Navigating climate disclosures in China -- An in-depth comparison of Scope 1, 2 and 3 emissions reporting criteria between CDP and China’s national ETS

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■ Date: Jul 24th, 2023

Navigating climate disclosures in China -- An in-depth comparison

of Scope 1, 2 and 3 emissions reporting criteria

between CDP and China’s national ETS

Author of this article

【Snapshot】

1. Scope 1 emissions reporting: Compared with China’s national ETS, CDP requires a lower level of emission breakdown. Emission data collected for CDP could provide a reference for China’s ETS reporting, but it cannot be directly copied.

2. Scope 2 emissions reporting: Both location-based and market-based method are accepted in CDP. Whereas China’s national ETS does not accept market-based method yet. Only location-based method, a method does not factor any contractual agreements such as green electricity PPA or energy attribute certificates (i.e. GECs), is used when calculating Scope 2 emissions. Thus, unless the factor changes, the only way for emission entities to reduce location-based emissions in ETS is to reduce total energy usage, or increase on-site renewable generation such as installing rooftop solar PV.

3. Scope 3 emission reporting: Companies participating in CDP should report their Scope 3 emissions, while the level of detail and the data accuracy of Scope 3 accounting are less required than that in Scope 1 and 2, given the primary evaluation of Scope 3 lies in the engagements with value chain partners to achieve decarbonisation. China’s national ETS does not require reporting on Scope 3 emissions.

Keywords: #CDP #SBTi #RE100 #ETS #Carbon Emission Trading #location-based #market-based #GEC

If you like this article, please also refer to our comprehensive analysis reports "Decarbonization in China" "Emissions Trading Scheme in China" in our database. And also our podcast "Episode 1: China's Carbon Market Quick Updates".

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The growing importance of climate and sustainability disclosure has drawn the attention of an increasing number of multinational corporations. On one hand, committing to such disclosure activities help a company to demonstrate leadership in tackling climate change, protect and improve the company’s reputation. On the other hand, the disclosure data provide a transparency and reliable reference for stakeholders (i.e. investors, customers, employees, etc.) to assess a company’s environmental performance, contributing to better decision-making in portfolio investments or business cooperation.

At present, a variety of international disclosure frameworks are available in the market, among which CDP (Climate Disclosure Project), SBTi (Science Based Targets initiative) and RE100 have gathered the most attentions in China. Though the above frameworks may sound familiar to many sustainability professionals, it could easily get confused when it comes to understanding the focus and links between these frameworks. Furthermore, for multinational companies that operate business in China, it could be a headache to figure out how the international frameworks could apply amid local regulations. Most-asked questions could be: What are the key elements that the company should report to CDP? If my company has already reported Scope 1, 2 and 3 emissions data to CDP, can I directly apply the data to China’s national ETS, or vise versa? What are the risks the company should pay attention to if it is about to be included in the national ETS?

To answer the above questions, this article walks through some of the key reporting elements in CDP and China’s ETS. Specially, we highlight the differences in reporting criteria between these two systems, such as the calculation methods of Scope 1, 2 and 3 emissions, to provide in-depth comparisons on how international disclosure frameworks could apply under China’s context. Understanding the differences helps to reduce the risks of misreporting, and thus minimize the additional costs that the company may bear, i.e. purchasing extra carbon credits, when navigating the decarbonisation journey in China.

Overview of the disclosure frameworks

To briefly explain, CDP is a global disclosure platform for companies to report their environmental performances in the form of the questionnaire. The topics that CDP covers are very comprehensive, including but not limited to, the company’s status quo of Scope 1, 2 and 3 emissions (i.e. emission sources, locations, facilities etc.), company’s emission reduction targets, decarbonisation engagements with supply chain partners, as well as involvements in any carbon market.

Following the establishment of CDP, the committee collaborates with a few other NGO partners to launch SBTi and RE100, with the former one focuses on emission reduction targets setting for Scope 1, 2 and 3 emissions, and the latter on offering multiple approaches to achieve 100% renewable electricity to reduce Scope 2 emissions mainly. By joining SBTi and RE100, a company could raise CDP scoring. Meanwhile, the company should report its SBTi and RE100 progress while completing CDP questionnaire.

Figure 1: Overview of disclosure frameworks

The rating of CDP does not necessarily based on the actual emissions that the company has reduced. Rather, CDP values the company being transparent of its environmental activities, and the initiatives the company undertakes to create positive impacts.

In terms of ETS, the CDP questionnaire has set up a section named “Carbon Pricing” for companies to report related activities in any compulsory or voluntary carbon market. Thus, a company should report to CDP if it is regulated under China’s national or provincial ETS, including the amount of emissions covered in ETS, the number of allowances received, etc.

Figure 2: A snapshot of CDP questionnaire (2023 version)

Comparison of Scope 1, 2 and 3 emission reporting criteria between CDP and China’s national ETS

CDP currently offers three questionnaires (Climate Change, Water Security and Forests). In this article, we focus primarily on the most important one -- Climate Change. The questionnaires include general questions alongside sector-specific questions aimed at high-impact sectors.

