Catrina Rorke, senior vice president of policy and research at the Climate Leadership Council, spoke with University of Oxford professor and E-ledgers Institute Co-Founder Karthik Ramanna in an armchair discussion during National Clean Energy Week about the importance of emissions accounting.
The U.S. has invested considerable time and resources in developing a more efficient manufacturing economy and achieving a carbon advantage over other countries. However, “we do need to be able to reliably prove that,” said Rorke, “and so we’re seeing increasing international pressure pushing us towards an emissions accounting system rooted in accuracy, transparency, and comparability.” Ramanna painted a picture of the world in 1935, when leaders recognized the need for consistent definitions of assets and revenues in the wake of the Great Depression, and they developed the Generally Accepted Accounting Principles (GAAP). “Now we’re at a similar point in this journey to decarbonization,” Ramanna described, which is why he joined with professors from the likes of Harvard University, the Massachusetts Institute of Technology, and Stanford University to create the E-ledgers Institute and “drive this idea to practice. And just as soon as we’ve done that, we hope this institute can fold and we can go on to writing our next papers.”
Implementing an accounting system for emissions, similar to GAAP, will enable the U.S. to price and monetize its competitive advantage in low-emission manufacturing. Ramanna noted that in the global economy, companies compete on cost, quality, and the timeliness of their delivery. There’s also a fourth dimension for emissions efficiency, “but that dimension is not getting priced in markets, because we don’t have this comparable basis for companies to be able to show that. Now, imagine that you create that. Suddenly, you’ve got the ability for American companies to be able to showcase this advantage that’s currently hidden.”
The E-ledgers Institute’s concept of an e-ledger will help companies track the embedded emissions of their products and services. “The role of the ledger is basically to hold the emissions as they’re incurred. Everything is counted once and only once,” Ramanna said. It works in the same way as, and parallel to, gross domestic product (GDP) accounting in the financial system. The system is relatively easy to apply, Ramanna argued, because “we’ve already trained millions of accountants out there in the real world to effectively apply these principles. Now, instead of accounting for them in dollars and cents, they can also account for things in, say, moles of CO2 that go into the atmosphere.” He concluded, “You’re again able to track these emissions as they move through supply chains, and you’re able to create the basis for competitive differentiation at each step of the way.”
Photo Courtesy E-ledgers Institute
A regulator pointed out that real companies need to start implementing the e-ledger approach for this system to be adopted. Accordingly, over the past four to five years, dozens of companies across various sectors, including automotive, cement, healthcare, oil and gas, steel, and tire manufacturing, have implemented the institute’s approach. Ramanna highlighted that “the good news is that every single company that has piloted this approach has not done it out of the goodness of their heart. They have done this because they have a competitive advantage that is going on price.” Customers will pay a premium for a product that is otherwise the same as a competitor’s, except with lower emissions. The result of commoditizing carbon will be to “unleash so much value, especially for American companies that already have this built-in advantage when it comes to clean manufacturing.”
On the policy side, Ramanna explained, “Few people get excited about accounting for its own sake, but you need a pull factor that actually allows for this kind of accounting to become public policy.” He pointed out that the rise of economic nationalism in the U.S. and the European Union could be beneficial for this, leading to the creation of a concept such as a carbon border adjustment, a foreign emission tariff, or a foreign pollution fee, as he offered a few different names for the idea. The forces of economic nationalism, therefore, “might well be that pull factor that makes something, as, quite frankly, boring as carbon accounting, the thing that needs to get done.”
