PCAF Methodology for Project Finance

From Open Risk Manual

PCAF Methodology for Project Finance

The PCAF for account and reporting GHG emissions linked to the financing provided to projects such as energy, power, industrial, infrastructure, and agricultural projects that rely primarily on the project’s cash flow for repayment.

Scope

This asset class includes all loans or equities to projects for specific purposes (i.e., with known use of proceeds as defined by the GHG Protocol) that are on the balance sheet of the financial institution. The financing is designated for a defined activity or set of activities, such as the construction and operation of a gas-fired power plant, a wind or solar project, or energy efficiency projects.

Financial institutions shall report the absolute scope 1 and 2 emissions of the project. Scope 3 emissions should be covered if relevant. Avoided and removed emissions may be reported if relevant but must be reported separately from absolute emissions.

Approach

In Project Finance the Use of Proceeds is assumed known. To calculate emissions, only the financed (ring-fenced) activities are included. Emissions and financials related to existing activities outside the financed project but within the financed organization are not considered.

Attribution

As a basic attribution principle, the financial institution accounts for a portion of the annual emissions of the financed project determined by the ratio between the institution’s outstanding amount (numerator) and the total equity and debt of the financed project (denominator). This ratio is called the attribution factor.

The attribution factor calculation is, in principle, only possible for project finance where project-specific financial data is available. For project finance where such data is unavailable, the attribution factor cannot be calculated but rough estimations on attribution can still be made based on region and sector specific average financial data and the outstanding amount. This is explained in more detail in the Project Emissions Calculation section and the list of available options.

Attribution Factor Formula

The core principle of the PCAF methodology is to attribute emissions proportionally to the the fraction of capital structure financing provided by the financial intermediary:

\mbox{Attribution Factor}_p = \frac{\mbox{Outstanding Amount}_p}{\mbox{Total Equity}_p + \mbox{Debt}_p}

where:

  • p is the project
  • The outstanding amount in the numerator is the amount of debt or equity provided by the individual financier
    • In the case of debt, the outstanding amount is defined as the value of the debt the borrower owes to the lender (i.e., disbursed debt minus any repayments).
    • In the case of equity, the outstanding amount is the outstanding value of equity the financial institution holds in the project. It is calculated by multiplying the relative share of the financial institution in the respective project by the total equity of the respective project according to its balance sheet
  • At the start of the project, the total equity and debt in the denominator is the total financing available for the project (total debt plus equity to realize the project). In subsequent years, it is expected that projects will report annually on their financials, including balance sheet information (i.e., the total equity and debt within the project). The value of total equity and debt in the denominator can then be used to calculate the attribution factor.

Financed Emissions

The financed emissions from a single project are calculated (in general - for all calculation options) by multiplying the attribution factor by the emissions of the respective project.

\mbox{Financed Emissions}_p = \mbox{Attribution Factor}_p \times \mbox{Project Emissions}_p

The total financed emissions from multiple projects is simply the sum

\mbox{Financed Emissions}_T= \sum_p \mbox{Attribution Factor}_p \times \mbox{Project Emissions}_p

Project Emissions Calculation

The PCAF Methodology for Project Finance offers a number of options for calculating and reporting attributed GHG emissions for a project. The different options get assigned different Data Quality scores, with score 1 indicating highest data quality and score 5 indicating lowest data quality

Option 1

Option 1 utilizes reported emissions, where verified or unverified emissions are collected from the project directly or indirectly through independent third parties.

Option 1a

Verified GHG emissions data of the project in accordance with the GHG Protocol

\mbox{Project Emissions}_p = \mbox{Verified Project Emissions}_p

Option 1b

Unverified GHG emissions data calculated by the project in accordance with the GHG Protocol

\mbox{Project Emissions}_p =  \mbox{Unverified Project Emissions}_p

Option 2

Option 2 uses physical activity-based emissions, where emissions are estimated based on primary physical activity data collected from the project (e.g., fuel consumed or megawatt-hours of electricity produced). The emissions data should be estimated using an appropriate calculation methodology or tool with verified emission factors expressed per physical activity (e.g., tCO e/MWh) issued or approved by a credible independent body such as the International Energy Agency (IEA)

Option 2a

Primary physical activity data for the project’s energy consumption by energy source (e.g., megawatt-hours of electricity) plus any process emissions. Emission factors specific to that energy consumption primary data (e.g., energy source-specific emission factors). Where this option is used, process emissions must be added to the calculated energy consumption emissions before multiplying by the attribution factor.

\mbox{Project Emissions}_p = \mbox{Energy Consumption}_p \times \mbox{Emission Factor}

  • NB 1: Supplier-specific emission factors (e.g., from electricity provider) for the respective primary activity data are always preferred over non-supplier-specific emission factors.
  • NB 2: The quality scoring for Option 2a is only possible for/applicable to scope 1 and scope 2 emissions as scope 3 emissions cannot be estimated by this option. Other options can be used to estimate the scope 3 emissions, however.

Option 2b

Primary physical activity data for the project’s production. Emission factors specific to production primary data (e.g., emission factor per production activity)

\mbox{Project Emissions}_p = \mbox{Production}_p \times \mbox{Emission Factor}

Option 3

Option 3 uses economic activity-based emissions, where emissions are estimated based on economic activity data collected from the project (e.g., revenue or assets). The emissions data should be estimated using official statistical data or acknowledged EEIO tables providing region- or sector-specific average emission factors expressed per economic activity (e.g., tCO2e/€ of revenue or tCO2e/€ of asset)

Option 3a

Outstanding amount in the project, total project equity plus debt, and the project’s revenue are known. Emission factors for the sector per unit of revenue or from similar projects is known (e.g., tCO e per euro of revenue earned in a sector)

\mbox{Project Emissions}_p = \mbox{Revenue}_p \times  \frac{\mbox{GHG Emissions}_s}{\mbox{Revenue}_s}

Option 3b

Outstanding amount in the project is known. Emission factors for the sector per unit of asset or economic activity-based emission factors from similar projects (e.g., tCO e per euro of asset in a sector) are known.

\mbox{Financed Emissions}_p = \mbox{Outstanding Amount}_p \times \frac{\mbox{GHG Emissions}_s}{\mbox{Assets}_s}

Option 3c

Outstanding amount in the project is known. Emission factors for the sector per unit of revenue (e.g., tCO e per euro of revenue earned in a sector) and asset turnover ratios for the sector or from similar projects are known.

\mbox{Financed Emissions}_p = \mbox{Outstanding Amount}_p \times \mbox{Asset Turnover Ratio}_s \times \frac{\mbox{GHG Emissions}_s}{\mbox{Revenue}_s}

Data Quality Score

Approach Data Quality
Option 1a Score 1
Option 1b Score 2
Option 2a Score 2
Option 2b Score 3
Option 3a Score 4
Option 3b Score 5
Option 3c Score 5

Notes

Guarantees have no attribution until they are called and turned into a loan. Financial institutions should either use the calendar or financial year-end outstanding amount, provided the approach is communicated and used consistently.