Report Scope 1 emissions in CDP

General formula:

Scope 1 emissions (tCO2e) = Fuel consumption x Emission factors

Figure 3: Reporting Scope 1 emissions in CDP

In general, a company should breakdown its emissions based on different categories (i.e. country/area/region, business division, production facility, etc.) when reporting Scope 1 emissions.

For emission factors, the company could refer to published databases such as, globally, IPCC Emission Factor Database or domestically, China Product Carbon Footprint Factors Database (中国产品全生命周期温室气体排放系数库).

Figure 4: A snapshot of IPCC emission factor database

Figure 5: A snapshot of China Product Carbon Footprint Factors Database

Scope 1 emissions reporting in CDP vs. in China’s national ETS:

In comparison with China’s ETS, CDP requires a lower level of emission breakdown in terms of Scope 1 emission calculation. CDP’s data could provide a reference for China’s ETS reporting, but it cannot be directly copied.

CDP asks a company’s to disclose its overall GHG emission status. Whereas China’s ETS requires reporting on specific emission inputs of a power generation unit, including carbon content (tC/GJ), low calorific value (GJ/t) and carbon oxidation rate (%) to ensure fair distribution of emission allowances and accurate monitoring of the total emissions of ETS. Such specific data inputs are not required in CDP.

Figure 6: Steel sector is expected to be included in China' ETS in the coming future.

Report Scope 2 emissions in CDP

There are two methods to calculate scope 2 emissions in CDP: location-based method and market-based method.

Location-based method calculates emissions intensity of the local grid area where the electricity usage occurs. Location-based method follows a general calculation equation shown below.

Figure 7: Reporting Scope 2 emissions in CDP using location-based method

Location-based method does not factor any contractual agreements. For example, location-based method does not include any renewable electricity that the company externally sources, nor any renewable energy attribute certificates (i.e. GECs, I-REC, etc.). Therefore, unless the factor changes, the only way to reduce location-based emissions is to simply reduce total energy usage, or increase on-site renewable generation such as installing rooftop solar PV.

Figure 8: Installation of rooftop solar PV helps to reduce scope 2 emissions

Market-based method calculates emissions based on the electricity that a company chooses to purchase, often include power purchase agreements (PPA) or energy attribute certificates like Green Electricity Certificate (绿色电力证书) in China. They are emissions associated with electricity that a company has procured, rather than the electricity generated locally. Unlike location-based method, market-based method takes the consumption of renewable energy into account. Emission factors of renewables are considered zero.

Figure 9: Reporting Scope 2 emissions in CDP using market-based method

In terms of emission calculation hierarchy using market-based method, energy attribute certificates are prioritised first, followed by contract with electricity generators such as PPA. Green electricity products come at the last.

Ideally, PPA contract papers would provide source-specific emission factors. So far, such emission factors are not included in China’s power market mid-to-long term contracts. A company could use the following alternative factors if emission factors of energy attribute certificates/contract, or supplier-specific rates (i.e. green tariff) are not available:

1) Residual mix: A residual mix emission factor represents the emissions and generation that remain certificates, contracts, and supplier-specific factors have been claimed and removed from the calculation.

2) Regional/national grid emission factor: When residual mix factor is not available, companies can use regional grid factors and, as option of last resort, national factors in market-based accounting.

CDP prefers residual mix over regional/national grid emission factors, since residual mix factors have removed all the certificates, contracts, and supplier-specific factors that have been claimed, and thus avoid double-counting of the emission attributes of contractual instruments.

To sum up, putting the above hierarchy in China’s context, for corporates who source electricity in the power market (i.e. entering into mid-to-long term contracts with generators), they should choose the emission factors based on the electricity sources tied with the contracts, if available. If a company, usually small and medium size, procures electricity via grid proxy purchase, where contract-specific factor could not be obtained, regional/national grid emission factors could be applied since residual mix factors are not available in China yet. In such case, the calculation logic is the same as location-based method.

Scope 2 emissions reporting in CDP vs. in China’s ETS:

Both CDP and ETS adopt location-based method to calculate scope 2 emissions. However, the grid emission factors used in these two systems differs.

a) CDP prefers to use regional grid over national grid emission factors. Regional grid factors vary among regions and may cause a big difference for companies that have operation sites cross-regionally in China, as shown on the map.

There are in total six regional grids in China, covering all the provinces except Tibet. The reporting company could refer any of the regional emission factor based on the location of its production site. For example, Beijing is within North China regional grid, Shanghai is under East China regional grid.

