The guidance, published by a key entity behind the Greenhouse Gas Protocol, provides information on reporting of avoided emissions, and eligibility criteria for companies.

On 22 March 2023, the World Business Council for Sustainable Development (WBCSD) released guidance on avoided emissions, i.e., emissions that occur outside of a company’s value chain. The WBCSD said the new guidance “will help ensure credible accounting of avoided emissions” and “seeks to bring harmonization and concrete guidance on how companies can assess and account for the decarbonizing impact of their solutions”.

Governments and regulators are increasingly placing emphasis on accountability for companies’ emission reduction targets, requiring greater disclosure in relation to both targets and the strategies to help meet the targets. In many instances, these requirements include requiring companies to disclose indirect, Scope 3 emissions in their reporting and/or targets, which represent the emissions of a company’s value chain.

However, companies may also contribute to mitigating climate change by taking action outside of their value chains. Such actions may include purchasing and retiring high-quality, verified carbon offsets, which lead to removal or mitigation of emissions from a third party that is often unrelated to the company.[1] Alternatively, companies may contribute to emissions reduction through their business, by offering solutions including products, services, technology, or projects that enable other parties to reduce emissions. Such solutions can lead to what is referred to as “avoided emissions”, which quantify the benefits (if relevant) that a company provides through its solutions compared to a reference scenario. In this way, avoided emissions can reflect the ability of a product or service to contribute to a low-carbon economy.

Because avoided emissions occur outside of a providing company’s value chain, they do not show up in companies’ carbon inventories, which conventionally consider Scopes 1-3 emissions only. The result could be a perverse situation in which a company providing solutions to climate change grows and scales up those solutions, only for its carbon inventory to show an increase in emissions (as the company grows), giving the appearance of negative climate impact.

To date, leading carbon accounting methodologies and institutions such as the Greenhouse Gas Protocol (GHGP), the WBCSD, or others had provided no clear guidance in relation to the accurate accounting of avoided emissions. Reporting such emissions therefore has been inconsistent and often ignored.

Role of the Guidance

Noting the above, the WBCSD collaborated with its member companies and the Net Zero Initiative (NZI)[2] to produce guidance for calculating and reporting avoided emissions[3] (the Guidance). The Guidance aims to support businesses in making credible, consistent, and transparent assessments and claims relating to their avoided emissions. It can be utilised to help shift the focus on avoided emissions from a purely compliance agenda to an innovation one.

The Guidance provides a starting point with the potential to direct public policy and investments, incentivising companies to shift business models to net zero-aligned products and services. Understanding the avoided emissions of decarbonisation solutions can support planning and decision-making, and the aim for companies and relevant stakeholders to focus on their role in the promotion of system-wide changes required for rapid decarbonization.

The Guidance focuses on five key areas to making credible avoided emissions claims:

1. Defining avoided emissions and best practices
2. Leveraging avoided emissions
3. Ensuring contributions are legitimate through eligibility criteria
4. Assessment of avoided emissions including accounting principles and calculation guidance
5. Reporting of avoiding emissions using best practices

The Guidance is not intended to be a binding document (at this stage). However, it was produced by the WBCSD (one of the key entities behind the Greenhouse Gas Protocol (GHGP)), the leading emissions accounting framework. Its publication is therefore a notable development.

Some of the key inclusions in the Guidance are as follows.

Reporting of Avoided Emissions

The Guidance highlights the reporting of avoided emissions as separate from the reporting of Scope 1, 2, and 3 greenhouse gas (GHG) emissions. Under the Guidance, companies should not present their avoided emissions as offsets to their GHG inventory emissions, should not use avoided emissions as part of net zero claims, and avoided emissions should also be kept separate from offsetting claims and carbon credits. This reporting method aims to alleviate potential greenwashing issues by separating the avoided emissions data to increase transparency.

Eligibility Criteria

The Guidance includes eligibility criteria (known as “gates” in the Guidance) that companies should meet as part of avoided emissions calculations to determine whether the claim can be made in accordance with the Guidance’s requirements. The company must be aligned with all criteria in order to be able to validly report avoided emissions under the Guidance:

• Gate 1: Climate action credibility — the company must have set and externally communicated a climate strategy consistent with “the latest climate science”[4]. This information should provide GHG footprint measurement, and include science-based targets for Scope 1, 2, and 3 emissions.

  This means that if a company is not aligned with the 1.5°C Paris Agreement target, the company cannot report avoided emissions in accordance with the Guidance. This aspect of the Guidance will likely significantly impact the number of companies that can make avoided-emissions claims in alignment with the Guidance, and is notable because the Guidance purports to be concerned with avoided emissions rather than emissions within companies’ value chains.

• Gate 2: Latest climate science alignment — the solution (or end-solution of an intermediary solution) should have mitigation potential according to the latest climate science and recognised sources, and is not directly applied to activities involving the exploration, extraction, mining, and/or production, distribution, and sales of fossil fuels[5].
• Gate 3: Contribution legitimacy — the solution must have a direct and significant decarbonizing impact.

Quantifying Avoided Emissions

Assuming companies meet the three eligibility gates described above, the Guidance offers a “5-step approach” for quantifying avoided emissions. The first four steps involve quantifying avoided emissions at the scale of one solution, whereas the optional fifth step considers avoided emissions at the scale of the company:

• Step 1: Identify the timeframe — the company identifies whether the solution’s avoided emissions should be calculated on a forward-looking basis (i.e., all future life cycle avoided emissions associated with the solution are calculated in the year of sale), or on a year-on-year basis (avoided emissions are assessed every year from the year of sale, until the end of life of the solution). The Guidance states that the timeframe a company chooses should be consistent with the reporting timeframe of the solution’s emissions in the company’s GHG inventory assessment.
• Step 2: Define the reference scenario — the company should select a reference scenario that reflects the scenario without the solution based on recognized and well-documented assumptions
• Step 3: Assess a solution and reference life cycle’s emissions — the company assesses life cycle emissions in a situation with the solution and in a reference scenario where the solution is not used.
• Step 4: Assess a solution’s avoided emissions — the company calculates the difference the difference in emissions of a reference activity with and without the solution being used, taking into consideration the solution’s entire life cycle.
• Step 5: Assess avoided emissions at the company scale — companies may assess their total avoided emissions by aggregating the avoided emissions of all solutions following the four previous steps.

Other Developments

In addition to the Guidance, other notable organisations in the climate accounting and target setting space are also recognising the necessity to focus on climate impacts outside of a companies’ traditional carbon inventory. During March 2023, the Science-Based Target initiative (SBTi) ran a consultation process in the form of a public survey to explore the specific types of investments companies are making outside of their value chains, and the types of related claims/incentives that would be appropriate. The results of this survey will be used to further inform the SBTi’s upcoming public guidance document on investment beyond the value chain, which is expected later in 2023.

Next steps

As noted above, the Guidance does not set a definitive standard, and the WBCSD has indicated that it will continue to refine and revise in further versions.

Latham & Watkins will continue to monitor developments in this area.

Endnotes

[1] For example, the purchasing of offsets backed by reforestation initiatives.

[2] The Net Zero Initiative (NZI) is an expert advisory group, established in 2018 considering the issue of developing an appropriate method to assess the compatibility of economic activities with the global climate goal.

[3] Refer to the WBCSD Guidance: Guidance on Avoided Emissions.

[4] The guidance acknowledges that at present, the latest climate science refers to the 1.5°C pathway presented by the latest IPCC Assessment Report 6.

[5] At present, recognised sources are the IPCC Sixth Assessment Report and the EU Taxonomy.