Carbon Accounting: The Importance of the GHG Protocol within the CSRD

Introduction

Doing Carbon Accounting is a task that can present many hurdles and methodological pitfalls. In this blog, you will learn the essential information about the GHG Protocol, its scopes of application, the connection with the CSRD, and recommendations for creating a CO₂ balance.

The GHG Protocol provides a comprehensive framework for measuring and reporting greenhouse gas emissions. It offers guidelines and standards important for both companies and countries & cities to effectively track their emissions and achieve their climate protection goals. It takes a comprehensive approach by considering both direct and indirect emissions, which are divided into three different scopes. Within the GHG Protocol, there are various standards tailored to specific areas of Carbon Accounting:

• The Corporate Standard, aimed at companies, helps them measure and report their own emissions (Scope 1-3).
• The Value Chain (Scope 3) Standard enables companies to consider emissions along their entire value chain and provides guidance on focusing their reduction efforts.
• Furthermore, the GHG Protocol offers more specialized standards tailored to the diverse needs and sectors.

Ideally, companies should always perform their emission calculation according to the Corporate Standard, which is considered the "gold standard" worldwide.

The CSRD requires companies to disclose their greenhouse gas emissions and to demonstrate their development over time. The GHG Protocol accounts for all greenhouse gases regulated under the Kyoto Protocol such as carbon dioxide (CO₂), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). In the GHG Protocol itself, these gases are consolidated as CO₂e.

Scopes of the GHG Protocol

The scopes of the GHG Protocol include Scope 1, Scope 2, and Scope 3. Reporting emissions from Scope 1 and 2 is mandatory in the first year of Carbon Accounting under CSRD, while Scope 3 emissions are mandatory from the second year.

Scope 1 - Direct Emissions:

• Definition: Scope 1 emissions refer to direct greenhouse gas emissions whose sources are owned or controlled by the company. Scope 1 consists of 4 categories, including, for example, emissions from combustion processes in owned or controlled facilities and vehicles.
• Scopes: This includes company-owned or -controlled industrial processes, combustion from production facilities, company vehicles and all other direct emission sources.
• Impact on accounting: These emissions are generally more accurate and easier to calculate than Scope 2 and 3, as they result directly from the company's activities. Taking them into account is crucial for a complete and transparent carbon footprint.
• Examples: Emissions from the company's own production, exhaust fumes from company cars, losses of refrigerants in air conditioning systems or in-house combustion for central heating.

Scope 2 - Indirect emissions from purchased energy

• Definition: Scope 2 is made up of 4 categories. This includes indirect greenhouse gas emissions resulting from the generation of purchased electricity, heat, steam or cooling for the company.
• Areas: This relates in particular to the company's energy consumption, such as electricity purchased for the operation of offices, factories and other facilities.
• Impact on accounting: Scope 2 emissions depend heavily on the energy mix of energy suppliers. They offer opportunities for reduction by switching to renewable energy sources.
• Examples: Emissions associated with the electricity purchased from an energy company, or indirect emissions associated with the use of district heating, purchased cooling or steam.

Scope 3 - Indirect emissions within the value chain:

• Definition: Scope 3 is made up of 15 categories and includes all other indirect emissions caused by the company's activities. A distinction can also be made between upstream and downstream emissions. Scope 3 emissions are often the most significant source of greenhouse gases. However, they are also the most difficult to measure, as they are outside the company's direct sphere of influence and there is often a lack of data and standardized methodology.
• Areas: These include emissions associated with the production of purchased materials, transportation of goods, business travel, employee commuting and the use of products sold.
• Impact on accounting: Scope 3 emissions are often the most extensive and complex, as they span the entire supply and value chain. Calculating and reducing them requires comprehensive analysis and cooperation with suppliers and partners. Scope 3 usually accounts for up to 90% of the total carbon footprint.
• Examples: Emissions associated with the production of supplier materials, third-party transportation services or emissions caused by the use of products sold

Scopes of the GHG Protocol

The scopes of the GHG Protocol include Scope 1, Scope 2, and Scope 3. Reporting emissions from Scope 1 and 2 is mandatory in the first year of Carbon Accounting under CSRD, while Scope 3 emissions are mandatory from the second year.

Scope 1 - Direct Emissions:

• Definition: Scope 1 emissions refer to direct greenhouse gas emissions whose sources are owned or controlled by the company. Scope 1 consists of 4 categories, including, for example, emissions from combustion processes in owned or controlled facilities and vehicles.
• Scopes: This includes company-owned or -controlled industrial processes, combustion from production facilities, company vehicles and all other direct emission sources.
• Impact on accounting: These emissions are generally more accurate and easier to calculate than Scope 2 and 3, as they result directly from the company's activities. Taking them into account is crucial for a complete and transparent carbon footprint.
• Examples: Emissions from the company's own production, exhaust fumes from company cars, losses of refrigerants in air conditioning systems or in-house combustion for central heating.

