The Greenhouse Gas Protocol is an organisation established in 1998 which “provides standards, guidance, tools and training for business and government to measure and manage climate-warming emissions”¹. Its so-called corporate standard² is used by virtually every company reporting on greenhouse gas (GHG) emissions and forms the basis for important corporate disclosure standards.

The Protocol distinguishes three operational boundaries for a company’s emission footprint:

• Scope 1: Direct GHG emissions occurring from sources owned or controlled by the company;
• Scope 2: Indirect GHG emissions resulting from the generation of purchased electricity and heat consumed by the company;
• Scope 3: Other indirect GHG emissions, which occur as a consequence of the activities of the company, but not from sources owned or controlled by the company, such as emissions in the company’s value chain and as a result of the use of products and services sold by the company.

One of the Protocol’s stated accounting principles is “relevance”, defined as the need to “ensure the GHG inventory appropriately reflects the GHG emissions (and removals, if applicable) of the company and serves the decision-making needs of users – both internal and external to the company”³ .

The question is thus whether the Protocol really equips stakeholders with relevant and accurate information that helps to take action and drive change.

But first, let’s take a step back.

From Kyoto to Paris

The thinking about climate change has evolved dramatically over the last decades and reminds me of the quote from Ernest Hemingway's 1926 novel The Sun Also Rises: 

The GHG Protocol was developed in an era when most policymakers thought that climate change could be addressed with gradual action. It was the time of the Kyoto protocol⁴, adopted in 1997, when 38 major (mostly developed) economies agreed to reduce emissions by an average 5 per cent by 2008-2012, compared to 1990. Among these countries, the EU set the most ambitious target, with an 8% emission reduction over this 20 year period, while Australia and Norway agreed to limit their increase in emissions by 8% and 1% respectively.

The policy thinking has without doubt evolved from gradually to suddenly with the 2015 Paris Climate Agreement, which aims for net zero emissions by 2050⁵, requiring a global 43% reduction in emissions by 2030 versus 2019⁶.
It is no exaggeration to refer to a “climate emergency”: at current emission rates, we will have exhausted the world's “carbon budget” in only 6 years⁷.

While the path to net zero may be complex, the overall recipe is straightforward. We need to eliminate the demand for fossil fuels as fast as possible and simultaneously accelerate the supply of low-carbon energy. Moving from a “Kyoto” to a “Paris” mentality thus requires a dramatic shift in gears from “improving efficiency” to “transformational change”. The GHG Protocol was developed and designed in an era of gradualism, when the need to phase out fossil fuels was not yet fully acknowledged. In addition, it contains a number of conceptual flaws that we will turn to now.
 

The Protocol’s prioritisation of Scope 1 and 2 emissions is unhelpful 

For companies that apply the Protocol’s corporate standard, it is mandated to report on Scope 1 and 2 emissions, while Scope 3 reporting remains optional, giving the impression that companies should focus primarily on reducing the first two Scopes. Such prioritisation is, however, unhelpful.

On average, Scope 3 emissions account for 75% of companies’ greenhouse gas emissions⁸. “Product use” alone, one of the 15 categories identified within Scope 3, accounts for over 80% of total emissions in sectors such as real estate and automobiles. Using these two sectors as an example, it is evident that real estate and car companies can achieve the biggest emission reductions by developing and commercializing better products with a lower carbon footprint, e.g. building houses that are well-insulated and equipped with heat pumps and offering a wide selection of reliable and affordable electric cars. One would expect that no industry is in a better position to reduce product emissions than the companies actually producing those products today (even when sometimes an outsider, such as Tesla, needs to trigger change).

Looking at this from a different angle: companies can often reduce Scope 1 and 2 emissions by implementing solutions invented by others (e.g. install more energy efficient equipment, buying low carbon electricity). Reducing Scope 1 and 2 emissions therefore tends to be an implementation challenge⁹ . Reducing Scope 3 emissions, on other hand, is rather an innovation challenge, requiring product innovation to reduce product use phase emissions, or entailing process innovation, whereby companies need to engage and influence their suppliers to reduce emissions in the supply chain.

