Chapter 7 — Accounting for GHG Emissions From Leased Assets

7.3 Lessee Accounting for Emissions From Leased Assets

As discussed in Section 7.1, understanding a company’s consolidation approach and type of lease is important because these factors will determine whether GHG emissions from a leased asset are accounted for in Scope 1, Scope 2, or Scope 3. Correctly identifying these factors will prevent and avoid double counting.

The table below, which is adapted from Table A.1 of the Scope 3 Standard, presents various considerations for lessees related to the classification of GHG emissions from leased assets into Scopes 1, 2, and 3.

Table 7-2 Leasing Arrangements2 and Boundaries (Lessee’s Perspective)

Type of Leasing Arrangement	Type of Leasing Arrangement
Type of Leasing Arrangement	Finance/Capital Lease	Operating Lease
Equity share or financial control	Case A: Lessee has accounting ownership and financial control. Therefore, GHG emissions associated with fuel combustion are accounted for in Scope 1, and those associated with the use of purchased electricity are accounted for in Scope 2.	Case C: Lessee does not have accounting ownership or financial control. Therefore, GHG emissions associated with fuel combustion and the use of purchased electricity are accounted for in Scope 3, Category 8 (upstream leased assets).
Operational control	Case B: Lessee has operational control. Therefore, GHG emissions associated with fuel combustion are accounted for in Scope 1, and those associated with the use of purchased electricity are accounted for in Scope 2.	Case D: Lessee has operational control. Therefore, GHG emissions associated with fuel combustion at sources in the leased space are accounted for in Scope 1, and those associated with the use of purchased electricity are accounted for in Scope 2.3

As illustrated in the table above, the lessee in a finance/capital lease as defined in the Scope 3 Standard (Cases A and B) is considered to have accounting ownership and operational control of the leased asset. Since, from an accounting perspective, the leased asset in a finance/capital lease is considered a wholly owned asset of the lessee that gives the lessee all of the risks and rewards of ownership, the lessee is required to account for all emissions related to the leased asset as if the lessee owned the asset. Therefore, regardless of the consolidation approach selected, GHG emissions from the leased asset that are associated with fuel combustion would be categorized as Scope 1 (direct), and those that are associated with the use of purchased electricity would be categorized as Scope 2 (indirect). See Example 7-2 for an illustration of this fact pattern.

As indicated in Table 7-2, Case D, if a lessee that applies the operational control approach classifies its leasing arrangement as an operating lease (in a manner consistent with both ASC 842 and the GHG Protocol) and has operational control over the leased asset (which would be the case if the lessee can operate the asset), the lessee would record (1) GHG emissions associated with fuel combustion at sources in the leased space as Scope 1 (direct) and (2) GHG emissions associated with the use of purchased electricity as Scope 2 (indirect). This treatment is similar to how a lessee in a finance/capital lease would record GHG emissions related to the leased asset under any of the consolidation approaches described above. Nonetheless, as indicated in the footnote to Case D above, a company that leases an asset from another entity under an operating lease and applies the operational control approach may report GHG emissions from the leased asset in Scope 3 if it can demonstrate that it does not have operational control over the leased asset. There is an implicit presumption within the GHG Protocol that a lessee has operational control over an asset subject to an operating lease. However, the ultimate determination of operational control would be based on the underlying facts and circumstances of each individual specified asset and associated lease agreement to assess whether this presumption can be rebutted. This assessment would involve weighing the major factors and/or triggers that cause any GHG emissions from the use and operation of a leased asset. Specifically, the party that has the full authority to introduce and implement the operating policies that most significantly affect whether and, if so, when and in what quantity GHG emissions are produced will typically be the party that is deemed to have operational control over the leased asset. Accordingly, if the lessee in an operating lease concludes that it does not have operational control over the leased asset and therefore reports emissions related to the leased asset in Scope 3, the lessee must disclose the background and reasoning that support its conclusion. See Chapter 3 for more information about GHG inventory reporting.

Example 7-4

Company A leases a fixed asset from another entity and applies the operational control approach to consolidate GHG emissions. It classifies its leasing arrangement as an operating lease (in a manner consistent with both ASC 842 and the GHG Protocol) in its audited financial statements.

