The Greenhouse Gas Protocol

The Greenhouse Gas Protocol (Revised edition) or GHG Protocol Corporate Standard provides standards and guidance for companies and other types of organizations¹ preparing a GHG emissions inventory.

It covers the accounting and reporting of the six greenhouse gases covered by the Kyoto Protocol—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6).

The standard and guidance were designed with the following objectives in mind: The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol

• To help companies prepare a GHG inventory that represents a true and fair account of their emissions, through the use of standardized approaches and principles
• To simplify and reduce the costs of compiling a GHG inventory
• To provide business with information that can be used to build an effective strategy to manage and reduce GHG emissions
• To provide information that facilitates participation in voluntary and mandatory GHG programs
• To increase consistency and transparency in GHG accounting and reporting among various companies and GHG programs.

Both business and other stakeholders benefit from converging on a common standard. For business, it reduces costs if their GHG inventory is capable of meeting different internal and external information requirements. For others, it improves the consistency, transparency, and understandability of reported information, making it easier to track and compare progress over time.

Standard 1. GHG Accounting and Reporting Principles

As with financial accounting and reporting, generally accepted GHG accounting principles are intended to underpin and guide GHG accounting and reporting to ensure that the reported information represents a faithful, true, and fair account of a company’s GHG emissions. The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol

GHG accounting and reporting practices are evolving and are new to many businesses; however, the principles listed below are derived in part from generally accepted financial accounting and reporting principles. They also reflect the outcome of a collaborative process involving stakeholders from a wide range of technical, environmental, and accounting disciplines.

GHG accounting and reporting shall be based on the following principles:

• RELEVANCE – Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users – both internal and external to the company.
• COMPLETENESS – Account for and report on all GHG emission sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions.
• CONSISTENCY – Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.
• TRANSPARENCY – Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.
• ACCURACY – Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.

Guidance 1. GHG Accounting and Reporting Principles

These principles are intended to underpin all aspects of GHG accounting and reporting. Their application will ensure that the GHG inventory constitutes a true and fair representation of the company’s GHG emissions.

Their primary function is to guide the implementation of the GHG Protocol Corporate Standard, particularly when the application of the standards to specific issues or situations is ambiguous.

Relevance

For an organization’s GHG report to be relevant means that it contains the information that users—both internal and external to the company—need for their decision making. An important aspect of relevance is the selection of an appropriate inventory boundary that reflects the substance and economic reality of the company’s business relationships, not merely its legal form. The choice of the inventory boundary is dependent on the characteristics of the company, the intended purpose of information, and the needs of the users. When choosing the inventory boundary, a number of factors should be considered, such as:

• Organizational structures: control (operational and financial), ownership, legal agreements, joint ventures, etc.
• Operational boundaries: on-site and off-site activities, processes, services, and impacts
• Business context: nature of activities, geographic locations, industry sector(s), purposes of information, and users of information

More information on defining an appropriate inventory boundary is provided in guidance 2 Business Goals and Inventory Design, 3 Setting Organizational Boundaries, and 4 Setting Operational Boundaries.

Completeness

All relevant emissions sources within the chosen inventory boundary need to be accounted for so that a comprehensive and meaningful inventory is compiled.

In practice, a lack of data or the cost of gathering data may be a limiting factor. Sometimes it is tempting to define a minimum emissions accounting threshold (often referred to as a materiality threshold) stating that a source not exceeding a certain size can be omitted from the inventory. Technically, such a threshold is simply a predefined and accepted negative bias in estimates (i.e., an underestimate).

Although it appears useful in theory, the practical implementation of such a threshold is not compatible with the completeness principle of the GHG Protocol Corporate Standard. In order to utilize a materiality specification, the emissions from a particular source or activity would have to be quantified to ensure they were under the threshold. However, once emissions are quantified, most of the benefit of having a threshold is lost.

A threshold is often used to determine whether an error or omission is a material discrepancy or not. This is not the same as a de minimis for defining a complete inventory. Instead companies need to make a good faith effort to provide a complete, accurate, and consistent accounting of their GHG emissions.

For cases where emissions have not been estimated, or estimated at an insufficient level of quality, it is important that this is transparently documented and justified. Verifiers can determine the potential impact and relevance of the exclusion, or lack of quality, on the overall inventory report.

More information on completeness is provided in Guidance 7 Managing Inventory Quality and Guidance 10 Verification of GHG Emissions.

Consistency

Users of GHG information will want to track and compare GHG emissions information over time in order to identify trends and to assess the performance of the reporting company. The consistent application of accounting approaches, inventory boundary, and calculation methodologies is essential to producing comparable GHG emissions data over time.

