Carbon reporting standards: a beginners' guide

Arguments about whether governments are legislating fast or thoroughly enough to really tackle climate change aside, legislation is coming.

As a result, an increasing number of UK companies will have to get their heads around the idea that carbon reporting could become just as requisite a part of being in business as financial audits.

This year sees the UK's Climate Change Bill become law as the government attempts to deliver on its commitment to achieve a 60 per cent reduction in emissions by 2050. The bill contains powers to enforce emissions trading schemes including the Carbon Reduction Commitment (CRC) which comes into force in 2010 and could require companies to include carbon emission information in the financial reports.

Emissions reporting developed to the same sophistication as financial reporting sounds like a daunting prospect - and for many it will be. However, as well as a raft of specialist agencies and consultants specialising in emissions measurement, including many of the existing financial services consultants, there are already very specific protocols around the measurement, management and reporting of greenhouse gas (GHG) emissions.

The most prevalent and widely supported mechanism for GHG reporting is the GHG Protocol. The origins of the protocol can be traced back to Kyoto in 1997, the result of a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The full protocol was eventually agreed and published in 2001 with the aim of creating a standardised approach to measuring GHGs.

However, rather than being a practical guide on how to measure emissions, it should be viewed as a framework for thinking about the problem. The protocol frames the process for measuring carbon emissions by using a series of so-called "scopes". Scope one is concerned with direct emissions such as those from a fac tory, scope two is indirect but concerned with products and services bought by the company, for example purchased electricity. The final, and emerging area, scope three, is focused on indirect sources such as outsourced services.

"It [the GHG Protocol] is pretty widely accepted as being the building block from which you might start from," says Harry Morrison, general manager of the Carbon Trust Standard. "It is a framework that enables an organisation to think in a structured way about how to measure, how to report, and how to disclose."

The Carbon Trust Standard (CTS), a recent offshoot of The Carbon Trust, uses the GHG Protocol as the basis for its work in providing companies with what the group claims is the first certification scheme for organisations looking to measure and reduce emissions. To encourage companies to join and comply with the Carbon Trust Standard, the organisation provides a carrot in terms of a certification mark in a similar way to organic or Fairtrade schemes.

As well as helping companies to frame where emissions may be coming from using the scope's approach, the GHG protocol also helps with another extremely important issue - what exactly constitutes a company when it comes to GHG emissions.

With financial reporting, there are international reporting standards that provide guidance on how to, for example, define which subsidiaries you should include as part of an organisation. But with GHGs, the challenge is that reporting is not necessarily restricted to emissions for which the company has legal liability of direct control. This process of defining the environmental limits of an organisation is referred to as "boundary setting" and is still a new and emerging area. "It is quite unusual for companies to report outside of their legal boundaries, but GHG reporting takes you into those other realms and GHG Protocol helps with that process," says Lois Guthrie.

Technical director of the Carbon Disclosure Project (CDP), a not for profit concerned with providing accurate information on private sector carbon emissions to shareholders to help with investment decisions, Guthrie's organisation regularly surveys companies, using the GHG Protocol as a basis for its methodology, to collect emission data and claims its web site is the largest repository of corporate greenhouse gas emissions data in the world.

As well as providing a basis for the work of organisations such as the Carbon Disclosure Project, and the Carbon Trust Standard, the GHG Protocol also informs other environmental measurement regimes and standards organisations. The International Organisation for Standardisation (ISO) has developed a standard, ISO 14064, which evolved and is directly based on the work done by the WRI and the WBCSD.

"It does what ISO standards do which is make it [the GHG Protocol] a bit more precise and take out any of the commentary," explains Morrison. "The rules are pretty much the same as the GHG Protocol and the answers you should get out at the end should be pretty much the same."

However the limitations of the ISO 14064 standard, according to Morrison, is that it is less accessible to a typical business user than the GHG Protocol itself. "It is very much a document written for the specialist analyst, that is essentially what ISO documents are for," he says.

The USA EPA also has a programme called Climate Leaders, which is similarly built on the GHG Protocol. Launched in February 2002, with 11 initial partners, the scheme is described as an "industry-government" partnership which encourages companies to audit, manage and eventually reduce their emissions.

Another organisation which makes use of the GHG protocol framework is the Global Reporting Initiative (GRI). Supported by the Organisation for Economic Co-operation and Development (OECD) and dating back to 2000, the GRI gives guidance on what should make up measures around carbon reporting. According to a recent report from the Sustainable Investment Research Analyst Network (SIRAN), more than 30 per cent of the 100 largest companies report on their efforts around sustainability using elements of GRI.

On first inspection, the GRI could be mistaken as an alternative to the GHG Protocol, or even a competitor, but it is actually more concerned with specific metrics and measurement. "It is not competitive with the GHG Protocol per se but rather complementary, companies can implement the GHG Protocols within the GRI Framework," explains Richard Kellett, head of technical strategy for reporting software specialist SAS. "GHG says 'what is the scope of what you are doing', and the GRI framework says 'here is a common set of measures on which you can report that'."

Despite the widespread support of the GHG Protocol and the other schemes that it supports and underpins, questions still stand over whether voluntary emission assessment work carried out by companies trying to head-off or anticipate future legislation is actually worthwhile. Law-makers have not officially ratified schemes such as the GHG Protocol and could choose to use different metrics when it comes to specific legislation.

"Legislation tends to have a more narrow focus," says the Carbon Trust Standard's Morrison. "If you take the European Emission Trading Scheme (EU ETS) that only focuses on emissions onsite from very energy intensive processes in effect. So trading schemes tend to be tackling very specific issues and are not looking at the organisation's impact in the round."

However, there is consensus that any emissions measurement or reporting work conducted voluntarily, while not guaranteed to map onto the metrics employed in cap-and-trade schemes for example, is relatively transferable and still useful.

"All organisations should be measuring and aspiring to understand their complete impact and a good structure for doing that is the GHG Protocol or the ISO standard, and in compiling that data set they would have much of the information they would need to comply with the various bits of legislation out there," adds Morrison.

Looking to the future, there are also questions over whether a more rigorous and absolute standard will be required as greenhouse gas reporting becomes even more prevalent. In February 2007, consultants PricewaterhouseCoopers, issued a report with the snappy title Global Emissions Compliance Language Needed To Build Trust In Emissions Trading, in which the organisation called for clearer frameworks and language around emissions reporting and trading.

"We need a global emissions compliance language to be able to build trust in emissions reporting in the most cost-effective way. This should include new global institutions, standards, terminology and enabling technologies," said Hans Schoolderman, director of verification service, PricewaterhouseCoopers Climate Change Services, at the time.

Whether the GHG Protocol and its ilk are only the precursors of more thorough standards is not yet clear, but experts agree that as far as emissions reporting go, it's still very early days. There is also a consensus developing that the relatively hands-off approach by government has enabled consensus around mechanisms such as the GHG Protocol and is definitely the way to proceed.

"Do we need something that is incredibly prescriptive, as in regulation, or do we need something that is more of a principal-based set of rules that reflect the needs of the market rather than the needs of the regulator?" asks CDP's Guthrie. "If you look at the list of users of the GHG corporate standard, and see the long list of corporate users, non-governmental users, government users, trading scheme users, business associations, that is hard evidence that there is widespread coalescence around the GHG Protocol."