As illustrated in Table 7-2, Case D, A would typically account for GHG emissions related to the leased asset in Scope 1 or Scope 2 (depending on the nature of the emissions). However, A discloses that it does not have operational control over the leased asset; accordingly, it reports the related emissions in Scope 3 instead.

As part of the definition of control in the Scope 3 Standard’s glossary, operational control is described as a type of control whereby “the organization or one of its subsidiaries has the full authority to introduce and implement its operating polices at the operation.” Therefore, even though A applies the operational control approach, if A is unable to fully direct the use of the leased asset and lacks full authority to implement its operating policies with respect to the leased asset, the emissions related to the leased asset may be included in A’s Scope 3 inventory as long as the decision is disclosed and justified in the public report.

However, in a situation in which a lessee has an operating lease and applies the equity share or financial control approach (Table 7-2, Case C), the direct GHG emissions related to the leased asset along with GHG emissions related to the leased asset that are associated with the use of purchased electricity would always be categorized in Scope 3, Category 8 (upstream leased assets). This is because the lessee does not have accounting ownership of the leased asset; under the equity share or financial control approach, companies would only report emissions in Scope 1 or Scope 2 if they have accounting ownership or financial control. For more information, see Sections 7.2.1 and 7.2.2.

Therefore, the determination of whether to report emissions from a leased asset in Scopes 1 and 2 or Scope 3 depends on both the type of lease (i.e., finance/capital or operating) and the consolidation approach selected.

Example 7-5

Company A applies the financial control approach and leases cars for its employees to use for their business travel. Company A classifies car leases as operating leases (in a manner consistent with both ASC 842 and the GHG Protocol) in its audited financial statements.

Since the car leases are classified as operating leases, A (i.e., the lessee) does not have accounting ownership of the vehicles. Because A applies the financial control approach and accounts for the car leases as operating leases, A would account for GHG emissions from the leased vehicles in Scope 3, Category 8 (upstream leased assets). See Table 7-2, Case C.

Example 7-6

Assume the same facts as in Example 7-5, except that Company A applies the operational control approach. Company A has full operational control over the cars in its operating leases.

Because A applies the operational control approach, accounts for the car leases as operating leases, and has operational control over the leased vehicles, A would account for (1) direct GHG emissions from the leased vehicles in Scope 1 and (2) indirect GHG emissions from the leased vehicles that are associated with the use of purchased electricity in Scope 2. See Table 7-2, Case D.

7.3.1 Lessee Accounting for GHG Emissions From Transportation and Distribution

Chapter 5 of the Scope 3 Standard includes the following discussion of GHG emissions from vehicles:

Scope 3 Standard, Chapter 5, “Identifying Scope 3 Emissions,” Page 46

5.5 Description of Scope 3 Categories . . .

Category 6: Business Travel . . .

Emissions from transportation in vehicles owned or controlled by the reporting company are accounted for in either scope 1 (for fuel use) or scope 2 (for electricity use). Emissions from leased vehicles operated by the reporting company not included in scope 1 or scope 2 are accounted for in scope 3, category 8 (Upstream leased assets). Emissions from transportation of employees to and from work are accounted for in scope 3, category 7 (Employee commuting).

GHG emissions from transportation and distribution related to leased vehicles may be accounted for differently depending on the type of lease, the reporting company’s chosen consolidation approach, and the specific use of the leased asset. A company may lease vehicles for various business reasons, such as transporting a good or inventory from the vendor to the company’s warehouse or leasing cars on behalf of employees for their commute. Companies are advised to carefully consider the facts and circumstances of their financial transactions to accurately account for their GHG emissions and avoid double counting.

For more information about accounting for upstream Scope 3 emissions from transportation and distribution, see Section 6.3.3.

7.3.2 Scope 2 Considerations for Lessees

As defined in the Scope 2 Guidance, energy to be reported by lessees includes energy that is acquired and consumed.

Scope 2 Guidance, Chapter 5, “Identifying Scope 2 Emissions and Setting the Scope 2 Boundary,” Page 34

5.3 Defining Scope 2

Scope 2 is an indirect emission category that includes GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by the reporting company.FN3 GHG emissions from energy generation occur at discrete sources owned and operated by generators that account for direct emissions from generation in their scope 1 inventory. Scope 2 includes indirect emissions from generation only; other upstream emissions associated with the production and processing of upstream fuels, or transmission or distribution of energy within a grid, are tracked in scope 3, category 3 (fuel- and energy-related emissions not included in scope 1 or scope 2).

