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August 10, 2009

Enterprise Carbon Accounting Shows the Way Forward

Jen Ace

Many CEOs and environmental managers probably exhaled a sigh of relief last December when Dell was lambasted for its carbon neutral claims, and thought, “Thank goodness that wasn’t us!” While Dell’s goals were laudable (they are, at least, moving in the right direction), their methodology needs some work.

Public-facing claims about carbon and other greenhouse gas emissions should meet two basic requirements: the company understands its carbon footprint, and communicates it clearly and transparently. Dell is half way there on the transparency front. It did state exactly which activities were covered by the “carbon neutral” claim and which were not, although making such a claim at all could be seen as misleading to consumers who don’t have time to read the fine print.

Where Dell needs the most help is in understanding its footprint in the first place. Dell’s Director of Environment, Health and Safety told the Wall Street Journal that their efforts were hampered by the fact that many of its suppliers have not yet calculated their own carbon inventories. A tool called Enterprise Carbon Accounting can help managers to calculate a company’s carbon footprint even if their suppliers have no idea what a carbon footprint is.

How does one quantify something as large and octopus-like as a company’s carbon footprint, which may have tentacles in far more than eight factories or even countries? Most people who aim to quantify a carbon footprint do so using traditional Life Cycle Assessment (LCA) tools, and start by using educated guesswork. Let’s use a computer manufacturer as an example. Managers might suspect that producing the silicon chips accounts for a large portion of energy use (and thus carbon emissions), as well as making the battery and screen. Managers would contact the manufacturers of those products and attempt to get data on the amount of energy and raw materials used to make each item. This approach yields relatively accurate data, but it is extremely expensive, time-consuming and labor intensive. It also is limited in scope and expensive to repeat in the future.

The biggest problem with this approach is the guesswork, even if it is educated. For most companies, it is simply not practical to contact the hundreds of manufacturers who make the thousands of parts in a computer, and get data from each one of them.

Managers must thus prioritize, and may elect to study chips, batteries and screens while ignoring the plastic housing, wires, and fans. But what if the manufacturing process for the wire actually produces a lot of greenhouse gases? Managers would never know, and might spend millions of dollars changing the way batteries are made when the money could have a far bigger impact spent elsewhere. It’s sort of like the old poem about the blind men and the elephant, where each man must touch the elephant and guess what it is: a snake (the man who touched the trunk); a wall (the massive body); a spear (the tusk). Traditional LCA can give a detailed picture of a trunk or a tusk, but is not well suited to seeing the whole elephant.

Another type approach for quantifying greenhouse gas emissions is called Economic Input-Output (EIO) LCA. Economic input-output tables, produced periodically by the government, indicate how each industry is reliant on other industries by tracking purchases between them. If we know the quantity of greenhouse gas emissions per unit of product and we know how much that product costs, we can translate the economic data of the input-output tables into greenhouse gases. For example, our computer manufacturer may purchase plastic and aluminum.

Practitioners of EIOLCA convert the dollar value spent on each product into greenhouse gas emissions. The EIO method solves the “guesswork” problem of traditional LCA, because it is an inherently complete listing of materials used by all industries (as long as not many of them are imported).

However, EIOLCA introduces a problem related to aggregation. It is not practical to track the purchases of every kind of plastic across industries, so all the different plastic types are aggregated into one category labeled “plastic,” some of which are used in the computer housing, but many of which are not. The carbon intensity of computer plastics may be much better – or worse – than the average, but are treated as if they were exactly average. There are only 480 basic classifications in the input-output tables, but many thousands of industrial products, all of which must be somehow grouped into those 480 classifications which makes this method suitable for only a very high-level overview.

EIOLCA also doesn’t work well for new technologies because the government’s figures are usually about five years old. EIOLCA is good at representing mature industries like steel manufacturing, but not new ones like creating biofuel from algae. We see the whole elephant, but we can’t see the type of hair on its body or the color of its tusks.

So what is the solution? Can we combine these LCA approaches to produce a picture that is both complete and usefully detailed? Enterprise Carbon Accounting is a tool that can do just this. It comprises the best parts of traditional and EIOLCA, using rules and accounting principles to make the approach repeatable and efficient. This hybrid LCA approach is iterative. Initially, EIOLCA is used to produce a very rapid overview of a company’s complete operation from the top down. Since a company’s financial statements capture everything it purchases, a high-level view of the entire operation is readily accessible and extends infinitely far up the supply chain, wherever dollars are exchanged. This allows managers to see the relative scale of greenhouse gas emissions and judge their materiality: perhaps batteries account for 25 percent of emissions, while plastic housing accounts for 0.25 percent. They can then ignore the plastic housing and focus on obtaining better quality data on batteries, where real savings on emissions could be made.

Of course, manufacturing is not the end of the story: the consumer who uses the computer generates more greenhouse gas emissions than the entire manufacturing process. Technically, EIOLCA omits carbon emissions generated after the computer leaves the factory. By treating the use-phase like a hypothetical industry sector, carbon can be accounted for by assigning electricity use accordingly.

As the adage goes, what gets measured gets managed. It’s a good business practice for a company to know where its major carbon emissions are, because emissions primarily result from energy use, which is not cheap. Reduce energy usage and you reduce costs.

This connection will become even more important when carbon trading becomes a reality, as it will if the Waxman-Markey bill is passed into law. A carbon footprint is the best proxy available for quantifying the fossil fuel exposure in a supply chain. Regardless of whether a company is directly regulated by cap and trade, the cost of doing business will increase in the short term as heavy emitters upstream pass along the new costs of emitting carbon. These price signals are intended to encourage carbon efficiency throughout the economy, which is good for business in the long view.

Companies may choose to buy and sell carbon credits, but the more strategic move is to extract fossil fuel from the supply chain. Products and processes will be redesigned, with low-carbon materials and suppliers being favored, and managers should anticipate this change and position their company to take advantage of it. Enterprise Carbon Accounting is a practical tool that managers can use to find carbon in both their business and their supply chain, and take steps to minimize it.

Jen Ace is Director of Client Engagement at Climate Earth, which uses Enterprise Carbon Accounting to help companies understand the carbon footprint of their entire business – including the supply chain.

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