Carbon Footprint Policies and Challenges for Companies

Authors：ZHU, He; NI, Tianling

Wang, Zhengming and Ning, Yingge

ESG Series: Policy Developments regarding Carbon Footprint and Challenges for Companies

Introduction

Due to the increasing attention on “sustainability” issues at both the international and domestic levels, environmental, social, and corporate governance (ESG) issues have become more important, and investors are paying close attention to the ESG performance of invested companies. Under international ESG standards, a company’s greenhouse gas emissions is one of the important indicators that need to be disclosed. As an important measure of greenhouse gas emissions, a company’s carbon footprint will affect its ESG performance. In recent years, some Chinese export companies have come under pressure from multinational corporations to report their carbon footprint and to label the carbon footprint of their products. With the legislative trends relating to carbon footprint in different countries and regions (especially in the EU) and China’s target of “Carbon Peak, Carbon Neutrality”, in order to remain competitive in the international market, Chinese companies will face new challenges in relation to carbon footprint of products and to reduce carbon emissions. This article aims to provide an overview of the relevant legislative trends and some key points which companies should be aware of.

I. Carbon Footprint Management for Companies

As an important measure of greenhouse gas emissions, carbon footprint has attracted increasing attention from the international community. On the one hand, the purpose of carbon footprint management is to meet the requirements of social self-government organizations or regulatory authorities and to maintain sustainable cooperative relations with international business partners. On the other hand, it is also an inevitable for companies to respond to international competition, assume their social responsibilities and enhance their corporate image in the ESG era.

At the international level, carbon footprint certification, carbon footprint reporting, and the reduction of the carbon footprint of products have been and will be further taken into consideration by self-government organizations or regulatory authorities. For example, the British Standards Institute (BSI) published the PAS 2060 Specification for the Demonstration of Carbon Neutrality in which the quantification and management of carbon footprints (including the carbon footprint of products) has become one of the requirements for carbon neutrality declarations. In December 2020, the revised battery directive draft issued by the EU set out carbon footprint requirements for some electric vehicle batteries and rechargeable industrial batteries. In order to comply with stricter emission reduction targets proposed by the European Green Deal, in July 2021 the EU issued a proposal to establish a carbon border adjustment mechanism (CBAM). According to this proposal, the EU intends to apply CBAM as from 2023, and the EU will officially impose carbon tariffs on cement, electric power, fertilizers, steel and aluminum imported from certain countries and regions from 2026 (this proposal is still in the process of amendment, so we cannot exclude the possibility that the relevant arrangements will change, such as the start time of the implementation of the carbon tariffs). The calculation of carbon tariffs will be affected by the carbon footprint of the product.

At the domestic level, China is reacting to follow-up studies of the current international carbon emission standards. The National Standardization System Construction and Development Plan (2016-2020) contain requirements for carbon footprint standards. In February 2021, the Ministry of Industry and Information Technology encouraged photovoltaic companies to carry out carbon footprint certification under PAS 2050 and ISO 14067 in the Photovoltaic Manufacturing Industry Specification Conditions that took effect in March 2021. In June 2021, Beijing took the lead in issuing its local recommended standard DB11/T 1860-2021 Guidelines for the Carbon Footprint Accounting of Electronic Information Products.

II.  How to Calculate Carbon Footprint

According to ISO 14067:2018 Greenhouse Gases--Carbon Footprint of Products--Requirements and Guidelines for Quantification (“ISO-14067”), the carbon footprint refers to the sum of greenhouse gas emissions and greenhouse gas removals in a product system, expressed as CO2 equivalents and based on a life cycle assessment. The main calculation methods for carbon footprint include the PAS 2050 Specification for the Assessment of the Life Cycle Greenhouse Gas Emissions of Goods and Services published by BSI and the Greenhouse Gas Protocol published by World Resources Institute (GHG Protocol), ISO-14067. For the calculation of the carbon footprint of products, a more commonly used method is the “Life Cycle Assessment” (LCA) proposed by ISO-14067, which focuses on the compilation and evaluation of the input, output and the potential environmental impact of a product system throughout its life cycle (including the whole process from raw material acquisition, production, distribution, use, to waste disposal).

Although the calculation of the carbon footprint of a product varies greatly in different industries, and it is hard to ignore its balance with the industry characteristics, the above-mentioned international standards and Beijing’s Guidelines for the Carbon Footprint Accounting of Electronic Information Products can give companies some guidance when calculating their own carbon footprint. There are likely to be more standards and/or norms for carbon footprint accounting in the future.

III.  Improving Carbon Footprint Management and Scientifically Reducing Carbon Emissions

In order to realize the carbon footprint management of products and scientifically reduce carbon emissions targets, it is advisable that companies focus on the following matters:

(1) Export companies (especially those in the industries of electric vehicle batteries and rechargeable industrial batteries, cement, electricity, fertilizer, steel and aluminum along with their suppliers) should closely follow the relevant international and domestic standards or policies regarding the carbon footprint of products and preemptively set up plans to reduce the carbon footprint of products.

(2) Companies may consider carrying out a comprehensive assessment and calculation of their carbon footprint, which should focus not only on direct and indirect carbon emissions in the production process (such as emissions caused by using electric power and heating power), but also on the entire chain of products production and the approaches to achieving carbon emission reduction by their suppliers.

(3)  Companies may consider incorporating carbon footprint management into their systems of scientific carbon emission reduction targets and further applying such system to the overall improvement of ESG performance. Companies can also set their practical scientific carbon emission reduction targets, approaches and plans by considering the industry characteristics and their own situation as well as the international and domestic environment. If there are any questions in this regard, companies could further discuss the relevant questions with their environmental lawyers or consultants.

IV.  Conclusion and Suggestions  

Faced with the pressure from carbon footprint management, in order to avoid or mitigate the impact of carbon footprint issues on exports or their ESG rating, companies (especially export companies and companies requiring ESG disclosure and rating) should pay attention to changes in the legislation, standards and policies related to carbon footprint, carry out carbon footprint accounting, and complete carbon footprint accounting as well as certification according to future policies and market demand. If you have any specific questions regarding carbon footprint accounting, carbon reduction targets, approaches and plans, or ESG due diligence, ESG report drafting or the overall improvement of your ESG performance, please contact us via email: ecoenvpro@junhe.com.

JunHe, with over 900 professionals, is one of China’s largest full-service law firms with an international reputation for providing high quality legal services. JunHe is one of the pioneers in the practice area of environmental, social, and corporate governance (“ESG”) and has one of the largest teams of environmental law lawyers in China, which provides clients with ESG related legal services. With a goal of sustainability, multidisciplinary practice groups (such as ESG, EHS, labor, IP, trade and data, finance and tax, commercial and criminal compliance, and other ESG related areas) and extensive experience in serving clients from different industries, JunHe provides ESG due diligence services in M&A transactions, assists enterprises or third party professional agencies (if requested) in drafting ESG reports and offers full legal services during enterprises’ daily operation, including ESG related legal and compliance analysis and establishment and improvement of ESG system.

ZHU, He

zhuh@junhe.com

Practice Area

Corporate and M&A

Infrastructure and Project Finance

Environmental, Health and Safety Compliance

NI, Tianling

Partner

nitl@junhe.com

Practice Area

Environmental, Health and Safety Compliance

Corporate and M&A

WANG, Zhengming

wangzhm@junhe.com

Ning, Yingge

ningyg@junhe.com

ESG Series

• How will ESG System Affect Pre-IPO Companies or Listed Companies

• Participating in the carbon emission trading scheme in China: six details you need to know

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