The CEO guide to carbon

(Third of four parts)

 Data controls

As in a business’s finance function, a system of data controls is needed for emissions and energy reporting. The controls inherent in carbon emissions data collection systems, whilst improving in many organizations, are often not strong because:

• they are usually in sites remote from head office without a direct focus of attention

• they do not have a general ledger control account such as occurs with inventory

• checks and cross-checks common in financial systems are often missing due to the immaturity of systems.

Features of robust systems of carbon emissions data and collection include:

• regular checks and calibrations of monitoring devices or measurement equipment

• sign-off by the person taking measurements or making calculations

• approval by a more senior knowledgeable person of the recorded readings or calculations

• reconciliation of periodic measurements or calculations to six-monthly or annual results

• cross checks, with an analysis and explanation of variations, of qualitative data to other data such as production levels where a relationship exists and budgeted data and/or data from previous periods.

Collection and processing of emissions data

The stages for collecting and processing carbon emissions data can be summarised as follows.

Set reporting boundary

The definitions of the boundary for collecting carbon emissions data need to be consistent with the definitions used for financial data unless sound reasons for a difference exist. A good, and widely used, example of such a difference is under the GHG Protocol the boundary for ownership emissions expands beyond controlling equity ownership to operational control.

Aspects to consider in determining the boundary include: the existence of joint ventures, contractual arrangements, outsourced activities, associated companies and franchises. Contractor arrangements warrant close attention to ensure reporting coverage is complete.

Identify emissions sources

Checks should be run to ensure the different emission scopes have been considered by those responsible for data collection. Sources of primary carbon emissions include:

- stationary combustion – engines, boilers, furnaces, (or any process generating excess heat)

- mobile combustion – cars, trucks, planes and ships

- process carbon emissions from physical or chemical processes

- fugitive carbon emissions from waste, coal piles and gas pipelines.

Collect data

Carbon emissions data can be obtained by:

- direct observation (rarely used)

- estimation by reference to readily observable variables that are closely related to carbon emissions such as the quantity of fossil fuels consumed

- sampling and analysis of a fuel consumed for its carbon content and other qualities that will affect actual emissions generated by its combustion at a facility

- direct monitoring through reliable metering devices

Appropriate technical guidelines should provide methods that allow for both direct emissions monitoring and the estimation of carbon emissions through the tracking of observable, closely related variables. Carbon emissions may be estimated by reference to reportable data such as fossil fuel consumption evidenced by invoices, and the use of specified emission factors provided in these technical guidelines.

Apply emissions factors

Applying emissions factors, which is the carbon content of an energy source, requires levels of technical knowledge and this is best located in an operational area. The technical experts should:

• provide assurance that the emissions factors are relevant and consistently applied in accordance with the appropriate standards under which the carbon emissions are being reported.

• provide details of any areas of uncertainty or significant assumptions or judgement applied in this process.

Consolidate/aggregate

The consolidation of multiple facility carbon emissions data to the corporate level should be overviewed at a corporate level to confirm accuracy and completeness and to avoid double counting.

Information and management systems

A vital component of successful data collection is the integrity, robustness and adaptability of the information systems being used.

Some of the key considerations regarding new and existing carbon emissions data systems include:

• the ability to capture, calculate and report carbon emissions accurately from a number of energy sources, sites and activities

• the system’s ability to collect and process information necessary to meet statutory reporting requirements

• the availability of an appropriate IT system

• the capabilities of the system for migrating data

• the adequacy of the training of the people to use the systems correctly

Managing the financial impact

In a competitive global market place it can be the carbon emissions metrics of a company, relative to its competition, that determines winners and losers arising from the introduction of carbon pricing.

Entities required to purchase permits or pay additional tax or penalties will seek to recover the costs through the supply chain or suffer lower margins. They face becoming uncompetitive.

These issues will vary depending on the company, and roles may include supporting commercial and strategic decision making. These decisions include assessing the financial and commercial viability of investments to reduce the company’s exposure to carbon pricing and the impact of carbon pricing on mergers and acquisitions. It can also include permit trading, involvement in supplier and customer negotiations along with input to costing and pricing strategies for products and services.

This is in addition to the impact on the balance sheet in areas such as permit asset valuation (for companies required to purchase permits) and asset value impairment, carbon emissions liability and measurement, understanding the implications for cash flow management, carbon price hedging strategies and the tax treatment of carbon-price related transactions.

The tax treatment of transactions related to most emission reduction schemes will vary. Permits or certificates may be treated as assets in some circumstances. Specialist tax advice should be sought on these transactions particularly on the tax implications of any international transfers of any emissions related permits or certificates.

The introduction of a price on carbon will also require adjustments to a range of financial management processes such as budgeting, forecasting and risk management. To be concluded

(Jennifer Westacott is a Partner for Advisory Services of KPMG Australia. Jack Holden is a Senior Manager for Advisory Services of KPMG Australia.

This article is an excerpt from Advisory Services publication, “The CEO Guide to Carbon: Emissions reporting and management in Asia Pacific”.

The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email Henry D. Antonio at [email protected] or [email protected]. Henry D. Antonio is a Partner for Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.)