The GHG information for all operations within an organization’s inventory boundary needs to be compiled in a manner that ensures that the aggregate information is internally consistent and comparable over time. If there are changes in the inventory boundary, methods, data or any other factors affecting emission estimates, they need to be transparently documented and justified.

More information on consistency is provided in Standard 5 Tracking Emissions Over Time and Standard 9 Reporting GHG Emissions.

Volkswagen: Maintaining completeness over time

Volkswagen is a global auto manufacturer and the largest automaker in Europe. While working on its GHG inventory, Volkswagen realized that the structure of its emission sources had undergone considerable changes over the last seven years. Emissions from production processes, which were considered to be irrelevant at a corporate level in 1996, today constitute almost 20 percent of aggregated GHG emissions at the relevant plant-sites. Examples of growing emissions sources are new sites for engine testing or the investment into magnesium die-casting equipment at certain production sites. This example shows that emissions sources have to be regularly re-assessed to maintain a complete inventory over time.

Transparency

Transparency relates to the degree to which information on the processes, procedures, assumptions, and limitations of the GHG inventory are disclosed in a clear, factual, neutral, and understandable manner based on clear documentation and archives (i.e., an audit trail).

Information needs to be recorded, compiled, and analyzed in a way that enables internal reviewers and external verifiers to attest to its credibility. Specific exclusions or inclusions need to be clearly identified and justified, assumptions disclosed, and appropriate references provided for the methodologies applied and the data sources used.

The information should be sufficient to enable a third party to derive the same results if provided with the same source data. A “transparent” report will provide a clear understanding of the issues in the context of the reporting company and a meaningful assessment of performance.

An independent external verification is a good way of ensuring transparency and determining that an appropriate audit trail has been established and documentation provided.

More information on transparency is provided in Standard 9 Reporting GHG Emissions and Guidance 10 Verification of GHG Emissions.

Accuracy

Data should be sufficiently precise to enable intended users to make decisions with reasonable assurance that the reported information is credible. GHG measurements, estimates, or calculations should be systemically neither over nor under the actual emissions value, as far as can be judged, and that uncertainties are reduced as far as practicable. The quantification process should be conducted in a manner that minimizes uncertainty.

Reporting on measures taken to ensure accuracy in the accounting of emissions can help promote credibility while enhancing transparency.

More information on accuracy is provided in Guidance 7 Managing Inventory Quality.

The Body Shop: Solving the trade-off between accuracy and completeness

As an international, values-driven retailer of skin, hair, body care, and make-up products, the Body Shop operates nearly 2,000 locations, serving 51 countries in 29 languages. Achieving both accuracy and completeness in the GHG inventory process for such a large, disaggregated organization, is a challenge. Unavailable data and costly measurement processes present significant obstacles to improving emission data accuracy. For example, it is difficult to disaggregate energy consumption information for shops located within shopping centers. Estimates for these shops are often inaccurate, but excluding sources due to inaccuracy creates an incomplete inventory. The Body Shop, with help from the Business Leaders Initiative on Climate Change (BLICC) program, approached this problem with a two-tiered solution. First, stores were encouraged to actively pursue direct consumption data through disaggregated data or direct monitoring. Second, if unable to obtain direct consumption data, stores were given standardized guidelines for estimating emissions based on factors such as square footage, equipment type, and usage hours. This system replaced the prior fragmentary approach, provided greater accuracy, and provided a more complete account of emissions by including facilities that previously were unable to calculate emissions. If such limitations in the measurement processes are made transparent, users of the information will understand the basis of the data and the trade-off that has taken place.

Guidance 2 Business Goals and Inventory Design

Improving your understanding of your company’s GHG emissions by compiling a GHG inventory makes good business sense. Companies frequently cite the following five business goals as reasons for compiling a GHG inventory:

• Managing GHG risks and identifying reduction opportunities
• Public reporting and participation in voluntary GHG programs
• Participating in mandatory reporting programs
• Participating in GHG markets
• Recognition for early voluntary action

Companies generally want their GHG inventory to be capable of serving multiple goals. It therefore makes sense to design the process from the outset to provide information for a variety of different users and uses—both current and future.

The GHG Protocol Corporate Standard has been designed as a comprehensive GHG accounting and reporting framework to provide the information building blocks capable of serving most business goals (see Box 1 below).

Thus the inventory data collected according to the GHG Protocol Corporate Standard can be aggregated and disaggregated for various organizational and operational boundaries and for different business geographic scales (state, country, Annex 1 countries, non-Annex 1 countries, facility, business unit, company, etc.).

