GHG Inventory Boundary Setting: Equity Share Approach Transcript
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Before beginning a greenhouse gas inventory, an organization must set the inventory boundary. The organization selects organizational, temporal, geographical and operational boundaries and applies them when quantifying and reporting its greenhouse gas emissions. The inventory boundary determines which direct and indirect emissions are accounted for by the company. The same boundary setting will be used consistently every time the company embarks on an greenhouse gas inventory quantification exercise.
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The temporal boundary defines the timeline or the period for which the emissions will be quantified. An emissions inventory will quantify the greenhouse gas emissions that occurred within 12 months or a period of 1 year. This one year period can be based either on calendar year beginning from January 1 to December 31, or some other period. The temporal boundary could be also be based on the organization’s fiscal or financial year. For example, the fiscal year could cover the period from November 1st to October 31st, as in the case of Canadian Banks.
In some cases, reporting programs like the Carbon Disclosure Project, or the CDP as it’s known, may request organizations to report their emissions for the period from April 1st to March 31st.
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Businesses have different legal and organizational structures. They could be wholly owned operations, incorporated or un-incorporated, join ventures, subsidiaries, or other.
Accounting rules determine how the various organizational structures are treated for financial purposes.
Similarly, when reporting greenhouse gas emissions, setting organizational boundaries determines how the greenhouse gas emissions from the various operations and businesses will be accounted for in the company’s emissions Inventory.
Simply put: If a company has 100% ownership, it owns and is responsible for 100% of the greenhouse gas emissions it generates. If the company has partial ownership then, the accounting of greenhouse gas emissions depends on the consolidation approach selected.
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In setting organizational boundaries, the company selects an approach to consolidate its greenhouse gas emissions and applies this approach throughout its operations and businesses.
There are two types of consolidation approaches: Equity share approach and control approach. Once the company decides upon a consolidation approach it should consistently apply the selected approach to its various entities and operations.
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In setting operational boundaries, the company identifies the GHG emissions generating activities from its various operations and then defines the scope of accounting and reporting these emissions.
Business travel, purchased electricity and manufacturing are some examples of operational activities that generate greenhouse gas emissions. These are either direct or indirect activities that undertaken by the company to conduct its day to day business. The selected operational boundary is applied consistently to define the scope of these direct and indirect emissions at each operational level within the already established organizational boundary.
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When accounting and reporting for greenhouse gas emissions, the company first sets the organizational boundary based on the selected consolidation approach. The company will choose to consolidate the greenhouse gas emissions from its operations and businesses based on either: The Equity Share Approach or the Control Approach.
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Under the Equity Share Approach the organization accounts for greenhouse gas emissions according to its share of equity in the operations. The equity share indicates the company’s economic interest in the operation. In other words, it shows the company’s share in the rewards and risks from the operation.
Usually, the company’s equity share in the operation is the same as the company’s share of ownership in the operation. However, if this is not the case, that is, if the percentage ownership is not the same as the company’s equity share in the operation, then the economic substance will define the company’s share of the greenhouse gas emissions from the operation not the legal ownership.
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Imagine a scenario where Apple Inc. is owned by two different entities. Google owns 70% of Apple and Microsoft owns 30% of Apple. How is the share of greenhouse gas emissions are accounted for by these companies? Distribution of GHG emissions is by equity ownership.
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How much of the emissions from Facebook are allocated to Google under the equity share approach? Google shares a part of the emissions from Facebook via its ownership of Apple. Since Apple owns 50 % of Facebook, Apple will account for 50 % of Facebook’s GHG emissions. Next, based on its 70% ownership of Apple, Google will account for 70% of the 50% of emissions from Facebook. Thus, Google accounts for 35 % of the emissions from Facebook.
In the case of Microsoft, based on its 30% ownership in Apple, Microsoft will account for 30% of the 50% of greenhouse gas emissions from Facebook. That is, Microsoft accounts for 15% of Facebook’s emissions.
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