Flaws in SEC's Proposed Climate Reporting Rule

Discover the critical concerns raised by experts on the SEC's proposed climate-related disclosure rule

The Securities and Exchange Commission (SEC) has recently proposed a rule on 'The Enhancement and Standardization of Climate-Related Disclosures for Investors'. However, there have been growing concerns that the proposed rule still has some major problems before it can be implemented. For an overview of the proposed rule, read our article here.

Offsets ≠ RECs

Investors and companies alike are eagerly awaiting the Securities and Exchange Commission's (SEC) proposed rule on "The Enhancement and Standardization of Climate-Related Disclosures for Investors." However, there are concerns over the proposed rule's treatment of Renewable Energy Certificates (RECs) and Offsets, and whether they should be considered as a similar category.

Critics argue that RECs and Offsets should be treated differently, as they represent fundamentally different aspects of carbon emissions. While Offsets represent an emission reduction equivalent to one metric tonne of CO2, RECs represent the generation of one megawatt-hour of electricity delivered to the grid. As such, RECs cannot be considered as a valid substitute for carbon offsets or as proof of GHG reductions.

Critics also highlight the fact that the retirement of RECs is unlikely to have any significant influence on investment or generation for renewable energy generators. This lack of impact further emphasizes the need to accurately distinguish RECs from other carbon credits and offsets.

Scope 2 Reporting

Critics of the proposed rule have raised concerns that the market-based method used for scope 2 emissions do not provide accurate reporting or credibility, as it does not accurately reflect an organization's physical consumption of grid-delivered electricity or the actual emission rate of that consumption.

Inaccurate reporting of scope 2 emissions not only undermines the rule’s reputation but can also impact investor confidence in energy transition initiatives. A more reliable and standardized reporting system will provide greater credibility and transparency for investors and other stakeholders.

To address this issue, some experts suggest using the U.S EPA Emissions and Generation Resource Integrated Database (eGRID) average emission factors by location as an alternative to the market-based method. This approach would provide a more accurate picture of an organization's physical consumption of grid-delivered electricity and the actual emission rate of that consumption, leading to more credible reporting.

Defining Renewable Energy Certificates (RECs)

Another concern is the differing definitions of Renewable Energy Certificates (RECs) that the rule provides.

First definition: “We are proposing to define a REC, consistent with the EPA’s commonly used definition, to mean a credit or certificate representing each purchased megawatt-hour (1 MWh or 1000 kilowatt-hours) of renewable electricity generated and delivered to a registrant’s power grid.”

Second Definition: “Renewable energy credit or certificate (“REC”) means a credit or certificate representing each megawatt-hour (1 MWh or 1,000 kilowatt-hours) of renewable electricity generated and delivered to a power grid.”

The first definition suggests that a REC represents each purchased megawatt-hour of renewable electricity generated and delivered to a registrant's power grid. However, the correct definition is that RECs represent each megawatt-hour of renewable electricity generated and delivered to “a power grid”. RECs do not represent delivery to a specific power grid, (“to the registrant's power grid”).

In addition, a purchase of an REC does not necessarily represent the delivery or purchase of electricity, it is only a record of generation occurring. This misrepresentation could lead to confusion and inaccuracies in reporting.

Overall, while the SEC's proposed rule on 'The Enhancement and Standardization of Climate-Related Disclosures for Investors' is a step towards more accurate and credible reporting, there are concerns that need to be addressed. The SEC should consider the concerns raised and alternatives proposed by experts to make the most efficient market outcome in context of its overall goals. The SEC should also be mindful of the upcoming revision to the GHG protocol and take this into account when finalizing the proposed rule.