Climate Leaders: Rigorous Accounting for Corporate Leadership on Climate Change

Thomas M. Kerr

For the past decade, while the debate has raged over the science of climate change and the necessity for action to mitigate potential climate impacts, a slow but growing number of companies across several industry sectors have voluntarily adopted climate-related targets. These targets - typically performance objectives tied to increasing energy efficiency and/or reducing greenhouse gas (GHG) emissions - are evidence that industry is willing to accept accountability for non-regulated impacts of their operations. The concept of "social reporting" has been around since the late 1980's, when corporations, reacting to the growing environmental movement, began publishing brochures about reducing pollution. In the past few years, with growing shareholder and consumer interest in companies' social behavior, many firms have engaged in increasingly rigorous reporting methods to ensure that their environmental claims deliver results.

This movement toward more rigorous environmental reporting is evidenced by the growing number of companies teaming with government or non-profit groups to set GHG reduction targets and conduct corporate-wide GHG emissions inventories. One of the newest programs is the U.S. Environmental Protection Agency's Climate Leaders initiative. Climate Leaders was launched on February 20 of this year as a voluntary government-industry partnership designed to help leading companies create a lasting record of their accomplishments in reducing GHG emissions. Put another way, for the first time, companies that set voluntary GHG reduction targets can use a standardized, government-run inventory protocol to track their annual progress towards their GHG reduction goals. Climate Leaders builds off of a suite of successful voluntary climate change programs, most notably the flagship Energy Star program that is designed to grease the markets for energy efficient products, homes and commercial buildings.

Background on EPA's Voluntary Climate Partnerships
Since 1992, when EPA first launched its Energy Star and Green Lights programs, the government has been working with industry through voluntary partnerships designed to achieve maximum environmental benefits at the lowest cost. In the beginning of the 1990's, while the best analysis demonstrated that dozens of technologies - ranging from energy-efficient lighting to heating, ventilation and air conditioning systems (HVAC) to computer monitors to copiers - delivered a positive return on investment, these technologies were not penetrating the marketplace in a substantial way. To address these market failures, EPA launched a number of voluntary partnerships designed to transform the marketplace for these technologies by providing a range of products and services. In 2000, EPA's voluntary climate partnerships had their most successful year to date, reducing U.S. energy consumption by 74 billion kilowatt hours. Partnerships produced net savings for consumers and businesses of more than $5 billion in energy costs, and prevented 35 million metric tons of carbon emissions (equivalent to removing almost 25 million cars from the road). The new Climate Leaders initiative allows companies that are already making great strides in reducing their GHG emissions through their participation in Energy Star and other partnerships the opportunity to take their climate commitment one step further.

Requirements of the Climate Leaders Program
Partners in Climate Leaders agree to set a corporate-wide GHG reduction goal and to inventory their emissions to measure and report annual progress towards that goal. Companies first work with EPA to conduct a corporate-wide GHG inventory. After this inventory has identified major emissions sources (and cost-effective reduction opportunities), companies will then work with EPA to negotiate a reduction goal.

To assist companies in conducting their inventories, EPA has developed a corporate GHG inventory protocol based on an existing protocol developed by a broad international coalition of businesses, non-governmental organizations (NGOs), government and intergovernmental organizations convened by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). These accounting guidelines, known as the GHG Protocol, were released in October 2001 after a three-year international collaborative process. In essence, the GHG Protocol for the first time created a set of generally accepted accounting practices for measuring and reporting corporate GHG emissions. The GHG Protocol was therefore a huge step forward in enabling companies, governments, and NGOs to agree on a common framework for setting boundaries, measuring, making calculations, and reporting emissions. EPA is building off the GHG Protocol and providing more detailed guidance, calculation tools, and reporting forms for the Climate Leaders program.

Reporting
EPA is currently in the process of releasing inventory design principles that include overall guidance on defining corporate GHG inventory boundaries, identifying emission sources, defining and adjusting a base year, and setting a GHG reduction target. The design principles also define the minimum reporting requirements under Climate Leaders (the "Core Modules") and include options to report additional sources to provide companies with maximum flexibility in achieving their goal.

Partners must document emissions of the six major GHGs (carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6)) on a company-wide basis (including all domestic facilities). The emissions associated with the following activities must be reported using the Core Modules:

• Direct emissions (as applicable);
• On-site fuel consumption;
• Process-related emissions;
• Onsite waste disposal;
• Refrigeration/air conditioning;
• Indirect emissions from electricity/energy purchases; and
• Emissions from owned or leased vehicles.