B O X 1. Business goals served by GHG inventories

Managing GHG risks and identifying reduction opportunities Identifying risks associated with GHG constraints in the future Identifying cost effective reduction opportunities Setting GHG targets, measuring and reporting progress Public reporting and participation in voluntary GHG programs Voluntary stakeholder reporting of GHG emissions and progress towards GHG targets Reporting to government and NGO reporting programs, including GHG registries Eco-labelling and GHG certification Participating in mandatory reporting programs Participating in government reporting programs at the national, regional, or local level Participating in GHG markets Supporting internal GHG trading programs Participating in external cap and trade allowance trading programs Calculating carbon/GHG taxes Recognition for early voluntary action Providing information to support “baseline protection” and/or credit for early action

Appendix C provides an overview of various GHG programs—many of which are based on the GHG Protocol Corporate Standard. The guidance sections of Standard 3 Setting Organization Boundaries and Standard 4 Setting Operational Boundaries provide additional information on how to design an inventory for different goals and uses.

Managing GHG risks and identifying reduction opportunities

Compiling a comprehensive GHG inventory improves a company’s understanding of its emissions profile and any potential GHG liability or “exposure.” A company’s GHG exposure is increasingly becoming a management issue in light of heightened scrutiny by the insurance industry, shareholders, and the emergence of environmental regulations/policies designed to reduce GHG emissions.

In the context of future GHG regulations, significant GHG emissions in a company’s value chain may result in increased costs (upstream) or reduced sales (downstream), even if the company itself is not directly subject to regulations. Thus investors may view significant indirect emissions upstream or downstream of a company’s operations as potential liabilities that need to be managed and reduced. A limited focus on direct emissions from a company’s own operations may miss major GHG risks and opportunities, while leading to a misinterpretation of the company’s actual GHG exposure.

On a more positive note, what gets measured gets managed. Accounting for emissions can help identify the most effective reduction opportunities. This can drive increased materials and energy efficiency as well as the development of new products and services that reduce the GHG impacts of customers or suppliers.

This in turn can reduce production costs and help differentiate the company in an increasingly environmentally conscious marketplace. Conducting a rigorous GHG inventory is also a prerequisite for setting an internal or public GHG target and for subsequently measuring and reporting progress.

IBM: The role of renewable energy in reducing GHG emissions

Indirect emissions associated with the consumption of purchased electricity are a required element of any company’s accounting and reporting under the GHG Protocol Corporate Standard. Because purchased electricity is a major source of GHG emissions for companies, it presents a significant reduction opportunity. IBM, a major information technology company and a member of the WRI’s Green Power Market Development Group, has systematically accounted for these indirect emissions and thus identified the significant potential to reduce them. The company has implemented a variety of strategies that would reduce either their demand for purchased energy or the GHG intensity of that purchased energy. One strategy has been to pursue the renewable energy market to reduce the GHG intensity of its purchased electricity. IBM succeeded in reducing its GHG emissions at its facility in Austin, Texas, even as energy use stayed relatively constant, through a contract for renewable electricity with the local utility company, Austin Energy. Starting in 2001, this five-year contract is for 5.25 million kWhs of wind-power per year. This zero emission power lowered the facility’s inventory by more than 4,100 tonnes of CO2 compared to the previous year and represents nearly 5% of the facility’s total electricity consumption. Company-wide, IBM’s 2002 total renewable energy procurement was 66.2 million kWh, which represented 1.3% of its electricity consumption worldwide and 31,550 tonnes of CO2 compared to the previous year. Worldwide, IBM purchased a variety of sources of renewable energy including wind, biomass and solar. By accounting for these indirect emissions and looking for associated reduction opportunities, IBM has successfully reduced an important source of its overall GHG emissions.

Public reporting and participation in voluntary GHG programs

As concerns over climate change grow, NGOs, investors, and other stakeholders are increasingly calling for greater corporate disclosure of GHG information. They are interested in the actions companies are taking and in how the companies are positioned relative to their competitors in the face of emerging regulations.

In response, a growing number of companies are preparing stakeholder reports containing information on GHG emissions. These may be stand-alone reports on GHG emissions or broader environmental or sustainability reports.

For example, companies preparing sustainability reports using the Global Reporting Initiative guidelines should include information on GHG emissions in accordance with the GHG Protocol Corporate Standard (GRI, 2002).

Public reporting can also strengthen relationships with other stakeholders. For instance, companies can improve their standing with customers and with the public by being recognized for participating in voluntary GHG programs.

