Innovative carbon accounting to boost competitiveness in American manufacturing
In today’s global market, American manufacturers who invest in cutting-edge, environmentally friendly technologies are strategically positioning themselves for success. Nevertheless, the current methods of carbon disclosure fail to accurately showcase the United States’ lower carbon intensity in comparison to major emitters like China, India, and Russia. While the Greenhouse Gas (GHG) Protocol serves as a foundation for emissions reporting, it lacks the precision and credibility necessary to highlight the competitive advantages of U.S. manufacturers. An innovative approach known as E-liability presents a solution to these shortcomings by simplifying cumbersome requirements and offering a more efficient alternative that not only maintains the economic competitiveness of American manufacturers but also enhances business decision-making regarding emissions.
Globally, regulatory bodies such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) and the U.S. Securities and Exchange Commission (SEC) climate disclosure rule both exclude Scope 3 emissions from mandatory reporting due to their complexity and potential for inaccuracy. Scope 3 encompasses indirect emissions throughout a company’s value chain, while Scope 1 and 2 emissions, which include direct emissions from owned sources and indirect emissions from purchased electricity, are relatively straightforward to measure. Relying on estimates for Scope 3 results in inflated compliance costs and allows companies to maintain an environmentally friendly facade without making meaningful changes to their supplier choices. This leads to an uneven playing field that undermines incentives for companies to support low-emission suppliers.
The current design of Scope 3, which necessitates reporting on the emissions of other entities, not only leads to duplicative accounting of the same emitting activities but also permits the use of industry-wide average data rather than actual information. This practice allows companies to appear environmentally conscious without needing to modify their practices, granting them undue advantages in a market that increasingly values low-carbon goods. Conversely, companies that prioritize sustainability by sourcing parts from environmentally friendly suppliers might not receive recognition under the Scope 3 model, as they are still reliant on industry average data for their emissions reports.
Such discrepancies can stifle innovation among companies that invest in costly emissions reductions without reaping the benefits of adhering to existing disclosure frameworks. For instance, a cement producer using lower-carbon materials may not experience financial gains from these efforts since customers may be unaware of their superior environmental record. This lack of precise data also results in missed investment opportunities and financial risks, as investors may unknowingly support companies that appear low-carbon but conceal high embedded emissions. To drive genuine emissions reductions, businesses require a system that offers precise, auditable, product-level carbon accounting, thereby eliminating the need for burdensome reporting practices that are not taken seriously by regulatory bodies.
The E-liability framework, developed by esteemed business school professors Robert Kaplan and Karthik Ramanna, proposes a revolutionary shift in carbon accounting by aligning the precision and rigor of financial accounting with carbon emissions tracking. By implementing this framework, businesses can accurately and meticulously track emissions across their supply chains, attributing one metric ton of E-liability to one metric ton of GHG emissions. Kaplan and Ramanna advocate for a carbon accounting approach that mirrors financial accounting principles to provide an accurate reflection of a business’s environmental performance. Their framework is guided by two key principles: each entity should only record emissions linked to their production or service, and each entity should obtain carbon emissions data from their tier-1 materials suppliers during transactions.
The implementation of E-liability enables the seamless transfer of emissions liability from producers to buyers, ensuring that every carbon dioxide molecule generated along the value chain is accounted for by a single entity, thereby preventing any overestimation or underreporting. By maintaining a carbon ledger that distinguishes sourcing emissions from production emissions, businesses can generate standardized reports that transparently document their emissions liabilities. These liabilities can be reduced as they emanate from the entity’s decisions, such as selecting sources or adopting specific production methods. Consequently, the framework incentivizes companies to decrease emissions, granting a competitive edge to those offering low-carbon products.
For instance, a cement company transitioning to low-carbon cementitious materials stands to benefit from E-liability accounting. By utilizing this system, the company can provide precise data demonstrating that a specific batch of cement has a lower carbon footprint than traditional products, earning the trust of buyers seeking sustainable materials. Under the conventional disclosure scheme, such improvements may not receive full recognition or proper credit.
E-liability represents a tangible step in the endeavor to monitor and reduce emissions. By supplying clear, real-time data and promoting consistency, this framework empowers businesses to address their carbon footprints decisively rather than struggling with unrealistic obligations. By reorienting incentives for accurate emissions reporting, E-liability has the potential to reinforce manufacturers’ voluntary commitments and reduce investment risks. This, in turn, fosters confidence in carbon-related information, lays a foundation for other market-based solutions to curb carbon emissions, and spurs investment in sustainable technologies. With sustainability and low emissions emerging as crucial factors for competitive advantage, E-liability offers a dependable
