 1 emissions.
CDP are sitting on the fence, with their current Technical Guidance for Scope 2 stating that companies “are encouraged to make their own judgement of the appropriateness of using green gas certificates in their emissions accounting” but that they should be “transparent about their use of green gas certificates”.
What’s going to happen next?
In November 2022 the GHG Protocol initiated the first major review and update of the Corporate Standard since its creation 20 years ago. The resolution of the green gas certificate accounting issue is bound to this much wider process, which is due to take roughly 2 years to complete. Provided that there is no slippage in announced timelines, we can expect to see consultation papers with the update proposals in Q1 2024, leading to finalised updated guidance in Q1 2025.
The GHG Protocol has published many of the responses to a global survey that was the first step of the update process. The survey took place between November 2022 and March 2023. How they will balance the many different viewpoints, while ensuring integrity around the treatment of biomethane, remains to be seen.
The problem of double counting could be easily fixed e.g. via the publishing of residual mix emission factors for gas networks in a similar fashion to market-based reporting of renewable electricity. The issue of additionality is more complicated to unravel.
While discussions continue, or if the market based approach is eventually allowed for biomethane in line with the current guidance for Scope 2 (i.e. without additionality featuring amongst the Quality Criteria), other factors like reputational risks and security of supply could steer biomethane consumers towards procurement routes that have more demonstrable additionality. An example of this may be long-term Gas Purchase Agreements that unlocks finance for new projects rather than the purchase of certificates from facilities already made viable by subsidies or quota schemes.
It’s worth noting that hydrogen poses similar carbon accounting challenges – i.e. many different possible supply chains to produce the same molecule, which may be injected into natural gas pipelines for distribution. The review of the GHG Protocol’s scope 2 market-based approach is overdue, and biomethane is just one part of it.
For further support or any other queries on net zero strategy please contact Tim Crozier-Cole, Head of Aim for Zero, Corporates.