Some countries and states have established GHG registries where companies can report GHG emissions in a public database. Registries may be administered by governments (e.g., U.S. Department of Energy 1605b Voluntary Reporting Program), NGOs (e.g., California Climate Action Registry), or industry groups (e.g., World Economic Forum Global GHG Registry). Many GHG programs also provide help to companies setting voluntary GHG targets.

Most voluntary GHG programs permit or require the reporting of direct emissions from operations (including all six GHGs), as well as indirect GHG emissions from purchased electricity. A GHG inventory prepared in accordance with the GHG Protocol Corporate Standard will usually be compatible with most requirements (Appendix C provides an overview of the reporting requirements of some GHG programs).

However, since the accounting guidelines of many voluntary programs are periodically updated, companies planning to participate are advised to contact the program administrator to check the current requirements.

Participating in mandatory reporting programs

Some governments require GHG emitters to report their emissions annually. These typically focus on direct emissions from operations at operated or controlled facilities in specific geographic jurisdictions.

In Europe, facilities falling under the requirements of the Integrated Pollution Prevention and Control (IPPC) Directive must report emissions exceeding a specified threshold for each of the six GHGs.

The reported emissions are included in a European Pollutant Emissions Register (EPER), a publicly accessible internet-based database that permits comparisons of emissions from individual facilities or industrial sectors in different countries (EC-DGE, 2000). In Ontario, Ontario Regulation 127 requires the reporting of GHG emissions (Ontario MOE, 2001).

Participating in GHG markets

Market-based approaches to reducing GHG emissions are emerging in some parts of the world. In most places, they take the form of emissions trading programs, although there are a number of other approaches adopted by countries, such as the taxation approach used in Norway. Trading programs can be implemented on a mandatory (e.g., the forthcoming EU ETS) or voluntary basis (e.g., CCX).

Although trading programs, which determine compliance by comparing emissions with an emissions reduction target or cap, typically require accounting only for direct emissions, there are exceptions. The UK ETS, for example, requires direct entry participants to account for GHG emissions from the generation of purchased electricity (DEFRA, 2003).

The CCX allows its members the option of counting indirect emissions associated with electricity purchases as a supplemental reduction commitment. Other types of indirect emissions can be more difficult to verify and may present challenges in terms of avoiding double counting. To facilitate independent verification, emissions trading may require participating companies to establish an audit trail for GHG information (see chapter 10).

GHG trading programs are likely to impose additional layers of accounting specificity relating to which approach is used for setting organizational boundaries; which GHGs and sources are addressed; how base years are established; the type of calculation methodology used; the choice of emission factors; and the monitoring and verification approaches employed.

The broad participation and best practices incorporated into the GHG Protocol Corporate Standard are likely to inform the accounting requirements of emerging programs, and have indeed done so in the past.

Recognition for early voluntary action

A credible inventory may help ensure that a corporation’s early, voluntary emissions reductions are recognized in future regulatory programs. To illustrate, suppose that in 2000 a company started reducing its GHG emissions by shifting its on-site powerhouse boiler fuel from coal to landfill gas.

If a mandatory GHG reduction program is later established in 2005 and it sets 2003 as the base against which reductions are to be measured, the program might not allow the emissions reductions achieved by the green power project prior to 2003 to count toward its target.

However, if a company’s voluntary emissions reductions have been accounted for and registered, they are more likely to be recognized and taken into account when regulations requiring reductions go into effect. For instance, the state of California has stated that it will use its best efforts to ensure that organizations that register certified emission results with the California Climate Action Registry receive appropriate consideration under any future international, federal, or state regulatory program relating to GHG emissions.

Tata Steel: Development of institutional capacity in GHG accounting and reporting

For Tata Steel, Asia’s first and India’s largest integrated private sector steel company, reducing its GHG emissions through energy efficiency is a key element of its primary business goal: the acceptability of its product in international markets. Each year, in pursuit of this goal, the company launches several energy efficiency projects and introduces less-GHG-intensive processes. The company is also actively pursuing GHG trading markets as a means of further improving its GHG performance. To succeed in these efforts and be eligible for emerging trading schemes, Tata Steel must have an accurate GHG inventory that includes all processes and activities, allows for meaningful benchmarking, measures improvements, and promotes credible reporting. Tata Steel has developed the capacity to measure its progress in reducing GHG emissions. Tata Steel’s managers have access to on-line information on energy usage, material usage, waste and byproduct generation, and other material streams. Using this data and the GHG Protocol calculation tools, Tata Steel generates two key long-term, strategic performance indicators: specific energy consumption (Giga calorie / tonne of crude steel) and GHG intensity (tonne of CO2equivalent / tonne of crude steel). These indicators are key sustainability metrics in the steel sector worldwide, and help ensure market acceptability and competitiveness. Since the company adopted the GHG Protocol Corporate Standard, tracking performance has become more structured and streamlined. This system allows Tata Steel quick and easy access to its GHG inventory and helps the company maximize process and material flow efficiencies.

