Accounting for Carbon
If you want to find the frontline of the effort to effectively deal with climate change, don’t look out the window to watch the gardener planting more trees, look down the corridor to your organisation’s treasury department. It is there that the direction of business reform will be set through the everyday effort of accountancy – carbon accountancy that is.
Accounting for the greenhouse gas (GHG) emissions of an organisation or a business activity (like manufacturing, or running a conference or similar event) is known as carbon footprinting. When you widen the scope beyond the measurement of greenhouse gases to incorporate water and other resources, the process is termed ecological footprinting. The term ‘footprint’ comes from the idea that we each leave an imprint of our time on the earth, through our deeds and decisions, like footprints left on a beach. Fundamentally, footprinting is simply accounting for of all the resources we have consumed both directly (the sandwich you had for lunch) and indirectly (the water, land, nutrients, fertilisers, and energy that went into the bread and the fillings).
Personal footprinting tools have become common; there are books about the topic, online calculators, calculation wheels and widgets galore. Such tools vary enormously in complexity, accuracy, and thoroughness, and are to corporate carbon accounting what a household budget is to a listed corporation’s accountancy processes and public financial reporting statements. Corporate footprinting is far more complex than adding in the air miles flown on holidays last year, and the estimate of the gas bill, and with legislation such as the UK Government’s Carbon Reduction Commitment, it has now become an exercise with near-term financial ramifications.
Thus far, carbon (and ecological) footprinting exercises have generally been performed by specialists: experts in the measurement methodologies prescribed in the Greenhouse Gas Protocol (GHGP) and associated ISO standards. The GHGP is well established and widely used and is the result of a long-standing partnership between the World Resources Institute and the World Business Council for Sustainable Development. It is also the basis for the UK’s Carbon Reduction Commitment (CRC) and the US’s proposed Mandatory Greenhouse Gas Reporting Rule, developed by the Environmental Protection Agency and currently released for a 60 day review cycle.
The GHGP provides various methodologies applicable to both private and public sector organisations for the inventory and reporting of all of the GHG emissions they produce. Treasury department staff would do well to acquaint themselves with the GHGP’s Corporate Accounting and Reporting Standards and the Project Accounting Protocol and Guidelines. While the idea and practice of footprinting is over a decade old, what is new is the imposition of a financial valuation on emissions, or more accurately on a permission to emit.
Paying for the privilege of emitting is the basis for cap and trade schemes like the UK’s CRC. ‘Cap’ refers to the eventual imposition of an absolute limit on emissions, which is linked to the commitments governments make under international agreements, such as the Kyoto Protocol. ‘Trade’ relates to the valuation of emissions and the scope for the buying and selling of spare permits in a semi-open market. Organisations will have an emissions cap applied to them which will be decreased in value over time. That cap is in effect equal to the number of ‘free emissions credits’ made available to the organisation for the current accounting period. If the organisation’s activities result in emissions over and above those paid for by the free credit, then further credits must be paid for at market rates. While there has been significant volatility in the valuation of emissions credits on existing markets (such as the EU’s Emissions Trading Scheme (ETS)), it is unlikely in the longer term that the market rates will remain free of manipulation by governments, just as currencies are managed to an extent today.
Applying a value to emissions is an effort to internalise onto the balance sheet something which has thus far been an economic externality. As such, cap and trade schemes should be recognised as being not so much a new tax or payment scheme, but rather an attempt to introduce far-reaching structural reform. The decisions that company executives have made regarding supply chain models, such as the location of facilities, what products they manufacture, from what and using which methods, have been made with no real consideration given to the associated emissions. Clearly, as a value for those emissions is applied, the balance of the financial case for any such activity alters and a fresh review must take place of the existing structure and operating models that apply. Misdiagnosing how best to re-organise corporate activities to reduce and manage emissions may not just cost a company financially, it may also cost it competitively in a rapidly shifting marketplace.
With all that at stake, plus the very real need to actually reduce emissions by at least 80% over year 2000 levels in order to avoid the worst of climate change, there is a vital need for an accounting of emissions conducted to the same degree of accuracy and with the same degree of governance as is already to be found within an organisation’s treasury department. Accurate information concerning emissions will need to be presented to executive management in the context of the associated financial implications in order to allow for accurate and insightful decision-making. For that reason, while standalone software tools are currently available to assist in the exercise of corporate footprinting, over time their functionality will likely be eventually subsumed into the existing financial accountancy packages used in treasury departments daily.
Looking ahead to the coming decade and beyond, it is clear that close attention needs to be paid toward carbon accountancy. For example, according to the current UK CRC timeline, 2011 is the first year of a three-year reporting and compliance phase, while 2013 brings the first year of full cap and trade operation. Treasury departments looking to understand and fulfil their impending role in providing an accurate carbon compass for their organisations would do well by beginning to gain expertise now with current footprinting methodologies and associated reporting requirements. Doing so will provide no less than a data-driven guide toward an ecologically sustainable business model and a ‘green economy’ for all.