Whilst implementation is important, innovation can have a positive multiplier effect by disrupting obsolete products and processes and thereby encouraging industry transformation, for example in the way that Tesla’s success forced other car manufacturers to follow.

In summary: companies should be encouraged to achieve the largest emission reductions at the lowest cost and in the shortest time span, irrespective of whether these emissions fall in Scope 1, 2 or 3, and consequently they should measure, manage and report on all 3 Scopes.
 

The magnitude of reported emissions under the Protocol does not equate to economic risk

The Protocol intends to provide stakeholders with relevant information on which to base their decisions. In a scenario of “Kyoto-type” climate action, it is indeed useful for (say) investors to know the carbon footprint of companies in their portfolio, for instance to assess the financial impact of gradually rising carbon prices. But it is becoming increasingly clear that the transition to a low carbon world will be quite disruptive as a result of drastic but necessary measures that are now being introduced, such as the mandatory phase out of ICE cars and oil heating systems in several countries.

Consider for a moment the relevance of emission reporting by companies active in the eco-system of products that will become obsolete when fossil fuels are eliminated, such as companies that manufacture spark plugs or car gearboxes. The emissions reported by these companies in line with the Protocol are largely irrelevant for investors. Whether these companies manage to reduce their Scope 1 or 2 emissions by installing solar panels on the factory roof or buying green electricity has little bearing on corporate value. What matters more is to know whether and how these companies anticipate the end of ICE cars by changing their product portfolio and how these companies leverage their expertise and resources to build solutions that help to accelerate (for instance) the roll-out of electric cars.

Knowing a company's carbon footprint is thus not at all sufficient to predict the transition risks. Stakeholders should rather focus on indicators of impact and business transformation to understand the true corporate risks and opportunities. It is for this reason that initiatives such as the Taskforce on Climate-related Financial Dislosure (TCFD)¹⁰ were launched to encourage companies to disclose the risks and opportunities related to the transition to lower-carbon economy.
 

Not all companies can be held similarly accountable for double-counted emissions

Under the Protocol the same emissions can be counted and reported multiple times by different companies. While the Protocol is designed to ensure that two or more companies do not account for the same emissions under Scope 1 and 2, Scope 3 emissions are likely to be recorded by multiple companies and can also overlap with Scope 1 or 2 emissions reported by other companies.

Let’s take an illustrative example: tailpipe emissions from employee commuting by car. These emissions can be reported by a variety of companies under Scope 3, including the person’s employer (assuming it is not a company car), the oil company (selling the petrol), the car company (selling the car), the tire company (whose tires were fitted on the car), and so on¹¹.

It is true that each of the abovementioned companies can to some extent play a role in reducing tailpipe emissions, but I would suggest that in this example the employer and the car manufacturer can play a major role, whereas the oil company and the tire company only have a secondary role. The employer can promote the use of public transport, restrict parking at the office and encourage working from home – to name a few options – all helping to significantly reduce tailpipe emissions. The car company can improve the selection and affordability of electric cars, again enabling major emission reductions. The oil and tire company, on the other hand, have far less opportunity to affect these emissions once the employer and car company have determined their policies and business strategies.

This illustrates that not all reported emissions “weigh” equally: a company will have more control, accountability and responsibility over some categories of emissions compared to others, even if they are all reported under the same Scope in the Protocol. The reporting and double counting of emissions does therefore not bring clarity to a key question: which company or stakeholder should be held accountable for acting to reduce a specific category of emissions?

Asset divestments muddle the picture

Asset divestments can create a disconnect between reported and real life emissions, confusing stakeholders who are trying to assess a company’s decarbonization efforts. An example is the 2019 sale by BP of its Alaskan oil fields to Hilcorp¹². This divestment allowed BP to cut its operational emissions by 8 million tons, bringing the company a step closer to its widely publicized net-zero target. However, as Hilcorp continued operating these oil fields, it is unlikely that this asset transaction had any real impact on global greenhouse gas emissions. In fact, because privately owned Hilcorp does not report on its emissions, we may never know.

