We Need Better Carbon Accounting. Here’s How to Get There.

The Rocky Mountain Institute reports that the average company’s supply-chain greenhouse gas (GHG) emissions are 5.5 times higher than the direct emissions from its own assets and operations. Any effective system of GHG accounting, therefore, needs to measure accurately each company’s supply-chain carbon impacts, providing visibility and incentives for it to make more climate-friendly product-specification and purchasing decisions.

Our recent HBR article, “Accounting for Climate Change” (Nov-Dec 2021), noted how the current dominant system for carbon accounting, the GHG Protocol, misses this critical point by allowing companies to guestimate upstream and downstream emissions. To address this shortcoming, we introduced an E-liability accounting system, based on well-established practices from inventory and cost accounting, for accurately measuring GHG emissions across corporate supply chains.

Since the article’s publication, we have had dozens of conversations with corporate executives, consultants, regulators, and standard-setters about the E-liability system. Many have expressed frustration that something like it has not been introduced sooner. In this follow-up piece, we describe the basic flaw inherent in the GHG Protocol, explain why it has persisted, and offer a way forward for robust carbon accounting that does not involve rescinding the Protocol, which has been widely embedded in many global climate agreements. We’ll conclude by identifying which companies stand to gain most from accurate GHG accounting and could be early adopters of the E-liability system.