In addition to these requirements, Climate Leaders Partners may choose to expand the boundaries of their GHG inventory to include other emission and/or reduction sources. The Climate Leaders Optional Modules provide companies with flexibility by allowing a wider possible range of corporate activities that can generate reductions. Other optional emission and/or reduction sources include the following:

• International facilities;
• Product transport;
• Employee commuting;
• Business travel; and
• Offset investments.

Monitoring and Verification
Companies report their inventories to EPA on an annual basis. Where needed, EPA will work with Partners to ensure the confidentiality of their inventory data. However, some companies have indicated an interest in having third-party auditing of their inventories to ensure maximum accountability and confidence in their results. EPA is working with these companies, accounting and engineering firms, and environmental NGOs to develop a system for third-party auditing of corporate GHG inventories, and will begin to develop these standards within the next year. In the meantime, corporations will perform self-audits with EPA review of all data.

Status and Plans for the Year Ahead
Climate Leaders currently has nineteen Partners, including companies from a wide range of energy-intensive sectors. EPA is actively recruiting other companies, with a goal of 50 Partners by the end of the year. EPA plans to release the first set of Core Modules for review and comment shortly, with subsequent release of sector-specific Modules in the months to come. (See www.epa.gov/climateleaders/news.html.) EPA will also begin work on the Optional Modules, including offset investments, with a goal of issuing draft Modules for comment by this fall. Finally, EPA will seek to provide high-level public recognition for the select companies that join Climate Leaders, as a way to recognize these firms for their leadership in taking on a GHG reduction goal and working with EPA to perform rigorous tracking of their progress towards that goal. Visit the program Website at www.epa.gov/climateleaders for more information.

Prospects for the Future and Other Voluntary Initiatives
Climate Leaders is the first U.S. government program to develop standardized measurement and reporting tools for conducting corporate-wide GHG inventories. There are a handful of programs operated by non-profit organizations that have similar structures, but with important differences. Some companies find it advantageous to partner with the federal government to accomplish environmental, energy, and/or climate management goals; others prefer working with environmental non-profit organizations; and some companies will be participating in multiple programs, as each offers different benefits to participants.

For example, World Wildlife Fund (WWF)'s Climate Savers program works with companies to establish, communicate and verify GHG reduction targets and implementation strategies. WWF's Climate Savers requires independent verification of GHG inventories and is focused on reducing energy-related carbon dioxide emissions. As such, companies' reductions must come from energy efficiency or clean energy activities.

Environmental Defense (ED) is working with eight companies in its Partnership for Climate Action. The companies will report their GHG emissions publicly and each has set a firm target for reducing emissions. Partnership for Climate Action companies commit to mass-based GHG limitations, and in a new twist, ED is trying to maximize opportunities for cost-effective reductions by allowing internal and external emissions trading to assist companies in achieving their targets. The Pew Center on Global Climate Change runs the Business Environmental Leadership Council, which allows companies to assert their commitment to reducing GHG emissions by encouraging, but not requiring, corporate-wide GHG inventories or target-setting. In addition, as mentioned previously, WRI and the WBCSD have collaborated on the international corporate GHG inventory protocols. In contrast to the other programs, however, WRI/WBCSD do not sign up companies to make corporate GHG emission reduction pledges.

Finally, other countries, including Canada and Australia, are also beginning to develop voluntary programs like Climate Leaders, and the International Standards Organization (ISO) is also seriously considering the development of a corporate GHG inventory guidelines. Most of these efforts will begin with the critical framework of the GHG Protocol, and EPA is working to ensure harmonization of standards.
In sum, it is clear that there is a significant amount of consensus developing around increased corporate accounting of GHG emissions, whether or not this is combined with corporate pledges to reduce emissions. Lawyers representing multinational companies, companies that have sizeable GHG footprints, and/or companies that are interested in demonstrating and tracking their leadership on climate change should consider these types of voluntary approaches to help their clients understand and better manage their GHG emissions, and to create a lasting record of GHG accomplishments. Taking this sort of action will have multiple benefits, including positive public recognition for climate leadership, as well as a seat at the table when rules are being negotiated. This is also the best way for companies to prepare for a wide range of potential future climate policies.

Thomas M. Kerr is chief of the Energy Supply and Industry Branch, in the Office of Air and Radiation of the U.S. Environmental Protection Agency. The views expressed in this article are the author's and do not necessarily reflect those of the U.S. EPA.