Ford Motor Company: Experiences using the GHG Protocol Corporate Standard

When Ford Motor Company, a global automaker, embarked on an effort to understand and reduce its GHG impacts, it wanted to track emissions with enough accuracy and detail to manage them effectively. An internal cross-functional GHG inventory team was formed to accomplish this goal. Although the company was already reporting basic energy and carbon dioxide data at the corporate level, a more detailed understanding of these emissions was essential to set and measure progress against performance targets and evaluate potential participation in external trading schemes. For several weeks, the team worked on creating a more comprehensive inventory for stationary combustion sources, and quickly found a pattern emerging. All too often team members left meetings with as many questions as answers, and the same questions kept coming up from one week to the next. How should they draw boundaries? How do they account for acquisitions and divestitures? What emission factors should be used? And perhaps most importantly, how could their methodology be deemed credible with stakeholders? Although the team had no shortage of opinions, there also seemed to be no clearly right or wrong answers. The GHG Protocol Corporate Standard helped answer many of these questions and the Ford Motor Company now has a more robust GHG inventory that can be continually improved to fulfill its rapidly emerging GHG management needs. Since adopting the GHG Protocol Corporate Standard, Ford has expanded the coverage of its public reporting to all of its brands globally; it now includes direct emissions from sources it owns or controls and indirect emissions resulting from the generation of purchased electricity, heat, or steam. In addition, Ford is a founding member of the Chicago Climate Exchange, which uses some of the GHG Protocol calculation tools for emissions reporting purposes.

Standard 3 Setting Organizational Boundaries

Business operations vary in their legal and organizational structures; they include wholly owned operations, incorporated and non-incorporated joint ventures, subsidiaries, and others. For the purposes of financial accounting, they are treated according to established rules that depend on the structure of the organization and the relationships among the parties involved. In setting organizational boundaries, a company selects an approach for consolidating GHG emissions and then consistently applies the selected approach to define those businesses and operations that constitute the company for the purpose of accounting and reporting GHG emissions.

For corporate reporting, two distinct approaches can be used to consolidate GHG emissions: the equity share and the control approaches. Companies shall account for and report their consolidated GHG data according to either the equity share or control approach as presented below.

If the reporting company wholly owns all its operations², its organizational boundary will be the same whichever approach is used.

For companies with joint operations, the organizational boundary and the resulting emissions may differ depending on the approach used. In both wholly owned and joint operations, the choice of approach may change how emissions are categorized when operational boundaries are set (see Standard 4 Tracking emissions over time).

Equity share approach

Under the equity share approach, a company accounts for GHG emissions from operations according to its share of equity in the operation. The equity share reflects economic interest, which is the extent of rights a company has to the risks and rewards flowing from an operation.

Typically, the share of economic risks and rewards in an operation is aligned with the company’s percentage ownership of that operation, and equity share will normally be the same as the ownership percentage. Where this is not the case, the economic substance of the relationship the company has with the operation always overrides the legal ownership form to ensure that equity share reflects the percentage of economic interest.

The principle of economic substance taking precedent over legal form is consistent with international financial reporting standards. The staff preparing the inventory may therefore need to consult with the company’s accounting or legal staff to ensure that the appropriate equity share percentage is applied for each joint operation (see Table 1 for definitions of financial accounting categories).

Control approach

Under the control approach, a company accounts for 100 percent of the GHG emissions from operations over which it has control. It does not account for GHG emissions from operations in which it owns an interest but has no control. Control can be defined in either financial or operational terms. When using the control approach to consolidate GHG emissions, companies shall choose between either the operational control or financial control criteria.

In most cases, whether an operation is controlled by the company or not does not vary based on whether the financial control or operational control criterion is used. A notable exception is the oil and gas industry, which often has complex ownership / operator-ship structures.

Thus, the choice of control criterion in the oil and gas industry can have substantial consequences for a company’s GHG inventory. In making this choice, companies should take into account how GHG emissions accounting and reporting can best be geared to the requirements of emissions reporting and trading schemes, how it can be aligned with financial and environmental reporting, and which criterion best reflects the company’s actual power of control.

