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February 26, 2009

The Elephant in the Room: Carving Up Scope 3 Emissions Across a Value Chain

Emma Stewart
Corporate Environmental Strategy Consultant

For a Fortune 1000 company today, it is easy to be casual about Scope 3 emissions. When it comes to measurement guidance, the  World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) GHG Protocol considers the quantification of Scope 3 emissions as optional when preparing an overall corporate GHG inventory.

As for current or pending regulation, it is unlikely that companies will be held accountable for their Scope 3 emissions (for example, see EPA Climate Leaders guidance). And when it comes to reputation, it is understandable that companies choose to ignore a category that typically represents an exponentially larger footprint than their Scope 1 and 2 emissions. Logical decisions all.

But in the aggregate, these decisions have led to three unintended effects: one pedantic, one peculiar and one perilous.

First, the pedantic. Those companies today that do measure and report their Scope 3 emissions tend to pick which activities to include in a piecemeal way (e.g. air travel but not employee commute), based upon the ease of data capture, relevance to brand, or degree of control. This means that, despite the advancements in carbon disclosure, investors and others are forced to compare apples to oranges. While the numerator may look comparable, the hidden denominator (or boundary) varies drastically between companies.

Secondly, the peculiar. When examined with fresh eyes, carbon reporting by most companies today actually ignores the core activity of the business. News Corp does not include newsprint production or delivery in their footprint, Dell does not include hardware production, delivery or use, and Yahoo does not include data servers. But what is News Corp without a newspaper, Dell without a laptop, or Yahoo without computing power? And these three companies are viewed as leaders in the space. If you looked at the carbon footprint of most major companies, you’d think they were simply a collection of office buildings. It is beginning to look even more imbalanced as companies tout the carbon-reduction potential of their products in the hands of the consumer, but choose to underplay the carbon-intensive impacts of their products as they’re manufactured, assembled, and delivered.

Third, the perilous. While at ground level it may seem critical to slice carbon accountability the right way, at the atmospheric level, what matters most is swiftness. With atmospheric levels of greenhouse gas reaching 450ppm (see Potsdam Institute for Climate Impact), we have already emitted, in absolute terms, enough to achieve a 2°C rise – or what scientists and policy-makers consider the threshold point for long-term irreversible climate change (see UNDP Human Development Report 2008). While we quibble with accounting models and intensity metrics, the rising absolute level of emissions continues to lock us into greater levels of climatic change. Because the majority of emissions are not currently included in corporate Scope 1 and 2 reporting (see CDP 2008), Scope 3 emissions have become the atmospheric deal breaker.

These challenges suggest the need for an approach to carbon attribution that is a) consistent and therefore comparable for investors, b) balanced in its approach to drawing boundaries upstream and downstream, and c) swift in its development and implementation. To achieve this, I see two essential steps for policy-makers and companies.

For policy-makers designing climate policy, the biggest contribution you can make is to swiftly develop a point of view on production-based versus consumption-based carbon accounting. Currently, policy dialogues run the spectrum. The U.S. appears inclined towards a production-based system in which upstream emitters are the target (e.g. cap-and-trade covering utilities, etc.) while the UK is testing out consumption-based systems in which individual consumers are the target (e.g. carbon quotas).

•    The production-based system appears to be administratively easier to roll-out (as with all point source pollution regulations) but may be politically challenging as the targets have significant vested interest in watering down any such system.
•    The consumption-based system, while sending the right macro-economic signals, is only feasible with a willing populous and new, economy-wide research to allocate carbon accurately by activity (see, for example, this report by The Carbon Trust). Once this decision is made, emissions registries will be far more powerful in helping to avoid double-counting.

For leadership companies and their value chain partners, the biggest contribution you can make is to develop a coherent point of view on the equity versus control model for attributing carbon. Socially responsible investors and activists seem predisposed towards the former, which assigns ownership for emissions on the basis of economic interest in a business activity. Corporate managers and management consultants are more inclined towards the latter, which assigns ownership for emissions based upon operational control or influence.

•    The equity model makes good sense philosophically and could mirror the financial tracking and legal liability systems already in place. However, the model is hamstrung unless companies begin to incorporate carbon as a new parameter in raising capital or selling debt.
•    The control model makes good sense pragmatically for the purposes of data capture and is more likely to result in carbon reductions due to the more direct relationship between operational decisions and emissions. However, it is challenging to quantify the degree of control one company has over another (i.e. Does one represent a major customer of the other by volume? Have they worked together for years? Is one likely to seek the same product or service elsewhere?).

It is in your joint interest to come to agreement within your given value chain on which of these models makes sense, and craft the contractual language to match, or else the decision will be made for you by climate policy makers, activists, or even trade negotiators.

Without these two major steps by policy makers and business leaders, I fear the elephant will remain perennially in the room. Or perhaps more fittingly, in the atmosphere.

Emma Stewart, Ph.D., is an environmental strategy consultant to Fortune500 companies and leading non-profit organizations, combining expertise in environmental trends analysis, policy and metrics design, and management consulting. She can be reached via LinkedIn.

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