The dirty secret of carbon accounting is the dirty secret


There's the dirty secret of carbon accounting, and it could be exposed soon. That's because the assumptions most companies base their calculations on could be wrong.

The corporate financial accounting tells you how much a company earned, how much it spent and how much it owes. All your numbers can be trusted because most large companies hire experienced auditors to ensure that the figures are as accurate as possible. When companies mess up, they can expect harsh punishment by regulators, ranging from huge fines to prison time. That means they have to be able to justify every figure on every line.

Carbon accounting is nowhere near as rigorous. Unlike free carbon accounting, nearly all carbon accounting is voluntary and based on voluntary standards. Good or not, the company will come in for praise for trying. No matter how egregiously they get a carbon accountant messed up, they're unlikely to see the inside of a jail.

While companies can be fairly accurate about the emissions they directly produce that accuracy drops rapidly when they have to account for emissions from their supply chain or users of their products. Even in the best case, carbon accounting is based on a huge number of assumptions.

You've probably guessed where I am going here. Voluntary reporting coupled with a long list of assumptions presents a huge risk of getting things wrong. Let’s take one example. The United States is more strict on emissions reporting than most large emitters. And yet, study after study shows that oil and gas companies underreport their methane emissions. Methane is the second largest contributor to warming the planet, following carbon dioxide.

That's a big problem on its own, but especially so because the emissions gas companies report as their Scope 1 form the basis of Scope 3 emissions reported by utilities that use the gas to generate electricity, by tech firms that use the gas to heat buildings, and on and on.

'That mistake propagates all the way through your system and gives you a false picture of your actual carbon footprint, says Ryan Orbuch, who works for credit card payment giant Stripe’s Climate Team. The emissions companies report form the basis of public decisions and investor opinion. In compliance markets such as the European Union Emissions Trading System, companies are required to provide accurate carbon emissions on an asset-by-asset level. These are only direct emissions of Scope 1 and companies that get those figures wrong can face fines.

Over the past six months, Bloomberg Green has been reporting on methane leaks across the globe from Australia to Canada. Many companies own up to the leaks when they show up on satellite images, but before the eyes in the skies appeared, they could have easily gotten away with it — you can't trace a methane molecule back to its source.

Last year, Engie Company halted a French-Engie natural gas plan with a U.S. company, because Engie worried that the methane leaks from the production of the fuel could run afoul of the energy company's plan to reduce emissions.

Still, satellite monitoring and compliance markets cover only a fraction of the global emissions. Governments don't employ people to verify every dollar, but rather rely on financial transparency sticks to ensure companies don't lie. The carbon accounting (CF) won't be as sustainable as it needs to be, says Cynthia Cummis, director of nonprofit climate mitigation at the World Resources Institute. 'Without those regulations, Cummis says, 'Companies do not have a lot of leverage over their power supplier to give accurate emissions data.

If you can't measure it, you can't manage it. If the world is serious about reducing emissions then it will have to get better at accurately accounting for it first.