A recent article from Cooley’s Cydney Posner presents an alternative to Scope 3 emissions accounting – called the “E-liability accounting system” developed by Robert Kaplan (Harvard Business School) and Karthik Ramanna (University of Oxford). E-liabilities work like markup. For example, a mining company produces ore and sells it at a higher price than it costs to produce. Each subsequent buyer of ore-containing products/materials does the same. The price for the final product is an aggregation of all marked-up material costs. The last seller in the chain transfers the sum of those costs to end customers proportional to how much product each customer buys.
Applying the concept to GHG emissions, each supply chain actor would add their own Scope 1 emissions as part of the “markup” passed forward. Each customer then aggregates and apportions the E-liabilities to their customers. It is easy to see how this could ultimately roll up into Scope 3 emissions. Conceptually this makes sense, but there are substantial obstacles and flaws.
I wrote about this in the 2022 update to Killing Sustainability and am not optimistic about how it would work in the real world. As a matter of fact, I gave it a mere one-half squirrel rating*. There are meaningful problems – many similar to those still encountered after 10 years of conflict minerals program implementation, which has parallels to E-liability:
- The idea only works where supply chains consist of “larger” companies in formal economies. This excludes informal economies in sectors such as artisanal mining, farming, agriculture, textiles and fishing just to name a few. In addition, small “mom and pop shops” will simply refuse to determine and account for their emissions.
- Given the authors’ criticism of the GHG Protocol, it isn’t clear how emissions are expected to be determined in a consistent manner.
- The concept only accounts for forward-flowing information – there is no mechanism to include end user/consumer “Scope 1” emissions “backwards” into E-liability accounting. This is no small or theoretical matter – oil and gas companies are already criticized for not considering end user/consumer emissions.
- The method ultimately intends to equate CO2 emissions to “environmental cost to society” – in other words, “externalities.”
- The framework doesn’t address carbon offsets. The only ways to eliminate E-liabilities are to transfer them to customers with products or depreciate capitalized E-liabilities. With billions of investment dollars chasing offsets, they should be addressed in the E-liability scheme.
- The authors suggest E-liabilities can also be applied to social matters and human rights. This is more problematic than they acknowledge. Even assuming relevant data can be collected, quantifying human rights and forced labor E-liabilities doesn’t seem workable and the connotation of applying cost accounting to people in this context would be highly controversial to put it mildly.
E-liability is only in an early pilot phase so there is no need to get anxious about changing your company’s processes, systems or approach. If you are interested, you can check out the E-liability website.
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* I used squirrels because “Dogs and sustainability/ESG professionals are easily distracted. Squirrels immediately capture canine attention, triggering a frantic chase. The squirrels of ESG include new fads, reporting guidelines, fantastic claims of financial value.” It just seemed more amusing than stars. On a scale of zero to three, three meant an issue/activity is high value and one meant it is questionable or of no value at the moment. I considered E-liability more of a skeleton than even one complete squirrel.