Carbon reporting urgently needs fixing — here’s how to do it

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Karthik Ramanna is a professor at University of Oxford Blavatnik School of Government. Robert Kaplan is Senior Fellow and Marvin Bower Professor of Leadership Development, Emeritus at the Harvard Business School

Much of companies’ carbon reporting today uses unverifiable disclosure standards better suited to subjective, unprovable statements than to the objective, rigorous data required for corporate financial reporting. A new approach offers a way to base carbon reporting on accounting principles, allowing corporate environmental performance to be accurate, verified and timely worldwide.

Disclosure has a meaningful role in markets but, as the US learnt after the 1929 Great Crash, without universally applied accounting and auditing principles it is a recipe for disaster. In the 1930s, Congress mandated financial accounting standards to serve as the bedrock for public capital markets. Our current work on carbon accounting responds to a similar need to eliminate the confusion, speculation and distortion in today’s climate disclosures.

Many corporate voluntary carbon disclosures focus on a small fraction of controllable emissions: those from assets a company owns and directly controls. Yet emissions from the products and services purchased from suppliers are, on average, more than five times the company’s direct emissions.

With most large companies having over 1,000 direct (Tier 1) suppliers — each with thousands more in their own supply chains — businesses have found it impossible to calculate accurately the emissions from purchased materials and services. Lacking rigorous measurement, corporate carbon disclosures use vague terms like ‘green’, ‘circular’ and ‘net zero’, often covering for the absence of quantifiable progress in reducing global emissions.

Four years ago, we introduced E-liability carbon accounting, a method grounded in fundamental principles taught in the early weeks of all introductory accounting courses. The method empowers firms to measure accurately the greenhouse gas emissions across even their most complex supply chains.

Working like a value-added calculation, each company adds its direct emissions to those embedded in purchased products and services from immediate suppliers. It then uses causal linkages, similar to activity-based costing, to assign its direct and purchased emissions to its output products.

When a company sells an output product, the transaction involves both an asset transfer on its financial ledger and an E-liability transfer on its E-ledger, denominated in kilogrammes of CO₂ rather than a currency unit.

Using this method, emissions are calculated once, at their source, where they can be audited and validated along with their allocation to output products. This information can then be securely transmitted to downstream customers using modern tools such as blockchain tokens and distributed ledgers.

The approach enables companies to communicate credibly, on every sales invoice, the product’s price and cradle-to-gate E-liability — from original extraction through all processing and transport stages. E-liability’s grounding in accepted accounting practices also eases adoption and compliance costs.

Over the past four years, we’ve worked with dozens of companies to apply and validate this approach — including businesses in automobiles, cement, energy, steel, tyres, agriculture and healthcare.

Hitachi Energy, for example, faced shareholder pressure to lower emissions by replacing mined (virgin) copper with recycled copper in large transformers. Some engineers questioned the benefit, as much of the virgin copper came from a fully electrified Swedish mine powered by hydroelectricity.

Under our guidance, the company compared emissions from Swedish virgin copper, recycled copper, and copper from a coal-fired overseas mine. The Swedish virgin copper had less than half the emissions of the recycled copper, which itself had 50 per cent fewer emissions than the coal-sourced copper.

This conclusion was reinforced by a project with a large steel company, which found that blending recycled steel from electric arc furnaces with virgin iron ore in blast furnaces produced lower lifetime emissions than using recycled steel alone. The bottom line: simplistic mandates — recycle, be green-not-brown — are unreliable guides for cutting global emissions.

Beyond better carbon reporting, E-liability accounting motivates companies to differentiate based on produced and embedded emissions. As Hitachi Energy shows, commodity products like cement, steel and copper aren’t commodities when measured by carbon performance.

E-liability opens a new dimension for competitive advantage by unlocking market forces to drive decarbonisation. Companies can use E-liability data to lower emissions by modifying products, improving operations, and adjusting sourcing and logistics. They can also purchase verified atmospheric carbon removals — E-assets — to offset remaining E-liabilities, making their products appeal to carbon-conscious customers.

Legislatures and regulators can also apply the E-liability system for carbon-border assessments, using actual verified emissions in imported goods to set tariffs based on carbon intensity, not national origin.

With published articles and new case studies now available, business school students should expect to learn how these accounting principles can be practically applied to help their future employers reduce global emissions.