THE PROBLEM WITH EMISSIONS ACCOUNTING TODAY
Several flaws exist in today’s emissions accounting methodology. These include:
- Lack of standardization – emissions factors vary widely and details remain murky.
- No universal price on carbon.
- Companies account for their emissions on an organization-wide basis and aren’t able to allocate carbon costs on a per-product, per-unit basis.
As a result, reporting companies are, insofar as carbon market-pricing signals are concerned, islands unto themselves. The result: carbon emissions externalities are not properly internalized.
Standardizing Emissions Accounting
The carbon accounting methodology practiced today has been developed by the Greenhouse Gas Protocol (GHG Protocol). This methodology will play a crucial role in internalizing the costs of carbon emissions but still needs to evolve.
Carbon accounting relies on emission factors. These convert measures of emissions-generating activity into actual carbon emissions. For example, combusting one gallon of gasoline produces about 20 lbs. of carbon emissions.
There are multiple authoritative sources of emissions factors; the IPCC, the EPA, and DEFRA, to name a few. Emissions factors for the same activity vary from authority to authority. Authorities routinely issue updates, changing the factors but it is often unclear exactly when these updates are intended to go into effect.
Global Warming Potentials
To further complicate matters, most activities emit gases, other than carbon dioxide, that also have a global warming impact. These emissions are converted to carbon dioxide equivalent (CO2e) numbers using global warming potentials (GWPs).
GWPs are generally issued by the IPCC but these too vary from time to time. There are currently five IPCC assessment reports. The latest, AR5, adjusts GWPs for the fourth time since the first assessment report.
Other Non-Standard Aspects of Emissions Accounting
In addition to the lack of standardization around emissions factors and GWPs, there are aspects of emissions accounting that are simply unspecified. The most glaring of these is the way emissions should be distributed over time.
For example, companies often rely on their utility suppliers’ invoices to measure their utility consumption. Should companies account for the related emissions as occurring instantaneously on the date of the invoice, or as distributed uniformly over the service period invoiced? Or some other way?
Universal Price on Carbon
Once a company is able to quantify its emissions, those emissions must be converted to a common currency, using a carbon price in the form of dollars per ton.
There is no universally agreed upon price on carbon emissions. Stanford University notes a carbon emission price range from $37 per ton at the low end to $220 per ton at the high end.
Perhaps a universal price on carbon is not necessary. Many markets are somewhat segmented. But some agreement on pricing is necessary, at least locally.
Organization-Wide Emissions Instead of Product-Specific Emissions
Today’s carbon accounting methodology requires each company to quantify the emissions resulting from their operational activities and combine those with upstream and downstream emissions associated with the goods and services that they buy and sell. Operational emissions are identified as Scope 1 and Scope 2 emissions. Upstream and downstream emissions are identified as Scope 3 emissions.
Eventually, when costs of carbon emissions are properly internalized, each company will send clear market signals by increasing the per-unit dollar cost of the products they sell to their downstream customers. Since customers choose vendors largely on price, market forces will reward vendors that emit less.
Until then, vendors will not be passing emissions costs to their customers in dollars. Instead, the burden is on reporting companies to estimate the upstream emissions associated with the products they buy.
Few of these companies have access to the kind of granular Scope 3 information that would enable them to choose vendors based on upstream emissions.