Growth in digital infrastructure is creating practical questions for Australian businesses about how to categorise electricity-related emissions for reporting purposes. This is particularly the case for data centres, co-location facilities, telecommunications sites, satellite ground stations and shared access arrangements, where one party may own or operate the site, another may own the equipment, and energy use may be sub-metered or passed through commercially.
Reporting under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) turns on two key questions: how the shared ‘facility’ is defined and who has ‘operational control’ of that facility or part of it. A party has operational control where it has the greatest authority to introduce and implement operating, and environmental policies.
However, under the Corporations Act 2001 (Cth) (Corporations Act) and Australian Accounting Standards Board AASB S2 Climate-related disclosures (AASB S2), emissions outside the entity’s Scope 2 reporting boundary may still need to be considered as Scope 3 emissions if they are material indirect greenhouse gas emissions occurring in the entity’s value chain.
Data centres specifically
A data centre will often be treated as one facility, with emissions reported by the data centre operator under their Scope 2 emissions. Data centre customers might report the emissions from their energy consumption at these data centres under their Scope 2 emissions, Scope 3 emissions, or not at all.
The reporting analysis turns on how the facility is defined, and which entity has ‘operational control’. ‘Operational control’ under the NGER Act means the greatest authority to introduce and implement operating, health and safety, and environmental policies. ‘Operational control’ under the international framework for reporting greenhouse gas emissions, the GHG Protocol, means the full authority to introduce and implement operating policies. Either way, it means looking closely at who controls the equipment, who can access the relevant area, who sets operating conditions, who manages power and cooling, and how electricity use is metered.
Where a customer has exclusive locked racks, separate metering and practical authority over the operation of its equipment, it is likely that they will be treated as having operational control of that component, if that component is treated as a separate facility. In this scenario, emissions would be considered the Scope 2 emissions of the customer, rather than the data centre operator.
Scope 2 or Scope 3
The Scope 2 position will usually follow from the NGER facility boundary and operational control analysis. If the operator has operational control of the relevant facility, electricity consumption at that facility may sit within the operator’s Scope 2 reporting boundary. If the customer has operational control of a separate facility or component facility, the electricity consumed by the customer’s equipment may sit within the customer’s Scope 2 reporting boundary.
If both the operator and the customer report the same electricity consumption as Scope 2 emissions, there is a risk of double counting. Conversely, if each party assumes the other is reporting the emissions, there is a risk that emissions are missed entirely.
If not reported as Scope 2, each entity – customer and operator – should still consider whether they fall within Scope 3, including whether they are captured by category 11 (use of sold products), category 13 (downstream leased assets) or separately as material Scope 3 emissions under AASB S2.
Scope 3 categories for data centre operators
Several Scope 3 categories may be relevant for data centre operators, including category 11 (use of sold products) and category 13 (downstream leased assets). These are downstream categories, which apply to the operator as the seller or lessor, rather than to the customer.
Category 11 includes emissions from the use of goods and services sold by the reporting company in the reporting year. However, simply providing electricity, even if bundled with space or connectivity, might not be enough to bring the arrangement within category 11 where the operator is not acting as an energy retailer or utility. This is especially the case where the relevant electricity is used by customer-owned equipment rather than by products sold by the operator.
Category 13 captures emissions from the operation of assets that are owned by the reporting company, leased to other entities, and not already included in the reporting company’s Scope 1 or Scope 2 emissions. The relevant asset is the equipment that uses the electricity. If the customer owns the equipment or the operator provides site access and power infrastructure but does not lease the relevant electricity-consuming asset, category 13 may not apply for data centre operators.
If neither category 11 nor category 13 applies, other categories may be relevant depending on the arrangements (such as category 8 (upstream leased assets)). Even if no categories apply, businesses should separately consider whether the relevant emissions are material indirect emissions in their value chain that need to be reported as part of their Scope 3 under mandatory sustainability reporting. This depends on the entity’s materiality thresholds and broader sustainability reporting judgments.
What the market is doing
Publicly available sustainability reporting shows that practice is not settled. For NGER purposes, operators have generally reported electricity consumed by customer equipment as their own Scope 2 emissions.
In their sustainability reports under AASB S2, data centre operators have approached this in different ways. Each of the below are the reporting approaches of different operators:
- DC operator 1 classifies electricity used by customer IT equipment as Scope 3 category 13;
- DC operator 2 excludes electricity used by customer IT equipment from its Scope 2 emissions as electricity supplied to end users, while keeping cooling and shared infrastructure electricity in its Scope 2 emissions. DC operator 2 relied on first-year relief not to report Scope 3 emissions, so it is not yet clear where it will report those emissions in future years; and
- DC operator 3 reports customer electricity as Scope 3 category 13 only where the customer takes ownership of it, and otherwise reports it as their own Scope 2 emissions.
On the customer side, sustainability reports show that major Australian customers also approach data centre emissions reporting in different ways.
For example:
- Customer 1 reports electricity from third-party data centres as Scope 3 category 1 emissions, based on invoiced consumption apportioned to it by the supplier;
- Customer 2 likewise reports its use of co-located data centres within Scope 3 category 1, where the provider reports Customer 2’s energy consumption as the provider's own Scope 2 emissions; and
- by contrast, Customer 3 reports data centre emissions within its Scope 1 and 2 emissions on an operational control basis, where it has oversight and pays for electricity usage or when it owns and controls the equipment at the data centre (having reclassified those emissions from Scope 3 in earlier years).
Reporting customer data centre emissions as Scope 3 generally assumes the operator is reporting the electricity as Scope 2. As some operators move customer IT electricity outside their Scope 2 in their sustainability reports, customers and operators should not assume their counterparty's reporting is consistent with their own.
Contracting for reporting certainty
Finally, it is generally the contract and operating model that will determine which entity reports emissions. Businesses should consider their agreements to assess who should report electricity consumption, whether energy use is sub-metered, who owns the equipment and controls access and who may introduce and implement operating, health and safety, and environmental policies.
Entities should also consider expressly allocating responsibility for reporting electricity consumption as Scope 2 emissions. This is particularly important for large-scale data centre procurement, co-location, satellite ground station, customer rack and other digital infrastructure arrangements where operational rights, ownership and metering might point in conflicting directions for reporting purposes. Businesses should assess these issues early, rather than waiting until reporting deadlines are approaching.
Our team has expertise in climate reporting, sustainability regulations, digital infrastructure and data centre arrangements. If you have any questions about NGER reporting, Scope 2 and Scope 3 emissions treatment or sustainability reporting requirements for digital infrastructure arrangements, please get in touch.
