Scope 3 emissions reporting and virtue signaling

Editor Neil McNaughton tries to unpick corporate "net zero" pledges to conclude that the three scopes confuse GHG reporting and can lead to double counting. The GHG protocol is an invitation to "creative" GHG accounting.

Reading a recent release from Schlumberger which reported on the company’s pledge to go ‘net zero’ by 2050. I was intrigued by the statement that the reduction of SLB’s emissions ‘included scope 3’. How could this be I thought. How can a company that does not sell carbon generate scope 3 emissions? I immediately pinged off a string of hot-headed emails to SLB’s press folks who handled my rants with elegance. For sure, a company that does not produce oil, gas (or coal) can have scope 3 emissions. I was pointed to the Greenhouse Gas Protocol website for more.

How are the scopes defined? First the easy part. Scope 1 emissions are direct GHG emissions that occur from sources owned or controlled by the company, i.e. emissions from combustion in company boilers, furnaces, vehicles, and so on. That’s fair enough. A company should be able to tally its fuel bills and figure something reasonable. Scope 2 covers, ‘indirect GHG emissions’ such as those ‘emitted during the generation of purchased electricity consumed by the company’. That could be a little harder to figure. A small manufacturer is unlikely to have a great handle on how ‘green’ its purchased electricity is. Modern markets may switch from different generation modes (coal, gas, nuclear, wind) as the day goes on and as the traders trade. But at least scope 2 is a noble goal, even if it’s accuracy is questionable.

So how about scope 3. Well first I want to explain scope 3 in terms of how I understood it before I started my shindig with Schlumberger. Scope 3, I thought naively, covers the emissions produced when, for example, the oil produces by an oil company is burned. For an oil company, its scope 3 emissions are those generated when you and me, or industrial users burn the stuff and emit the CO2. The oil company’s scope 3 are our scope 1. That’s seems fair enough, but, as I said, Schlumberger and other ‘net zero’ reporters don’t necessarily sell oil or any other carbon.

To understand this, forget naïve, or as they say over here, ‘pourquoi faire simple quand on peut faire compliqué*? The GHG Protocol defines scope 3 as ‘an optional reporting category’ that allows for the treatment of all other indirect emissions. ‘Scope 3 emissions are a consequence of the activities of the company, but occur from sources not owned or controlled by the company. Some examples of scope 3 activities are extraction and production of purchased materials; transportation of purchased fuels; and use of sold products and services’.

Only the ‘sold products’ falls into my ‘naïve’ category. The ‘services’ part is, well, rather nebulous. GHGP does warn that ‘Scope 3 is optional, but it provides an opportunity to be innovative in GHG management’. ‘Companies may want to focus on accounting for and reporting those activities that are relevant to their business and goals, and for which they have reliable information. Since companies have discretion over which categories they choose to report, scope 3 may not lend itself well to comparisons across companies’. That is putting it politely. Innovative GHG management sounds a bit like ‘creative accounting’. Reporting scope 3 is rather like rolling bits of your clients’ P&L into your own accounts.

The ‘optional’ scope 3 category contains ‘around 95%’ of Schlumberger’s total emissions footprint (52 million tonnes CO2 equivalent). Schlumberger reports that ‘nearly 90% of our Scope 3 emissions come from just two of these categories: emissions resulting from the use of our technology and emissions associated with purchased goods and services in our supply chain*’. I find this curious. How can a company know how much emissions are being produced from the ‘use of its technology’? Much of Schlumberger’s potential for scope 3 reduction comes from technology it is selling to reduce flaring. But will this technology be applied correctly or at all. Perhaps it will prove too expensive to avoid flaring in a future energy hungry world. Upstream activity often involves many service providers, all ‘competing’ for the same scope 3 emissions. If a company invents a better mousetrap that cuts its clients’ emissions, how can it truly know if the new gizmo is used all the time, if its performance is always up to scratch? How is the improvement shared across all service providers? If 95% of a company’s emissions are reported from this ‘optional’ and impossible to figure category, it is easy to imagine how ‘net zero’ could be gamed.

ESG reporting, thanks to these tortuous reporting ‘standards’, has blossomed into a cottage industry with a plethora of companies offering to hold hands and put their clients enviro credentials in as best a light as possible. In this issue of Oil IT Journal we already have the longest ‘going green’ section ever. Do we now need to add an ESG report too? I am feeling weak at the knees.

My cursory spin through the GHG Protocol leads me to think that ESG reporting would be much better if there were no scope 2 or scope 3. This would eliminate the current virtue signaling that a ‘commitment to net zero’ announcement entails, based on a hypothetical reduction of (probably double counted) emissions outside the reporting company’s control. One final thing. One ESG specialist we talked to, acknowledging the double counting problem, suggested that this could ‘fixed’ with some kind of blockchain! My weak knees have given way. I am now on the floor, not knowing whether to laugh or cry.

* Why do simple when you can do complicated?

** See the Schlumberger statement.

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