Figure 10: China’s regional grid emission factors for CDM/CCER

Note: North China regional grid covers Beijing, Tianjin, Hebei, Shanxi, Shandong, Inner Mongolia; North-east China one covers Liaoning, Jilin, Heilongjiang; East China one covers Shanghai, Jiangsu, Zhejiang, Anhui, Fujian; Central China one covers Henan, Hubei, Hunan, Jiangxi, Sichuan, Chongqing; North-west China one covers Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang; South China one covers Guangdong, Guangxi, Yunnan, Guizhou, Hainan.

b) China’s ETS uses a unified national grid emission factor (0.5703 tCO₂/MWh in 2022). The national emission factor is updated by MEE (Ministry of Ecology and Environment, 生态环境部) , regulator of China’s ETS.

Applying regional grid emission factor is much more closer to the actual emissions, especially for CDP participants since it only covers specific regions of grid. Previously NDRC (former regulator of ETS) published China’s regional grids in 2011 and 2012, but it hasn’t been updated for years. It’s possible that in the future MEE will update the regional grid emission factors.

Although the latest regional emission factor has not yet released. Some municipals, such as Shanghai, has updated its local grid emission factor in 2022. If a company operates production sites in Shanghai, the Shanghai municipal grid emission factor could also be an option for choosing grid emission factor.

China’s ETS does not accept market-based method yet. Only location-based method is allowed when calculating Scope 2 emissions. While in some provincial ETS such as Beijing, Tianjin, and Shanghai, market-based method for green electricity procurement is also adopted.

On June. 13^th2023, Shanghai Municipal Bureau of Ecology and Environment released a notice to adjust the emission factor of purchased green electricity to be zero, meaning that local companies who participates in the green electricity trade via Beijing Power Exchange Center could use market-based method to calculate its Scope 2 emissions (purchased green electricity only). Similarly, Beijing Bureau of Ecology and Environment made an announcement saying that emission entities who purchased green electricity can use market-based method to calculate Scope 2 emissions, with the green electricity emission factor considered zero.

The market-based method may in the future apply to the national ETS after trials at provincial ETS, though it may depend on some other factors, such as the maturity of the green electricity trade, especially inter-provincial trade, as well as a more reliable traceability scheme to avoid double-counting issues. (See: China’s Green Electricity Pilot Trade In a Nutshell )

How to report Scope 3 emissions in CDP

In comparison with Scope 1 & 2, accuracy of scope 3 emissions is less required. This is because a company’s Scope 3 emissions usually overlap with its suppliers / customers’ Scope 1 & 2 emissions. It is difficult to set an absolute standard. The main objective of reporting Scope 3 emissions is not about accurate calculation, but to grasp high emitting sector in the value chain.

A company should clearly identify the Scope 3 categories that are relevant to its business. Applying primary data, data which are collected and calculated by the company’s internal system is preferable. If primary data is difficult to obtain, secondary data provided by third parties, i.e. government departments or industry associations, can be used. It should be noted that the databases introduced above are secondary data, meaning the data are collected at the industry-average level, rather than primary data that directly from the specific activities within a company’s value chain. Thus, some emission factors may not be up to date, resulting in miscalculation. A possible solution for a company to reduce Scope 3 emissions is come up with emission factors directly based on the company’s activities.

General formula: Scope 3 emissions (tCO2e) = Activity data x Emission factors

Figure 11: Reporting scope 3 emissions in CDP

Scope 3 emissions reporting in CDP vs. in China’s ETS:

Companies participating in CDP should report Scope 3 emissions. China’s ETS does not require emission entities to disclose Scope 3 emission data.

For many CDP members such as Apple, BASF, and Starbucks are actively engaging with their supply chain partners to reduce product carbon footprints. Carbon accounting software could be a useful tool to calculate product carbon footprints.

Beijing Organic and Beyond Corp, a domestic organic food producer, is partnering with Carbonstop, a carbon accounting software service provider to produce ‘carbon neutral’ coffee through carbon footprint calculation and credit offsetting.

Figure 12: Carbon Neutral Coffee

Looking ahead

The national ETS regulates more than 2,000 key emissions entities (KEE) from the power sector with an annual emissions of more than 26,000 tCO₂, including combined heat and power, as well as captive power plants in other sectors (i.e. petrochemical, chemical, paper and pulp, etc.). By 2025, the national ETS is expected to cover a few other sectors such as cement and aluminum. For those non-heavy industry players (i.e. retails, food & beverage, financial services, etc.) that are less likely to be regulated under China’s ETS, CDP could be the major disclosure framework to follow. While for those foreigner players in sectors such as steel, chemicals, aluminum, they are keep an eye on both reporting framework to get better preparation for the future. (See: China's Emissions Trading: The Opportunities Ahead)

References:

MEE. 2023.02.07 关于做好2023-2025年发电行业企业温室气体排放报告管理有关工作的通知
MEE. 2022.12.21 关于印发《企业温室气体排放核算与报告指南发电设施》《企业温室气体排放核查技术指南发电设施》的通知
MEE. 2020.12.29. 2019年度减排项目中国区域电网基准线排放因子
CDP Technical Note: Accounting of Scope 2 emissions
CDP Supply Chain Member Guide for Accounting and Reporting Your Scope 3 Emissions
BMW AG CDP Climate Change Questionnaire 2021