__________________________________

FN3 Corporate Standard (WRI/WBCSD 2004), p. 25. The word “acquired” was added in the Scope 3 Standard (p. 28) to reflect circumstances where a company may not directly purchase electricity (e.g., a tenant in a building), but where the energy is brought into the organization’s facility for use.

If a reporting company is the lessee (i.e., tenant) in a leased space or using a leased asset and either (1) applies the equity share approach or the financial control approach to a finance/capital lease (Table 7-2, Cases A and B) or (2) applies the operational control approach to an operating lease (Table 7-2, Case D), it is required to report any energy purchased in Scope 2. In some building leases, tenants do not pay for electricity separately; rather, the cost of electricity is included in the rent or a flat overhead charge from the landlord or lessor. Regardless of who (i.e., landlord/lessor or tenant/lessee) pays for the purchased electricity, a lessee is not exempt from reporting GHG emissions from that energy use.

Connecting the Dots

A reporting company would categorize emissions associated with the use of purchased electricity as Scope 2 (indirect) in any of the following scenarios:

The reporting company is a lessee in a finance/capital lease and uses the equity share or financial control approach to consolidate GHG emissions (Table 7-2, Case A).
The reporting company is a lessee in a finance/capital lease and uses the operational control approach to consolidate GHG emissions (Table 7-2, Case B).
The reporting company is a lessee in an operating lease and uses the operational control approach to consolidate GHG emissions (Table 7-2, Case D).

Note that if a lessee is accounting for GHG emissions associated with the use of purchased electricity in Scope 2, the lessor would account for the same GHG emissions in Scope 3, Category 13 (downstream leased assets). For more information, see Sections 7.2.1 and 7.4.

7.3.2.1 Types of Energy Purchased by Lessees for Consumption

Scope 2 Guidance, Chapter 5, “Identifying Scope 2 Emissions and Setting the Scope 2 Boundary,” Page 35

5.3 Defining Scope 2 . . .

5.3.1 Forms of Energy Use Tracked in Scope 2

Scope 2 accounts for emissions from the generation of energy that is purchased or otherwise brought into the organizational boundary of the company. At least four types of purchased energy are tracked in scope 2, including the following:

Electricity. This type of energy is used by almost all companies. It is used to operate machines, lighting, electric vehicle charging, and certain types of heat and cooling systems.

Steam. Formed when water boils, steam is a valuable energy source for industrial processes. It is used for mechanical work, heat, or directly as a process medium.

Combined heat and power (CHP) facilities (also called cogeneration or trigeneration) may produce multiple energy outputs from a single combustion process. Reporting companies purchasing either electricity or heat/steam from a CHP plant should check with the CHP supplier to ensure that the allocation of emissions across energy outputs follows best practices, such as the GHG Protocol Allocation of GHG Emissions from a Combined Heat and Power (CHP) Plant (2006).

Heat. Most commercial or industrial buildings require heat to control interior climates and heat water. Many industrial processes also require heat for specific equipment. That heat may either be produced from electricity or through a non-electrical process such as solar thermal heat or thermal combustion processes (as with a boiler or a thermal power plant) outside the company’s operational control.

Cooling. Similar to heat, cooling may be produced from electricity or through the distribution of cooled air or water.

The GHG Protocol identifies four categories of purchased energy for reporting companies, including lessees, to consider. The purpose of the above list is to ensure that a reporting company includes a complete inventory of its purchased energy in its organizational boundary.

The following example from the Scope 2 Guidance applies specifically to lessees/tenants:

Scope 2 Guidance, Chapter 5, “Identifying Scope 2 Emissions and Setting the Scope 2 Boundary,” Page 34

5.2 Operational Boundaries . . .

5.2.1 Leased Assets . . .

On-site heat generation equipment, such as a basement boiler, typically falls under the operational control of the landlord or building management company. Tenants therefore would report consumption of heat generated on-site as scope 2. If a tenant can demonstrate that they do not exercise operational control in their lease, they shall document and justify the exclusion of these emissions.