A second example regards Sembcorp Industries, a Singapore-based company, which in 2022 sold its Indian coal power plants to a private Omani consortium¹³. The divestment enabled Sembcorp to reduce its emission intensity in line with targets set in the company’s sustainability bonds, thereby qualifying for a more favorable interest rate. In reality, this divestment did nothing to reduce global emissions.

Both BP and Sembcorp report emissions in accordance with the Protocol’s corporate standard, which requires companies to remove emissions from divested assets from both the base year and the reported year. However, these provisions in the Protocol do not prevent companies from creating a misleading impression about the progress they are making when their climate targets are not also adjusted. As a result, BP came closer to its net zero target and Sembcorp achieved its emission intensity target not because of any climate action, but thanks to financial transactions.
 

A company successful with “greener” products may well see an increase in reported emissions – confusing stakeholders

The “race to zero” implies massive, disruptive change for certain sectors. As an example, the International Energy Agency outlines in its net-zero roadmap¹⁴ that electric vehicles (EVs) will need to grow from around 5% of global car sales to more than 60% by 2030. Some car companies will be leading this industry transformation, gaining share from other car companies.

Now consider the GHG emissions (Scope 1-3) reported by various car companies over time. Companies that are successfully leading this transformation – selling more and more EVs every year – may well see their total GHG emissions increase over time. Companies that are lagging behind and are being disrupted – selling less and less cars every year – may in fact see their total GHG emissions fall as their company shrinks.

The same is true for other industries and companies. The race to zero will require more solar panels, wind turbines, electric motors, electricity cables and so forth and so on – and producing and installing these products creates GHG emissions. Consequently, companies driving the energy transition may nevertheless see their carbon footprint increase over time.

Therefore, stakeholders cannot take reported corporate GHG emissions at face value: an increase or decrease in reported emissions does not necessarily mean that a company has a positive or negative environmental impact because that depends on how a companies’ activities and products affect the overall system and thus global emissions.

The protocol and reporting standards

As discussed, the Protocol suffers from a number of flaws. Separating emissions in the three Scopes defined by the Protocol doesn’t really help companies to prioritize action and neither informs external stakeholders which company to hold accountable. The absolute level and evolution of reported emissions doesn’t need to be correlated to transition risk; there is the issue of double counting, and the Protocol does not always handle well corporate divestments.

It is true of course that the Protocol should not be seen in isolation. It forms the basis for carbon emission reporting in important corporate disclosure standards: the Global Reporting Initiative (GRI), CDP, the Sustainability Accounting Standards Board (SASB), the Taskforce on Climate-related Financial Disclosures (TCFD), the proposed US Securities and Exchange Commission (SEC) climate disclosures and the proposed European Sustainability Reporting Standards (ESRS).

These reporting standards address and help overcome some of the Protocol’s deficiencies. The GRI standard requires disclosing a company’s governance, policy and business strategy to mitigate and adapt to climate change. The ESRS addresses the impact of divestments by requiring companies to comment on the year-on-year comparability of emissions in case of company structure changes. The SASB standard focuses on the disclosure of relevant information on a sectoral basis, e.g. by asking automotive companies to disclose the number of electric cars sold as an indicator of how their business model changes in light of the climate crisis.

The Protocol and these related reporting standards have certainly helped companies in understanding their carbon footprint and create a certain level of comparability with peer companies. In external communications, however, the primary focus seems to be on broadcasting company-wide Scope 1, 2 and 3 emissions (or emission targets) and using this to allocate blame or signal virtue. As an example, a headline in the Guardian¹⁵ stated that “Just 100 companies responsible for 71% of global emissions, study says”, listing 100 companies predominantly in coal, oil and gas.

But allocating blame or signaling virtue based on reported Scope 1-3 emissions does not recognize the integrated nature of pollution activities across the economy. None of these top 100 “polluters” would be in business without a demand for their fossil fuels by other companies and consumers. To illustrate this point, not one car company is featured on this list of top 100 polluters, even though most cars run on fossil fuels produced by these 100 “evil” companies. To the contrary: some car companies have actually put themselves forward as climate leaders by affiliating themselves to the UNFCCC Race to Zero Campaign, pledging to achieve net zero emissions across all three emission Scopes. A closer “look under the hood” however, reveals that at least two companies (VW and Mercedes-Benz) have climate strategies of “poor integrity”¹⁶.
 

