Newly published study establishes accounting principles to clean up carbon-offset markets

For immediate release: 13 June 2023

Forest fires in Canada have caused US East Coast cities to experience historically poor air quality. These boreal forests are popular sites for carbon-offsetting projects, which raises the questions: What should companies do when their carbon-offset assets are destroyed? Can they (still) claim to be carbon neutral or net zero? The lack of rigorous standards for corporate offsetting practices has enabled widespread chicanery in the industry, as reported in numerous media outlets.

A new article, published today in the Harvard Business Review, solves this problem. The authors – Robert S. Kaplan of Harvard Business School’s “Business in Global Society” Initiative, Karthik Ramanna of the University of Oxford’s Blavatnik School of Government, and Marc Roston of Stanford University’s Doerr School of Sustainability – apply fundamental and well-established financial-accounting principles to improve the measurement and reporting of carbon offsets. The principles define what actually constitutes a carbon-offset asset, when can such an offset be traded in arms’-length exchanges, when can the asset be used to extinguish emissions liabilities, and who bears responsibility for reporting offset impairments after the underlying assets are destroyed, for instance, due to fire or deforestation.

Professors Kaplan and Ramanna previously published, in November 2021, the McKinsey-HBR award-winning article “Accounting for Climate Change,” which established a transformational framework for the rigorous measurement of GHG emissions embedded in any product or service in the global economy. Their approach, called the E- (or environmental) liability method, has since spurred dozens of major companies to consider innovative carbon-measurement projects to identify opportunities for decarbonisation (in their own processes or those of their suppliers). To support and advise such pilot projects and to disseminate the results widely, thus driving further adoption of the method, Professors Kaplan and Ramanna co-founded the not-for-profit E-liability Institute in November 2022.

Today’s article on accounting for carbon offsets provides the foundational complement to the E-liabilities framework, by defining the concept of an E-asset along with the principles for its measurement and proper use. Together, E-assets and E-liabilities provide the basic accounting tools for organisations and governments to measure and manage their performance toward decarbonisation targets, including net-zero goals. The E-ledgers on which they are recorded provide a fully auditable vehicle for stewarding an organisation’s environmental claims, mitigating the puffery and greenwashing that has plagued corporate reporting in this space. 


Mike Mahoney: