Establishing a yardstick for climate impact is critical. It would help investors, policy makers, and others understand the extent of companies’ contributions to overall emissions as well as assess the associated climate damages, perhaps even monetarily. It would also enable investors and stakeholders to compare the performance of different companies. This benchmarking could ultimately create incentives for voluntary reductions as well as lend credibility to emissions-reduction commitments. Lastly, it could help spur green innovation as companies try to lower their footprint not by manipulating the figures but by adjusting their activities and investing in technology that would help them be more energy efficient or otherwise reduce emissions.
To be effective, such a metric would have to be clear, simple, and hard to manipulate. It would also have to be audited or verified, and the disclosure would have to be enforced. The more complex the measurement system, the more vulnerable it would be to the kind of creative accounting that undermines trust and accountability.
Three types of emissions reporting
What exactly should companies be mandated to report? Broadly speaking, there are three scopes of carbon emissions, as outlined by the international Greenhouse Gas Protocol developed by the World Resources Institute, a global research nonprofit.
Scope 1 emissions reporting is the most straightforward. It essentially details that a reporting organization disclose its direct emissions, those from sources that it directly owns or controls. For example, a delivery company would report the emissions produced by its trucks and jets; a manufacturing plant would count the carbon emitted by its smoke stacks.
Scope 2 emissions reporting accounts for some “indirect emissions,” meaning those that are produced as a consequence of the activities of the reporting organization, but which occur at sources owned or controlled by another organization. Scope 2 emissions are from purchased energy. Thus, a company would report the emissions that were produced by its power supplier in generating energy for it.
Scope 3 expands indirect-emissions reporting further to include an organization’s entire supply chain. These “upstream emissions” would extend beyond energy to all the organization’s clients, partners, and suppliers. For example, a phone maker would have to report the carbon emissions produced by all the suppliers that manufacture the components that go into the final product. Scope 3 also includes “downstream emissions” that are produced by users of the final product. A carmaker would have to account for the emissions produced by drivers.
Asking companies to report each of these mutually exclusive levels has its pros and cons, which is perhaps why the scope of emissions reporting is still extensively debated. So which measurement and reporting system should we adopt?
On the face of it, reporting all emissions (so adopting Scopes 1, 2, and 3) may appear the most attractive, best suited to address the global climate challenge and best placed to reduce incentives for companies to shift activity elsewhere. If regulatory regimes were to adopt just Scopes 1 and 2, companies might be able to manipulate their carbon footprints by outsourcing the dirtier parts of their business. Scope 3, by contrast, includes upstream emissions and hence cannot create the appearance of a small carbon footprint by shifting production to other firms and suppliers.
However, there are at least two significant problems with Scope 3 reporting. First, it would force companies to report on behavior over which they have little to no control. An oil producer, for example, undoubtedly has a significant role in carbon emissions but does not control the many ways in which its oil is used by all of its downstream customers and end users. In this sense, Scope 3 reporting could be misleading, since these emissions are not solely its responsibility but also the responsibility of those who use the oil.
Secondly, measuring Scope 3 emissions is difficult to do. It would require the aforementioned oil producer to correctly anticipate or track who buys its oil and what these customers do with it, as emissions differ across uses. Moreover, Scope 3 reporting entails significant double counting: many upstream and downstream emissions would be reported multiple times along the supply chain and thereby produce an exaggerated measure of overall emissions.