Financial Control. The company has financial control3 over the operation if the former has the ability to direct the financial and operating policies of the latter with a view to gaining economic benefits from its activities. For example, financial control usually exists if the company has the right to the majority of benefits of the operation, however these rights are conveyed. Similarly, a company is considered to financially control an operation if it retains the majority risks and rewards of ownership of the operation’s assets. Under this criterion, the economic substance of the relationship between the company and the operation takes precedence over the legal ownership status, so that the company may have financial control over the operation even if it has less than a 50 percent interest in that operation. In assessing the economic substance of the relationship, the impact of potential voting rights, including both those held by the company and those held by other parties, is also taken into account. This criterion is consistent with international financial accounting standards; therefore, a company has financial control over an operation for GHG accounting purposes if the operation is considered as a group company or subsidiary for the purpose of financial consolidation, i.e., if the operation is fully consolidated in financial accounts. If this criterion is chosen to determine control, emissions from joint ventures where partners have joint financial control are accounted for based on the equity share approach (see table below for definitions of financial accounting categories).

Operational Control. A company has operational control over an operation if the former or one of its subsidiaries (see table Financial accounting categories below) has the full authority to introduce and implement its operating policies at the operation. This criterion is consistent with the current accounting and reporting practice of many companies that report on emissions from facilities, which they operate (i.e., for which they hold the operating license). It is expected that except in very rare circumstances, if the company or one of its subsidiaries is the operator of a facility, it will have the full authority to introduce and implement its operating policies and thus has operational control. Under the operational control approach, a company accounts for 100% of emissions from operations over which it or one of its subsidiaries has operational control. It should be emphasized that having operational control does not mean that a company necessarily has authority to make all decisions concerning an operation. For example, big capital investments will likely require the approval of all the partners that have joint financial control. Operational control does mean that a company has the authority to introduce and implement its operating policies. More information on the relevance and application of the operational control criterion is provided in petroleum industry guidelines for reporting GHG emissions (IPIECA, 2003).

TABLE The Greenhouse Gas Protocol – Financial accounting categories

Accounting category	Financial Accounting Definition	Accounting for GHG Emissions according to GHG Protocol Corporate Standard
		Based on Equity share	Based on Financial control
Group companies / subsidiaries	The parent company has the ability to direct the financial and operating policies of the company with a view to gaining economic benefits from its activities. Normally, this category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has financial control. Group companies/ subsidiaries are fully consolidated, which implies that 100 percent of the subsidiary’s income, expenses, assets, and liabilities are taken into the parent company’s profit and loss account and balance sheet, respectively. Where the parent’s interest does not equal 100 percent, the consolidated profit and loss account and balance sheet shows a deduction for the profits and net assets belonging to minority owners.	Equity share of GHG emissions	100% of GHG emissions
Associated / affiliated companies	The parent company has significant influence over the operating and financial policies of the company, but does not have financial control. Normally, this category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has significant influence, but not financial control. Financial accounting applies the equity share method to associated/ affiliated companies, which recognizes the parent company’s share of the associate’s profits and net assets.	Equity share of GHG emissions	0% of GHG emissions
Non-incorporated joint ventures / partnerships / operations where partners have joint financial control	Joint ventures/partnerships/operations are proportionally consolidated, i.e., each partner accounts for their proportionate interest of the joint venture’s income, expenses, assets, and liabilities.	Equity share of GHG emissions	Equity share of GHG emissions
Fixed asset investments	The parent company has neither significant influence nor financial control. This category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has neither significant influence nor financial control. Financial accounting applies the cost/ dividend method to fixed asset investments. This implies that only dividends received are recognized as income and the investment is carried at cost.	0.00%	0.00%
Franchises	Franchises are separate legal entities. In most cases, the franchiser will not have equity rights or control over the franchise. Therefore, franchises should not be included in consolidation of GHG emissions data. However, if the franchiser does have equity rights or operational/ financial control, then the same rules for consolidation under the equity or control approaches apply.	Equity share of GHG emissions	100% of GHG emissions

NOTE: This table is based on a comparison of UK, US, Netherlands and International Financial Reporting Standards (KPMG, 2000).

Sometimes a company can have joint financial control over an operation, but not operational control. In such cases, the company would need to look at the contractual arrangements to determine whether any one of the partners has the authority to introduce and implement its operating policies at the operation and thus has the responsibility to report emissions under operational control.

If the operation itself will introduce and implement its own operating policies, the partners with joint financial control over the operation will not report any emissions under operational control.

