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 Fuel Protocol.
Ramanna is an knowledgeable in monetary accounting programs and company management on the College of Oxford. On this event, he’d been requested to step exterior his area 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 massive kind that it was an accounting customary. Nevertheless it wasn’t accounting in the best way 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 taking a look at it and also you assume, ‘wait a minute, that is astrology, not astronomy’,” he instructed Trellis. “It was very, very jarring.”
That second was the genesis for a analysis partnership that has produced a substitute for the prevailing system for emissions accounting. It’s an effort that has received reward from consultants and been piloted in a number of nations. It’s additionally produced loads of pushback, with critics asserting Ramanna and colleagues fail to understand the strengths of the prevailing system, which their disruptive conduct is now 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 instructed these in attendance, however the system that underlay it didn’t qualify as accounting.
Sitting within the digital viewers was Robert Kaplan, an educational credited with a few of the most important accounting improvements of the previous half-century and a former colleague from Ramanna’s time at Harvard.
“He sends me a be aware and he says, ‘I couldn’t agree extra with you and we must always work on this,’” Ramanna mentioned. “Now, Bob Kaplan has labored on some fairly necessary issues. For him to say that, I used to be like, oh, perhaps I’m onto one thing right here.”
On the coronary heart of Ramanna and Kaplan’s thought, which first appeared in an educational 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 concept of an organization having to quantify an exercise taken by different organizations in a worth chain, because the Scope 3 guidelines require, is nonsensical. As an alternative, corporations needs to be requested to quantify solely emissions related to what they produce — their Scope 1 emissions, in different phrases.
E-liabilities
Think about the availability chain behind a metal automobile half, starting with a mine that produces iron ore. The mining firm is chargeable 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 acceptable 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 an announcement of the emissions liabilities.
One good thing about this “E-liabilities” method — “E” for “environmental” — is that every firm focuses on the emissions it controls. Within the current Scope 3 system, each firm within the worth chain must no less than estimate the emissions of each different firm. Beneath E-liability, the measurement occurs as soon as, at supply, and is handed on.
Educational proposals to overtake accounting programs don’t essentially make a splash, however Ramanna credit Kaplan with a present for framing issues in a method that decision-makers discover helpful. The pair’s provocative language didn’t damage, both: Their paper was titled “The right way to Repair ESG Reporting” and a follow-up, revealed later the identical yr within the Harvard Enterprise Evaluation (HBR), was described as “the primary rigorous method to ESG reporting”.
Within the enterprise neighborhood, this method struck a chord: Kaplan and Ramanna received the 2021 HBR McKinsey Award, which fits to the evaluate’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 inspiration for a 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 alternative for the GHG Protocol.”
Like different critics, Ranganathan famous that double-counting in Scope 3 is a function, not a bug: Firms that take duty for value-chain emissions are incentivized to collaborate with suppliers and prospects on decarbonization options. “Whereas you will need to stay open to new concepts,” she concluded, “we shouldn’t be too fast to throw the child 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 worth chain to additionally estimate emissions and interact with the E-liability registry,” wrote Michael Gillenwater, co-founder of the Greenhouse Fuel Administration Institute and an advisor to the GHG Protocol.
Objections like that from institution figures have possible slowed makes an attempt to judge E-liabilities, however the thought continues to select up adherents. Different lecturers have weighed in with supportive commentary, starting from proposals for incorporating use of carbon removals to recommendations that E-liabilities may drive investments in supply-chain decarbonization. And pilots are ongoing: Ramanna’s most up-to-date HBR article, from February of this yr, describes a check by BMW that outlined how massive corporations may help 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 apply be held chargeable 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 method will unfold piecemeal, colonizing elements of worth chains till it emerges as a de facto customary, or transfer extra rapidly by successful top-down help from a authorities prepared to mandate the method. A 3rd end result, after all, is that the challenges related to the concept will trigger the pilots to dry up and the method to fizzle.
Ramanna instructed 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 Trump and different forces favor his system. “One of many strongest pull elements we’ve got right now, geopolitically, is financial nationalism,” he mentioned.
One instance is the E.U.’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 sort of aggressive pressure that E-liabilities is designed to harness.
“Carbon border accounting, if carried out proper, is usually a highly effective instrument towards local weather change,” Ramanna wrote final yr. “It will possibly elevate the foundations of the sport in order that corporations and nations compete on low-emissions items and companies, simply as they at the moment compete on elements akin to prices, high quality, and timeliness.”
With Trump intent on defending choose home industries and punishing imports, the second is perhaps proper for a U.S. model of CBAM. Final month, a bipartisan pair of representatives launched a invoice to interchange the federal gasoline 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,” mentioned Ramanna. “However there are sufficient tailwinds to have interaction with this course of in america and around the globe as a win-win. It’s a win on commerce, it’s a win on local weather, it’s a win on financial competitiveness.”