Scope 2 - Indirect emissions from purchased energy

• Definition: Scope 2 is made up of 4 categories. This includes indirect greenhouse gas emissions resulting from the generation of purchased electricity, heat, steam or cooling for the company.
• Areas: This relates in particular to the company's energy consumption, such as electricity purchased for the operation of offices, factories and other facilities.
• Impact on accounting: Scope 2 emissions depend heavily on the energy mix of energy suppliers. They offer opportunities for reduction by switching to renewable energy sources.
• Examples: Emissions associated with the electricity purchased from an energy company, or indirect emissions associated with the use of district heating, purchased cooling or steam.

Scope 3 - Indirect emissions within the value chain:

• Definition: Scope 3 is made up of 15 categories and includes all other indirect emissions caused by the company's activities. A distinction can also be made between upstream and downstream emissions. Scope 3 emissions are often the most significant source of greenhouse gases. However, they are also the most difficult to measure, as they are outside the company's direct sphere of influence and there is often a lack of data and standardized methodology.
• Areas: These include emissions associated with the production of purchased materials, transportation of goods, business travel, employee commuting and the use of products sold.
• Impact on accounting: Scope 3 emissions are often the most extensive and complex, as they span the entire supply and value chain. Calculating and reducing them requires comprehensive analysis and cooperation with suppliers and partners. Scope 3 usually accounts for up to 90% of the total carbon footprint.
• Examples: Emissions associated with the production of supplier materials, third-party transportation services or emissions caused by the use of products sold

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Advantages of using the GHG protocol within the CSRD

The main goal of the GHG Protocol is to analyze emissions within a company, including the direct emissions generated on-site and the indirect emissions arising from the supply chain. Additionally, the GHG Protocol aims to create uniform guidelines for actions to reduce greenhouse gases, ensuring transparency and consistency in capturing and reducing GHG emissions.

The CSRD introduces clearly defined standards: The European Sustainability Reporting Standards (ESRS). The ESRS consists of two cross-cutting standards (ESRS 1 and ESRS 2) and 10 topic specific covering the ESG criteria (Environmental, Social, and Governance). Under ESRS, ESRS 2 is always mandatory.

The necessity for further reporting obligations is determined by the outcome of the double materiality analysis. For industrial companies, ESRS E1 and ESRS S1 usually form the basis. ESRS E1 is the standard with the most disclosure requirements and data points (220) of all the standards. Moreover, the European Financial Advisory Group (EFRAG) has evaluated a current version of the ESRS for recurring administrative costs. Standard E1, alongside having the most data points, also accounts for the highest recurring administrative costs at 27.5%.

Within the E1 standard, 110 data points have a direct or indirect reference to greenhouse gas emissions and thus to the Carbon Accounting of a company. A company that accounts for its emissions according to the GHG Protocol standard already collects essential data for sustainability reporting under CSRD, saving additional efforts.

An Overview of the ESRS Standards

Advice for companies

Dealing with the CSRD regulation

• Understanding the basics: It is important to know exactly what the CSRD requirements are. The regulation requires detailed reporting on Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy) and Scope 3 (all other indirect emissions)
• Identify emission sources: Determine which emission sources are relevant in your company. This can range from direct emissions from your own facilities to emissions from the supply chain.

Implementation of emissions management systems‍

• Make a system selection: Decide on a suitable system for collecting and managing emissions data. This can be specialized software or a customized system.
• Establish processes: Develop clear processes for data collection and updating. An efficient system is only as good as the data it receives.

The first sustainability report‍

• Take regulatory requirements into account: Your sustainability goals should be in line with the CSRD requirements and integrated into the corporate strategy. The year 2024 is suitable for many companies as a test year for Carbon Accounting, as there is still sufficient lead time for the first sustainability reporting.
• Develop reporting mechanisms: Create a clear system for regular reporting that is transparent and understandable both internally and to external stakeholders.

Proactive compliance with CSRD requirements

• Continuous review: Monitor and update your sustainability reporting practices regularly to meet changing requirements.
• Communication and transparency: Be open in communicating your progress and challenges in complying with CSRD.
• Continuous improvement: Commit to continuously improving your sustainability practices and actively contribute to climate protection.

How does Tanso help companies collect their emissions in Scope 1-3?

The Tanso software not only enables automated data collection of emissions from Scope 1-3 but also the control and optimization of your company's sustainability goals. Find out here how the software can support your organization in setting up a resilient and audit-proof standard process with an audit trail.
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