At some point in the course of the Covid winter of 2020, along with his journey plans derailed, Karthik Ramanna sat right down to learn the Greenhouse Gasoline Protocol.
Ramanna is an professional in monetary accounting techniques and company management on the College of Oxford. On this event, he’d been requested to step exterior his discipline and touch upon a bit of sustainability analysis. He anticipated to seek out himself on acquainted floor: The entrance of the protocol, he recalled, declared in giant sort that it was an accounting commonplace. However it wasn’t accounting in the way in which he or his friends understood it.
“Think about you choose up a e-book that claims ‘The Astronomy of Mars’ and then you definitely begin it and also you assume, ‘Wait a minute, that is astrology, not astronomy’,” he informed Trellis. “It was very, very jarring.”
That second was the genesis for a analysis partnership that has produced a substitute for the present system for emissions accounting. It’s an effort that has received reward from specialists and been piloted in a number of international locations. It’s additionally produced loads of pushback, with critics asserting Ramanna and colleagues fail to understand the strengths of the present system, which their disruptive habits is placing in danger.
‘We should always work on this’
After studying the protocol and the analysis he’d been requested to evaluate, Ramanna joined a Zoom gathering to share his ideas. He had no main downside with the analysis, he informed these in attendance, however the system that underlay it didn’t qualify as accounting.
Sitting within the digital viewers was Robert Kaplan, an instructional credited with among the most important accounting improvements of the previous half-century and a former colleague from Ramanna’s time at Harvard.
“He sends me a word and he says, ‘I couldn’t agree extra with you and we should always work on this,’” Ramanna stated. “Now, Bob Kaplan has labored on some fairly essential issues. For him to say that, I used to be like, oh, possibly I’m onto one thing right here.”
On the coronary heart of Ramanna and Kaplan’s thought, which first appeared in an instructional paper in August 2021, is an answer to what the pair have described because the “deadly flaw” of reporting underneath the GHG Protocol: Scope 3. To a standard accountant, the thought of an organization having to quantify an exercise taken by different organizations in a price chain, because the Scope 3 guidelines require, is nonsensical. As an alternative, corporations ought to be requested to quantify solely emissions related to what they produce — their Scope 1 emissions, in different phrases.
E-liabilities
Contemplate the availability chain behind a metal automobile half, starting with a mine that produces iron ore. The mining firm is liable for measuring emissions from its operations. In Ramanna and Kaplan’s system, when it sells the ore to a metal producer, it additionally transfers an applicable fraction of these emissions — identified, by analogy to monetary accounting, as liabilities.
The metal producer then measures its personal emissions from the processing of the ore into metal and provides them to the emissions it inherited from the mining firm. When it sells a batch of metal to the subsequent firm within the chain, the producer allocates a fraction of the overall to every cargo. The method continues down the chain, with every firm measuring, including and allocating emissions. When the auto firm purchases the automobile half, alongside the bill comes a press release of the emissions liabilities.
One advantage of this “E-liabilities” strategy — “E” for “environmental” — is that every firm focuses on the emissions it controls. Within the present Scope 3 system, each firm within the worth chain must at the very least estimate the emissions of each different firm. Below E-liability, the measurement occurs as soon as, at supply, and is handed on.
Tutorial proposals to overtake accounting techniques don’t essentially make a splash, however Ramanna credit Kaplan with a present for framing issues in a manner that decision-makers discover helpful. The pair’s provocative language didn’t damage, both: Their paper was titled “Easy methods to Repair ESG Reporting” and a follow-up, printed later the identical yr within the Harvard Enterprise Assessment (HBR), was described as “the primary rigorous strategy to ESG reporting.”
Within the enterprise neighborhood, this strategy struck a chord: Kaplan and Ramanna received the 2021 HBR McKinsey Award, which matches to the overview’s greatest article of the yr. Firms started to supply to check the system. In subsequent HBR articles, Ramanna and colleagues report on E-liabilities pilots carried out in standard spheres (cement and tires), in addition to extra uncommon ones (safety companies in Afghanistan).
