If a global rewire of our economic system is underway, the rules for businesses and investors to record and report emissions deserve serious attention.
The widespread adoption of GHG accounting over the last 20 years should be celebrated. Over 92% of Fortune 500 companies now practice some degree of carbon emissions reporting.
Yet fundamental issues with the practice remain. Issues in data collection, boundaries and double counting have plagued the protocol as it has grown in adoption. If the promise of GHG accounting and climate finance is to be fully realized, its rules need to be reexamined.
THE TAKEAWAY
GHG Emissions is the primary measure of business' contribution to climate change.
GHG Accounting was created so organizations can track and report the quantity of GHGs produced by a given business activity.
The rules need to be revisited. These rules, well intended when reporting was voluntary, must be reexamined in order to achieve the next stage of adoption.
GHG Accounting
To determine global climate health, scientists measure the total volume of heat absorbing gasses (GHGs) — like carbon dioxide (CO₂) — emitted into the atmosphere. GHGs linger in the air for a long time (think 1,000+ years) resulting in an ever-growing concentration. The more GHGs, the warmer the Earth. The impact of this warming is not linear — we quickly approach a tipping point which risks the permanent disruption of the Earth's capacity to self-regulate surface temperature, a planetary benefit humanity has benefited from for over 9,000 years.
By the late 1990s, growing concerns around climate change reached its own ‘social’ tipping point. A coalition of businesses and investors began the initiative to develop a standard approach form the measurement and reporting of data related to GHG emissions for businesses.
GHG accounting has many names — carbon accounting, emissions inventory, emissions accounting, and CO₂ accounting are all common. This can be confusing, but rest assured that they all generally mean the same thing – a method to measure and report the quantity of greenhouse gasses an organization produces (also referred in short-hand climate-lingo as CO₂ or CO₂e).
If you see “CO₂e” rather than CO₂, don’t panic. It just means CO₂ “equivalent”. CO₂e provides a common unit to measure global warming regardless of the different gas types involved. A metric ton of any other greenhouse gas can be easily converted into 'equivalent' tons of CO₂ using its respective Global Warming Potential (GWP). CO₂e simplifies top-level reporting. (see chart the below).
Lastly, GHG accounting is not the same thing as GHG detection. Scientists today know how much heat is absorbed by CO₂ molecules. They use these facts to accurately measure the concentration of CO2 in the air.
Unfortunately, the practice of GHG accounting for organizations is less scientific and less accurate…
Source: https://www.epa.gov/climate-indicators/greenhouse-gases
GHG Protocol - The Global Standard
The GHG Protocol is the world’s leading authority for GHG accounting. It was built in partnership with the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). Today, most companies have adopted this standard and regulators are increasingly incorporating its methodology into law. First published in 2001, and last revised in 2015, the GHG Protocol is overdue for its 4th major revision (hopefully) sometime in 2024.
The GHG Protocol utilizes the concept of scoped emissions to categorize emissions from business operations.
Scope 1: Direct emissions resulting from sources directly owned and/or controlled by an organization (think exhaust pipes from heating, cooling, or gas engines).
Scope 2: Indirect emissions resulting from electricity consumed by a company (think of utility bills. The electric company emits carbon based on a businesses purchases)
Scope 3: Indirect emissions resulting from upstream operations of a company's supply chain and downstream activities by the company’s end-users (think about the emissions caused from making clothes that were purchased, or the emissions caused by using Apple products).
Clear as mud right? Back in 2001, the intent of these "direct" and "indirect" emission scopes was for businesses to develop as a proxy for risk. In concept, it allowed businesses to understand how much exposure its business practices had to a potential carbon-tax.
At the time (in 2001), accountants and investors had little to say on the protocol. However, cracks have emerged if it to be treated as the universal accounting system…
Current Challenges in GHG Accounting
The success of the GHG Protocol’s adoption should be celebrated, but at the same time, the challenges to scaling the protocol should not be ignored if it is to realize its objective:
Data Collection. Many businesses are simply not set up to supply emissions details to upstream clients or downstream suppliers (and often don't want to out of trade secret concerns). This lack of data is pervasive and research has shown that 91% of businesses aren’t measuring their full emissions.
Accuracy. Without actual data, these gaps are replaced with assumptions – and with large businesses, assumptions can pile on top of assumptions – making it unclear how much trust should be applied to a given report. One BCG study suggests error rates between 30% and 50% for any given sustainability report.
Boundary Setting. The GHG protocol gives companies leeway in drawing the borders of what should and should not be included in emissions reporting. Furthermore, firms are constantly evolving, restructuring, and acquiring other businesses – sometimes resulting in hastily redrawn boundaries contributing further to accuracy concerns.
Timing. Surprisingly, the protocol does not have a clearly define concept of "stock". Even though carbon goes into the atmosphere and persists, each annual report doesn't have a carry-over effect from prior year emissions.
Double Counting. Last but not least, is the issue of double-counting across businesses. While the protocol was created with the fundamental intent to double-count for the purpose of not hiding behind outsourced emissions – this creates very real actuarial issues that prevent financial institutions from rolling out trustworthy financial products that could be accelerating climate adoption.
These issues have created complications (such as "Permanence, "Additionality" and "Leakage") which practitioners have wrestled with for the last twenty years, unfortunately earning them the glazed-eyes of many business operators in positions of leadership.
What's next for companies?
As the necessity for accurate GHG accounting increases, well-intended features of the GHG Protocol need to be re-examined. Some of those discussions are happening now.
In our next post we’ll dive deeper into the nuances of the GHG Protocol and also explore some fresh ideas such as the E-Liability Institute that attempt to address these mounting complexities (including — gasp! — the elimination of "scoped emissions" entirely!).
We're excited to dig into these and distill the best takeaways in upcoming articles. Please consider subscribing to The Rewire and join us as we learn more about the science, economics, and technologies rewiring the global economy.
Until next time,
Anea & Logan @ The Rewire
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