Our response to Janet Ranganathan’s critique of E-liability on the WRI Insights Blog

Dear Friends,

The website of the WRI, the nonprofit parent entity of the GHG Protocol, recently posted a Critique of E-liability carbon accounting, a method we introduced in a November 2021 Harvard Business Review article. The E-liability algorithm uses fundamental accounting principles to provide a rigorous yet practical way for measuring corporate supply-chain emissions, those labelled as Scope 2 and upstream Scope 3 by the GHG Protocol. Some of you have asked us to issue a response to the Critique. Below is our brief response.

The Critique contained a few errors or misattributions about E-liability that we have addressed in a short technical appendix at this link. More importantly, it is worth emphasising that the GHG Protocol and the E-liability algorithm do share a common mission, which is to inform organizations and society on GHG emissions from various economic activities. We agree with the Critique’s argument that the Protocol and E-liability have different approaches to accomplish that shared mission. The key difference is, as the Critique acknowledges, that the GHG Protocol was designed as a voluntary mechanism. This was suitable to a world with no or few carbon reporting regulations, to perhaps bring visibility to some politically sensitive companies and industries. In contrast, the E-liability method is designed to operate as a systemic solution, which scales iteratively as more jurisdictions move toward mandating carbon reporting above a given materiality threshold (whether to better inform capital markets or to enable carbon border assessments). In this context, the E-liability method will, over time, both be more socially efficient and generate more accurate information, at the product, transaction, and entity levels, to drive decarbonisation.

The Critique states: “Ideally all companies would collect and share primary data. The challenges to this are multiple, especially in voluntary systems. Supply chains can have thousands of suppliers and components. Suppliers may be unwilling to share proprietary primary data.” This problem is exactly why we introduced E-liability carbon accounting.

The GHG Protocol’s Scope 2 and Scope 3 standards have adopting companies searching distantly backwards, and forwards, in their complex value-chains for emissions information, a practically impossible task. As a result, adopting companies must resort to guesstimates and using industry- or regional-average emissions factors. Moreover, this process is inherently redundant, as each adopting company in a value chain ends up trying to estimate similar information. In contrast, under the E-liability carbon accounting system, companies measure their cradle-to-gate emissions with information only from their own direct emissions and from immediate (Tier 1) suppliers, with whom they already have a market-based relationship. Each company, in an E-liability accounting regime, can use secure and private information technology to post both the carbon content of their output products and the assurance documents, from independent auditors, to attest that the posted information “fairly represents” the product’s embedded emissions. With E-liability’s simple and secure reporting of the carbon content in the products being transferred between supplier and customer, all downstream companies have access to accurate information about the specific emissions embedded in products and services they purchase.

We have, since publication of our original article, worked with companies in many industries, including those supplying cement, tires, steel, electrical transformers, building materials, LNG, medical services, protection services, and agricultural produce, to implement E-liability accounting. The projects have reinforced our original proposition that E-liability carbon accounting is a simple, accurate, and auditable solution for system-wide carbon measurement and reporting, whether within a jurisdiction or globally. A growing body of evidence suggests that E-liability information helps corporate leaders identify opportunities, with incentives and accountability, for rapid and effective reduction of total cradle-to-gate emissions, a goal that we all can endorse. We stand ready to work with the WRI and other bodies to drive this powerful solution into practice.  

Respectfully,

Bob Kaplan and Karthik Ramanna