Hitting the brakes
Response throughout the sustainability neighborhood has been extra circumspect — significantly from those that spent years establishing the GHG Protocol as the muse for the way corporations report on emissions.
Maybe probably the most notable critique got here from Janet Ranganathan, a managing director on the World Assets Institute and a lead creator of the GHG Protocol. Her 2024 commentary on E-liabilities opens with a warning, in daring, that “E-liability isn’t a substitute for the GHG Protocol.”
Like different critics, Ranganathan famous that double-counting in Scope 3 is a characteristic, not a bug: Firms that take accountability for value-chain emissions are incentivized to collaborate with suppliers and prospects on decarbonization options. “Whereas it is very important stay open to new concepts,” she concluded, “we shouldn’t be too fast to throw the newborn out with the bathwater.”
Others have questioned the practicality of Ramanna and Kaplan’s concepts. “The e-liability system is brittle, as every firm will depend on each different firm working upstream of it in a price chain to additionally estimate emissions and interact with the E-liability registry,” wrote Michael Gillenwater, co-founder of the Greenhouse Gasoline Administration Institute and an advisor to the GHG Protocol.
Objections reminiscent of that from institution figures have probably slowed makes an attempt to judge E-liabilities, however the thought continues to choose up adherents. Different lecturers have weighed in with supportive commentary, starting from proposals for incorporating use of carbon removals to recommendations that E-liabilities might drive investments in supply-chain decarbonization. And pilots are ongoing: Ramanna’s most up-to-date HBR article, from February, describes a take a look at by BMW that outlined how giant corporations can assist smaller suppliers to develop emissions measurement capabilities.
Ramanna and colleagues have additionally prolonged their proposal. After opponents identified that particular person shoppers on the finish of worth chains can’t in follow be held liable for emissions embedded in merchandise they buy, Ramanna and Kaplan responded by specifying when and the way corporations promoting to shoppers ought to disclose downstream emissions.
Pull issue
One query now’s whether or not the E-liabilities strategy will unfold piecemeal, colonizing components of worth chains till it emerges as a de facto commonplace, or transfer extra rapidly by successful top-down assist from a authorities prepared to mandate the strategy. A 3rd end result, after all, is that the challenges related to the thought will trigger the pilots to dry up and the strategy to fizzle.
Ramanna informed Trellis that he doesn’t anticipate a authorities imposing the system wholesale within the subsequent couple of years, however the political and financial realignments being pushed by President Donald Trump and different forces favor his system. “One of many strongest pull elements now we have at this time, geopolitically, is financial nationalism,” he stated.
One instance is the EU’s Carbon Border Adjustment Mechanism (CBAM). European corporations in high-emission sectors, together with metal and cement, will subsequent yr have to start out paying tariffs on the carbon generated by the manufacturing of the products they import. The system will incentivize suppliers exterior Europe to compete to cut back the emissions related to their merchandise — precisely the type of aggressive pressure that E-liabilities is designed to harness.
“Carbon border accounting, if completed proper, could be a highly effective instrument towards local weather change,” Ramanna wrote final yr. “It may possibly increase the principles of the sport in order that corporations and international locations compete on low-emissions items and companies, simply as they at the moment compete on elements reminiscent of prices, high quality, and timeliness.”
With Trump intent on defending choose home industries and punishing imports, the second could be proper for a U.S. model of CBAM. Final month, a bipartisan pair of representatives launched a invoice to switch the federal fuel tax with a carbon border tax. A associated invoice was launched within the Senate a month earlier.
“I’m not saying that is all hunky-dory and it’ll occur tomorrow,” stated Ramanna. “However there are sufficient tailwinds to have interaction with this course of in the USA and world wide as a win-win. It’s a win on commerce, it’s a win on local weather, it’s a win on financial competitiveness.”
[Connect with more than 3,500 professionals decarbonizing and future-proofing their organizations and supply chains through climate technologies at VERGE, Oct. 28-30, San Jose.]