The example above illustrates that even when the energy purchased and consumed by a lessee/tenant is generated by on-site equipment, the lessee/tenant must report GHG emissions from that energy in Scope 2, just as it would have to report Scope 2 emissions from the generation of electricity purchased for consumption through a traditional grid. Further, as discussed in Section 7.3, if the lessee in an operating lease concludes that it does not have operational control over the leased asset and therefore reports emissions related to the leased asset in Scope 3, the lessee must disclose the background and reasoning that support its conclusion. See Chapter 3 for more information about GHG inventory reporting.

The Scope 2 Guidance provides the following additional considerations that apply to leased facilities and equipment:

Scope 2 Guidance, Chapter 5, “Identifying Scope 2 Emissions and Setting the Scope 2 Boundary,” Pages 37–38

5.4 Distinguishing Scopes Reporting by Electricity Production/Distribution Method . . .

Some companies own, operate, or host energy generation sources such as solar panels or fuel cells on the premises of their building or in close proximity to where the energy is consumed. This arrangement is often termed “distributed generation” or “on-site” consumption, as it consists of generation units across decentralized locations (often on the site where the energy output will be consumed, as opposed to utility-scale centralized power plants). The company may consume some or all of the energy output from these generation facilities; sell excess energy output back to the grid; and purchase additional grid power to cover any remaining energy demand.

The owners/operator of a distributed generation facility may therefore have both scope 1 emissions from energy generation, as well as scope 2 emissions from any energy purchased from the grid, or consumed from on-site generation where attributes (e.g., certificates) are sold.

If a company owned and operated the distributed generation facility, the direct GHG emissions from generating the energy would be recorded in Scope 1, and any indirect GHG emissions associated with the use of electricity or other energy purchased for the on-site generation would be recorded in Scope 2. If a company leased this facility from another entity, the company would need to perform the same evaluation to select a consolidation approach and classify the lease so that it can determine whether to account for the related GHG emissions in Scope 1, Scope 2, or Scope 3.

The Scope 2 Guidance also provides considerations related to the consumption of electricity from a direct line transfer that are applicable to lessees/tenants:

Scope 2 Guidance, Chapter 5, “Identifying Scope 2 Emissions and Setting the Scope 2 Boundary,” Page 36

5.4 Distinguishing Scopes Reporting by Electricity Production/Distribution Method . . .

In [Figure 5.2 below], energy production is fed directly and exclusively to a single entity — here, Company B. This applies to several types of direct line transfers, including:

An industrial park or collection of facilities, where one facility creates electricity, heat, steam, or cooling and transfers it directly to a facility owned or operated by a different party.
For energy produced by equipment installed on-site (e.g. on-site solar array or a fuel cell using natural gas) that is owned and operated by a third party.
For electricity, heat, steam, or cooling produced within a multi-tenant leased building (by a central boiler, or on-site solar) and sold to individual tenants who do not own or operate the building or the equipment. Tenants may pay for this energy as part of a lump rental cost and the tenant may not receive a separate bill.

In any of these scenarios:

The company with operational or financial control of the energy generation facility would report these emissions in their scope 1, following the operational control approach, while the consumer of the energy reports the emissions in scope 2.
Any third-party financing institution that owns but does not operate the energy generation unit would not account for any scope 1, 2, or 3 emissions from energy generation under the operational control approach, since they do not exercise operational control. Only the equipment operator would report these emissions in their scope 1 following an operational control approach. Equipment owners would account for these generation emissions in scope 1 under a financial control or equity share approach, however.
If all the energy generation is purchased and consumed, then Company B’s scope 2 emissions will be the same as Company A’s scope 1 emissions (minus any transmission and distribution losses, though in most cases of direct transfer there will be no losses).FN4

Figure 5.2 Direct Line Energy Transfer

__________________________________

FN4 Line losses in Figure 5.2 can be separately reported in Company B’s scope 3. If Company A owns the line, it does not need to report these line-loss emissions separately since they have already been reported in scope 1.

Footnotes

This table uses the terms “finance/capital lease” and “operating lease” as defined in the Scope 3 Standard.

Sometimes, a reporting company that leases an asset from another entity in an operating lease may be able to demonstrate that the reporting company (lessee) does not have operational control over the leased asset. In such a case, the reporting company may report GHG emissions from the leased asset in Scope 3 as long as the decision is disclosed and justified in the public report.