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.
|
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. 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.
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.
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.
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
2
This table uses the terms “finance/capital lease” and
“operating lease” as defined in the Scope 3 Standard.
3
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.