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Karthik Ramanna is a professor at the Brabatnik government at the University of Oxford. Robert Kaplan is a senior fellow and Professor Marvin Bauer in Honorable Leadership Development at Harvard Business School.
Today, many companies’ carbon reports use unverified disclosure criteria that are more suitable for subjective and unfamiliar statements than the objective and rigorous data required for company financial reporting. The new approach provides a way to build on carbon reporting based on accounting principles, allowing companies’ environmental performance to be accurate, validated and timely across the globe.
Disclosure plays a meaningful role in the market, but as the US learned after the 1929 major crash, without universally applied accounting and auditing principles, it is a disaster recipe. In the 1930s, Congress mandated financial accounting standards to function as bedrock for public capital markets. Current work on carbon accounting addresses a similar need to eliminate confusion, speculation and distortions in today’s climate disclosures.
The voluntary carbon disclosures of many companies focus on a small portion of their controllable emissions. It comes from assets owned and directly managed by the company. However, on average, emissions from products and services purchased from suppliers are more than five times the company’s direct emissions.
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With most large companies having over 1,000 direct (tier 1) suppliers (each of which thousands more in their own supply chain), it turns out that it is impossible for companies to accurately calculate the emissions from the materials they purchase and services. Due to the lack of rigorous measurements, corporate carbon disclosures use ambiguous terms such as “green”, “round”, and “net zero”, often covering the lack of quantifiable advances to reduce global emissions.
Four years ago we introduced e-Liability Carbon Accounting, a method based on the basic principles taught in the early weeks of all introductory accounting courses. This method allows businesses to accurately measure greenhouse gas emissions, even in the most complex supply chains.
Each company that acts like a value-added calculation will add emissions directly to those built into products or services purchased from immediate suppliers. It then uses a similar causal relationship to activity-based costs to assign its direct and purchased emissions to the output product.
If a company sells output products, the transaction includes both asset transfers in the financial ledger and electronic lead transfers in the electronic ledger.
Using this method, emissions can be calculated once at the source and audited and verified along with allocation to the output product. This information can be sent firmly to downstream customers using modern tools such as blockchain tokens and distributed ledgers.
This approach allows businesses to communicate reliably with all sales invoices, product prices, and original extraction from all processing and transport stages to cradle-to-gate e-liability. The basis of e-liability in accepted accounting practices also eases recruitment and compliance costs.
Over the past four years, we have worked with dozens of companies to apply and verify this approach, including automotive, cement, energy, steel, tyres, agriculture, and healthcare companies.
Hitachi Energy, for example, faced shareholder pressure to reduce emissions by replacing (virgin) copper mined in large transformers with recycled copper. Some engineers questioned the profits as much of the virgin copper came from fully electrified Swedish mines with hydroelectric power.
Under our guidance, the company compared emissions from Swedish virgin copper, recycled copper and copper from overseas mines of coal-fired power. Swedish virgin copper was less than half the emissions of recycled copper, and itself had 50% less emissions than coal-supplied copper.
This conclusion was strengthened by a project with a large steel company. This found that blended steel recycled steel from electric arc furnaces in blast furnaces produces lower lifetime emissions than using only recycled steel. The bottom line: Simple missions – Recycle, Green Knot Brown – is an unreliable guide to reducing global emissions.
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Beyond better carbon reporting, E-Liability Accounting motivates companies to distinguish between produced and embedded emissions. As Hitachi Energy shows, product products such as cement, steel, and copper are not products when measured by carbon performance.
E-Liability opens up a new dimension for competitive advantage by unlocking market power and promoting decarbonization. Companies can use electronic solvent data to reduce emissions by changing products, improving operations, and adjusting sourcing and logistics. You can also purchase a verified atmospheric carbon removal (electronic set) to offset the remaining e-liability and appeal to carbon-conscious customers.
Congresses and regulators can also apply the e-liability system to carbon boundary assessments to use actual verified emissions of imported goods to set tariffs based on carbon strength rather than origin.
With published articles and new case studies now available, business school students should expect to apply these accounting principles in practice to help future employers reduce global emissions.
