Effective climate policies and initiatives require reliable and accurate carbon emission measuring and tracking. However, carbon accounting at the firm or product level is a challenge in an age of complex supply chains and international trade. A recent report discusses the importance of carbon accounting and proposes solutions to address these challenges.
Charles Cannon and colleagues from the Rocky Mountain Institute (RMI) have released an insightful report on carbon accounting. They find that investors, policymakers, and consumers drive the development of more sophisticated and accurate carbon accounting by corporations. Investors are prioritizing climate risks as important factors when managing their investments. Policymakers have proposed policies that require reliable product-level carbon accounting through the supply chain. For example, the EU and the United States have proposed carbon border taxes that seek to levy taxes on carbon emissions from imported goods. Consumers are also shifting to favor sustainable products. Researchers find that half of the growth of consumer-packaged goods from 2013-2018 was driven by products marketed as sustainable.
The report focuses on carbon accounting of corporations’ direct emissions and supply chain emissions—those associated with suppliers’ production of goods and services. One of the biggest challenges of carbon accounting, according to the report, is tracking the carbon emissions associated with a certain product throughout the supply chain.
In the United States, carbon-intensive facilities are required to report their carbon emissions at the facility level. The EPA mandates that sources generating 25,000 metric tons of greenhouse gases or more to submit emission reports to the agency. Other emission reporting guidelines are also used by corporations to measure and calculate their own emissions. However, as the RMI report points out, there is no existing system to track a product’s carbon emissions from upstream to downstream of the supply chain.
Measuring the amount of carbon emission generated in producing a good throughout the entire supply chain is challenging for several reasons: First, carbon emissions are not readily observable and need to be monitored and measured. Second, input sourcing and product manufacturing or assembly are hard to track with the complicated global supply chains. Third, the same products manufactured by different company facilities could have different carbon emissions, as facilities could use different production technologies or electricity generated from different energy sources.
To track carbon emission at the product level, the report recommends that carbon accounting and financial accounting be aligned to ensure reliability. The authors explain that carbon accounting is becoming more closely tied to financial incentives through “price premiums, regulations, and cost of capital or corporate value.” It would be beneficial and valuable for corporations to integrate their carbon and financial accounting to avoid misalignments and ensure carbon and financial reporting reliability.
Aligning carbon and financial accounting may seem challenging, but existing accounting and reporting systems that track added tax liability throughout the supply chain for a value-added tax work fine. As carbon accounting standards, systems and technologies improve and are used broadly, having firms report both may not be as onerous as some will fear.
Carbon accounting still has quite a few challenges. Recognizing the challenges and working towards solving them will enable us to achieve more reliable and accurate carbon accounting, which will provide valuable insights for investors, regulators, and consumers and better inform climate mitigation efforts.