Decoding P2: Carbon Accounting
In our last article, we started decoding the complicated world of carbon accounting. We now turn to how the field is evolving from the issues we highlighted before, ways to get involved, and companies hard at work on this solution.
A functioning carbon accounting system – consistent, accurate, verifiable, and trackable over time – would provide the foundations upon which real climate progress could (and would!) be built.
How do we get there?
Accurate: The use of secondary data (for example, 1 kWh of electricity used generates - on average - 0.5 kg of CO2) creates perverse incentives and dubious accuracy, ultimately reducing trust. To accurately compute emissions, we must maximize primary data usage and enable transparent sharing of data. Examples of primary data include CO2e monitors that directly calculate the number of carbon emissions.
Consistency: Inventory boundaries are flexible which allows users to game the system, estimated (forecasted) emissions are incorrectly combined/conflated with known (reported) emissions. Ideally, system boundaries should be consistent across companies. For example, our Scope 3 analysis should cover all emissions that are a result of production activities; in other words, those emissions that would be avoided if a company did not exist. One framework that companies use is “cradle-to-gate,” examining the upstream emissions from resource extraction (cradle) to when it leaves the warehouse to reach the customer (gate). Others use a “cradle-to-grave” boundary, which adds the downstream emissions from customer use and eventual disposal (grave) – this is important for industries like apparel, consumer electronics, and automobiles, where customer use and disposal actually make up the bulk of lifecycle emissions.
Double counting of Scope 3 emissions across suppliers: Upstream Scope 3 (“cradle-to-gate”) sums the Scope 1 & 2 emissions each supplier used to produce the product. If these suppliers report their own Scope 1 emissions, then actual anthropogenic emissions will be double counted. If they decide to report their Scope 1-3 emissions, anthropogenic emissions could be quadruple-counted.
Faculties at Harvard and Oxford have proposed a new system called e-liability accounting that can address the issue of double counting. Under this system, each product or service in a supply chain passes embodied carbon emissions from seller to buyer. The reporting entity combines its direct emissions with supply chain emissions and passes its emissions liability downstream, avoiding double counting.
Verifiable and Trackable: Companies are voluntarily reporting their carbon emissions using the GHGP Corporate Reporting Standard. Carbon accounting systems need to evolve as business accounting systems have. With consistent rules and systems that address the current challenges, carbon accounting can become as auditable as financial statements are. Moves are happening: the SEC has announced standardization around climate-related disclosures for investors in 2022.
There are a range of companies and organizations hard at work on carbon accounting. From a technology standpoint, many startups focus on a vertical niche (ex. Measurabl for real estate), but horizontal incumbents and ESG software providers have launched their own carbon accounting solutions to upsell their install base (ex. SAP). Since many startups offer their customers the ability to integrate with incumbent solutions (ex. SAP has information on flights, and the software applies a carbon emission factor to multiply and calculate the total emissions), the jury is out on whether the incumbents will win because they have the most data or startups will win with unique vertical insight or go-to-market.
If you are a consultant or accountant, many of the big firms are now offering consulting services to help clients hit Net Zero; this can be a great horizontal move into climate.
Are you feeling fired up to work on this? It is a nascent space and requires the best and brightest to continue to make progress on the issues above. Luckily, there are a range of functional skill sets that are in demand.
Consulting: We need consultants to work with clients on calculating their emissions accurately. Were you an ex-consultant before business school or want to work in consulting afterward?
Software engineering, product management, and product design: There are carbon accounting SaaS startups and incumbents building software to help companies automatically calculate their footprint.
Program management: Join the corporate sustainability team at a large company and make decisions internally on how the company should approach net zero.
Policymakers: We need better disclosures on how companies report their carbon emissions.
Academics: Stanford, Oxford, and Harvard are hard at work on the fundamental issues and potential solutions around carbon accounting.