Consolidation at multiple levels

The consolidation of GHG emissions data will only result in consistent data if all levels of the organization follow the same consolidation policy. In the first step, the management of the parent company has to decide on a consolidation approach (i.e., either the equity share or the financial or operational control approach). Once a corporate consolidation policy has been selected, it shall be applied to all levels of the organization.

State-ownership

The rules provided in this chapter shall also be applied to account for GHG emissions from industry joint operations that involve state ownership or a mix of private/ state ownership.

BP: Reporting on the basis of equity share

BP reports GHG emissions on an equity share basis, including those operations where BP has an interest, but where BP is not the operator. In determining the extent of the equity share reporting boundary BP seeks to achieve close alignment with financial accounting procedures. BP’s equity share boundary includes all operations undertaken by BP and its subsidiaries, joint ventures and associated undertakings as determined by their treatment in the financial accounts. Fixed asset investments, i.e., where BP has limited influence, are not included. GHG emissions from facilities in which BP has an equity share are estimated according to the requirements of the BP Group Reporting Guidelines for Environmental Performance (BP 2000). In those facilities where BP has an equity share but is not the operator, GHG emissions data may be obtained directly from the operating company using a methodology consistent with the BP Guidelines, or is calculated by BP using activity data provided by the operator. BP reports its equity share GHG emissions every year. Since 2000, independent external auditors have expressed the opinion that the reported total has been found to be free from material misstatement when audited against the BP Guidelines.

Guidance 3 Setting Organizational Boundaries

When planning the consolidation of GHG data, it is important to distinguish between GHG accounting and GHG reporting. GHG accounting concerns the recognition and consolidation of GHG emissions from operations in which a parent company holds an interest (either control or equity) and linking the data to specific operations, sites, geographic locations, business processes, and owners. GHG reporting, on the other hand, concerns the presentation of GHG data in formats tailored to the needs of various reporting uses and users. The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol

Most companies have several goals for GHG reporting, e.g., official government reporting requirements, emissions trading programs, or public reporting (see Guidance 2 Business Goals and Reporting Principles). In developing a GHG accounting system, a fundamental consideration is to ensure that the system is capable of meeting a range of reporting requirements. Ensuring that data are collected and recorded at a sufficiently disaggregated level, and capable of being consolidated in various forms, will provide companies with maximum flexibility to meet a range of reporting requirements. The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol

Double counting

When two or more companies hold interests in the same joint operation and use different consolidation approaches (e.g., Company A follows the equity share approach while Company B uses the financial control approach), emissions from that joint operation could be double counted. This may not matter for voluntary corporate public reporting as long as there is adequate disclosure from the company on its consolidation approach. However, double counting of emissions needs to be avoided in trading schemes and certain mandatory government reporting programs.

Reporting goals and level of consolidation

Reporting requirements for GHG data exist at various levels, from a specific local facility level to a more aggregated corporate level. Examples of drivers for various levels of reporting include:

• Official government reporting programs or certain emissions trading programs may require GHG data to be reported at a facility level. In these cases, consolidation of GHG data at a corporate level is not relevant
• Government reporting and trading programs may require that data be consolidated within certain geographic and operational boundaries (e.g., the U.K. Emissions Trading Scheme)
• To demonstrate the company’s account to wider stakeholders, companies may engage in voluntary public reporting, consolidating GHG data at a corporate level in order to show the GHG emissions of their entire business activities.

Contracts that cover GHG emissions

To clarify ownership (rights) and responsibility (obligations) issues, companies involved in joint operations may draw up contracts that specify how the ownership of emissions or the responsibility for managing emissions and associated risk is distributed between the parties. The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol The Greenhouse Gas Protocol

Where such arrangements exist, companies may optionally provide a description of the contractual arrangement and include information on allocation of CO2 related risks and obligations (see Standard 9 Reporting GHG Emissions).

Using the equity share or control approach

Different inventory reporting goals may require different data sets. Thus companies may need to account for their GHG emissions using both the equity share and the control approaches. The GHG Protocol Corporate Standard makes no recommendation as to whether voluntary public GHG emissions reporting should be based on the equity share or any of the two control approaches, but encourages companies to account for their emissions applying the equity share and a control approach separately.

