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On the Cover: Greenhouse Gas Emissions Reporting and the Role of CAs
Beyond Numbers · May 2010

By Chris Ridley-Thomas

On November 25, 2009, the BC government issued a new reporting regulation under its Greenhouse Gas Reduction (Cap and Trade) Act. This new reporting regulation specifies the requirements for both the reporting and verification of greenhouse gas emissions. The following article provides a summary of this latest development and explains the potential impact of the new regulation on CAs and their clients and/or employers.

— Amy Lam, CA, ICABC Senior Director of Member Services

Organizations in BC with forecast green-house gas emissions of over 10,000 tonnes of carbon dioxide equivalent (CO2e) per annum recently submitted emissions forecasts to BC’s Ministry of Environment, kicking off the first of a series of actions intended to culminate in the implementation of a cap and trade program for selected emitters between 2012 and 2015.

To support this market-based trading program, organizations with greenhouse gas emissions of 25,000 tonnes or more of CO2e are required to have their emissions data audited on an annual basis. In presentations on the reporting requirement, the Ministry of Environment has made it clear that it expects these organizations to have “financial level data controls and data audit trail(s)” supporting their emissions calculations, as this supporting data is considered a necessary underpinning to a credible financial market for greenhouse gas emissions.

Who is affected?

BC’s approach to emissions regulation is intended to capture the vast majority of stationery industrial emissions within the province. As a result, many of the approximately 200 facilities expected to report in BC will be medium-sized facilities. This is in significant contrast to the approach taken in jurisdictions such as Alberta, where the focus to date has been on large final emitters (LFEs) emitting over 100,000 tonnes per year.

Some of the types of facilities captured by BC’s reporting regulation include pulp mills, petrochemical plants, smelters, electronics manufacturers, glass manufacturers, refineries, and cement plants.

Developing proper controls

Many of these organizations have at least some experience with emissions reporting; however, very few have developed the kind of control environment necessary to support an audit conclusion on their emissions. Developing and implementing a robust control environment for emissions reporting is a critical step in ensuring that a clean audit of emissions will be possible by the spring of 2011. In our experience, the current reporting structures often lack key controls over data sourcing, use of emission factors and estimates, and protection of data integrity. As the 2010 reporting year is already well underway, it is vital that organizations identify and address these gaps through a structured diagnostic process as soon as possible.

Organizations will also need to amend existing business planning processes to factor in the cost of carbon when making business decisions about items such as asset maintenance, asset replacement, business expansion, energy supplies, and procurement sources.

Managing compliance

A range of options will be available to help organizations meet compliance targets. These options include:

• Purchasing emissions reductions from third parties;
• Paying for internal emissions reductions; or
• Investing in incremental internal emissions reductions, and selling these to third parties.

Organizations will need to develop an understanding of the various options and their potential costs to determine which strategies are most appropriate in their particular circumstances.

Understanding all of the options and their associated costs is the first step toward creating a strategy for managing compliance obligations, and—for some—creating a new source of revenue. Organizations should develop the capacity to understand both the risks and opportunities associated with carbon costing, and bring this knowledge to the table when business decisions are being made.

Who will be conducting the audits?

The emission audits will be conducted by organizations accredited under ISO 14065, which provides a management framework for firms providing greenhouse gas assurance. Auditors comprise a mix of technical engineering, biology, air quality, and assurance professionals with experience in greenhouse gas assurance.

At present, very few of the organizations working under ISO 14065 are located in BC, which could create a real implementation challenge for the program in this province. Our experience in implementing ISO 14065 has been that the greenhouse gas assurance process benefits from the application of a blend of financial assurance and technical skills.

There are real challenges in reporting on greenhouse gas emissions due to inherent uncertainties, evolving measurement mechanisms, and the frequent need to rely on estimates of emissions where empirical data is not available. In this environment, transparent reporting of uncertainty is essential and favours the use of long-form audit reports that describe this uncertainty in clear detail. Much of the terminology for reporting is borrowed from financial reporting models, so assurance professionals can play an important role in helping to ensure that the audit reporting is robust.

How CAs fit into the equation

Accordingly, chartered accountants can assist their organizations and/or clients in several critical ways. CAs can help by:

• Building an understanding of the impact of carbon costing on a wide range of business decisions, and helping organizations develop the necessary tools to do so;
• Helping organizations understand the changes needed to the existing business controls in order to report robust emissions numbers that can support an audit process; and
• Working with technical emissions experts to provide the necessary assurance regarding greenhouse gas data.

In other words, it’s time to add greenhouse gases to the list of topics with which every business advisor should be familiar.

What’s next?

The monetization of greenhouse gas emissions and the development of emissions reporting requirements are sometimes mistakenly seen as end products of a process to better account for “externalities” within the business reporting framework. More likely, they are just the vanguard of a range of issues—traditionally outside the financial reporting framework, but with very real costs to society and the environment—that are slowly becoming better reflected within reporting frameworks; examples include: water use; safety practices; and items traditionally considered outside of the scope of an organization’s responsibilities, such as supplier performance on environmental, labour, and human rights measures.

The continued growth of corporate responsibility and sustainability reporting, especially within larger organizations, reflects the increasing importance placed on this data by both management and shareholders. CAs can and should play an important role in shaping the way that these information needs are met.

Chris Ridley-Thomas is the president of KPMG Performance Registrar Inc., a wholly owned subsidiary of KPMG LLP that conducts greenhouse gas verification as well as quality, health and safety, and environmental certification. He is also an active member of the firm’s Carbon Advisory Group, assisting clients in climate change strategy and reporting.

Disclaimer: KPMG LLP states that the information contained herein is current to March 31, 2010. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although KPMG LLP endeavours to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.