Companies need to decide on the approach best suited to their business activities and GHG accounting and reporting requirements. Examples of how these may drive the choice of approach include the following:

• Reflection of commercial reality. It can be argued that a company that derives an economic profit from a certain activity should take ownership for any GHG emissions generated by the activity. This is achieved by using the equity share approach, since this approach assigns ownership for GHG emissions on the basis of economic interest in a business activity. The control approaches do not always reflect the full GHG emissions portfolio of a company’s business activities, but have the advantage that a company takes full ownership of all GHG emissions that it can directly influence and reduce.
• Government reporting and emissions trading programs. Government regulatory programs will always need to monitor and enforce compliance. Since compliance responsibility generally falls to the operator (not equity holders or the group company that has financial control), governments will usually require reporting on the basis of operational control, either through a facility level-based system or involving the consolidation of data within certain geographical boundaries (e.g. the EU ETS will allocate emission permits to the operators of certain installations).
• Liability and risk management. While reporting and compliance with regulations will most likely continue to be based directly on operational control, the ultimate financial liability will often rest with the group company that holds an equity share in the operation or has financial control over it. Hence, for assessing risk, GHG reporting on the basis of the equity share and financial control approaches provides a more complete picture. The equity share approach is likely to result in the most comprehensive coverage of liability and risks. In the future, companies might incur liabilities for GHG emissions produced by joint operations in which they have an interest, but over which they do not have financial control. For example, a company that is an equity shareholder in an operation but has no financial control over it might face demands by the companies with a controlling share to cover its requisite share of GHG compliance costs.
• Alignment with financial accounting. Future financial accounting standards may treat GHG emissions as liabilities and emissions allowances / credits as assets. To assess the assets and liabilities a company creates by its joint operations, the same consolidation rules that are used in financial accounting should be applied in GHG accounting. The equity share and financial control approaches result in closer alignment between GHG accounting and financial accounting.
• Management information and performance tracking. For the purpose of performance tracking, the control approaches seem to be more appropriate since managers can only be held accountable for activities under their control.
• Cost of administration and data access. The equity share approach can result in higher administrative costs than the control approach, since it can be difficult and time consuming to collect GHG emissions data from joint operations not under the control of the reporting company. Companies are likely to have better access to operational data and therefore greater ability to ensure that it meets minimum quality standards when reporting on the basis of control.
• Completeness of reporting. Companies might find it difficult to demonstrate completeness of reporting when the operational control criterion is adopted, since there are unlikely to be any matching records or lists of financial assets to verify the operations that are included in the organizational boundary.

Royal Dutch/Shell: Reporting on the basis of operational control

In the oil and gas industry, ownership and control structures are often complex. A group may own less than 50 percent of a venture’s equity capital but have operational control over the venture. On the other hand, in some situations, a group may hold a majority interest in a venture without being able to exert operational control, for example, when a minority partner has a veto vote at the board level. Because of these complex ownership and control structures, Royal Dutch/Shell, a global group of energy and petrochemical companies, has chosen to report its GHG emissions on the basis of operational control. By reporting 100 percent of GHG emissions from all ventures under its operational control, irrespective of its share in the ventures’ equity capital, Royal Dutch/Shell can ensure that GHG emissions reporting is in line with its operational policy including its Health, Safety and Environmental Performance Monitoring and Reporting Guidelines. Using the operational control approach, the group generates data that is consistent, reliable, and meets its quality standards.

The Greenhouse Gas Protocol – A CASE : THE EQUITY SHARE AND CONTROL APPROACHES

The figure Defining the organizational boundary of Holland Industries presents the organizational boundary of Holland Industries based on the equity share and control approaches.

Holland Industries is a chemicals group comprising a number of companies/joint ventures active in the production and marketing of chemicals. The table Holland Industries – organizational structure and GHG emissions accounting below outlines the organizational structure of Holland Industries and shows how GHG emissions from the various wholly owned and joint operations are accounted for under both the equity share and control approaches.

In this example, Holland America (not Holland Industries) holds a 50 percent interest in BGB and a 75 percent interest in IRW. If the activities of Holland Industries itself produce GHG emissions (e.g., emissions associated with electricity use at the head office), then these emissions should also be included in the consolidation at 100 percent.

Notes:

1. The term “operations” is used here as a generic term to denote any kind of business activity, irrespective of its organizational, governance, or legal structures.
2. Financial accounting standards use the generic term “control” for what is denoted as “financial control” in this chapter.

In setting its organizational boundary, Holland Industries first decides whether to use the equity or control approach for consolidating GHG data at the corporate level. It then determines which operations at the corporate level meet its selected consolidation approach. Based on the selected consolidation approach, the consolidation process is repeated for each lower operational level. In this process, GHG emissions are first apportioned at the lower operational level (subsidiaries, associate, joint ventures, etc.) before they are consolidated at the corporate level.

Continue to Standard 4 Setting operational boundaries

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