Making corporate climate disclosures more relevant and actionable for stakeholders

There is no substitute for strong action by governments to tackle the climate crisis, focussing on fossil fuels as they are by far the largest contributor to greenhouse gas emissions. The demand for fossil fuels must be eliminated through carbon pricing and by mandating a phase-out of fossil fuel dependent technologies for which low carbon alternatives exist. Governments must also support the supply of low carbon energy by investing in relevant infrastructure and incentivizing companies and consumers.

But while government action is indispensable, other stakeholders can and must also play a positive role, in particular companies, investors and consumers. In this sense, the Greenhouse Gas Protocol and its corporate standard helped create awareness and made reporting and disclosure of corporate GHG emissions common practice among an increasingly large group of companies. The limitations to the Protocol, highlighted in this paper, are now widely acknowledged and the GHG Protocol organization is currently reviewing the need for an update¹⁷. Furthermore, the deficiencies are partially addressed by the various reporting frameworks mentioned. I also note that the World Business Council for Sustainable Development recently issued guidance¹⁸ on measuring and reporting so-called “avoided emissions”.

Despite these efforts to continue improving corporate emission reporting, it is questionable whether this will be sufficient to catalyse transformational change at the scale and pace required to meet the Paris Climate Targets. We need to bring more clarity to the question of accountability: which company can actually be held responsible for which emissions? We need to give better information to consumers, in order to reduce the demand for high carbon products and services. And we need to give investors more relevant, forward-looking information so that they can channel funding to companies that really walk the talk when it comes to a low carbon future.

With this in mind, I would like to highlight and promote the following three tools that - in my humble opinion – are more likely to trigger systemic climate action by companies, consumers and investors compared to traditional corporate emission reports:
 

1. E-liability
 

The e-liability concept proposed by Kaplan and Ramanna addresses the conceptual flaws of the Protocol by applying corporate cost accounting principles to GHG emissions¹⁹. In a first step, each company calculates the e-liability (i.e. GHG emissions) it creates and eliminates in each period, adding them to the e-liabilities it acquires and has accumulated. In a second step, the company allocates some or all of these e-liabilities to the units of output produced. Finally, companies publish an annual e-liability statement which shows the stocks and flows of e-liabilities during a reporting period.

In other words, this concept requires companies to measure what are currently Scope 1 emissions, combine this with information provided by its upstream suppliers (thereby incorporating Scope 2 and upstream Scope 3 emissions) and allocate the emissions accumulated up to that point to the company’s products and services. The concept applies activity-based costing principles to the accounting and reporting of GHG emissions, for instance when assigning emissions related to overhead activities or when allocating emissions related to fixed assets by “depreciating” them over time.

When selling their products, companies then “transfer” the related e-liabilities to their customers. This will help unleash the power of markets and competition, as highly polluting companies will face resistance from potential customers if the e-liabilities that come with these products are excessive (just as high cost suppliers will not so easily find buyers). Highly polluting companies may be tempted to underallocate e-liabilities to their products in order to please customers, but this would cause a steadily escalating e-liability statement for the company in question, just as selling products below cost leads to a deteriorating financial balance sheet.

E-liability accounting enables emissions to be accurately tracked along the value chain, eliminating the current inefficiency where several companies may be estimating and reporting the same Scope 3 emissions. Another big plus is that a company’s e-liability balance can be audited like financial statements. As Kaplan and Rammana conclude, it will “enable GHG reports to approach the relevance and reliability expected of today’s corporate financial reports”. E-liability accounting will provide a company’s supply chain customers and investors with much better tools than they have today to drive climate action and it simultaneously prepares the ground for a more systematic way of informing and empowering final consumers – my next point.
 

2. Product life-cycle emission footprints
 

In 2019, leading academics including 28 Nobel laureates called for the introduction of carbon taxes as the “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary”²⁰. Despite this strong support from the academic world, political action continues to lag behind with only 23% of global emissions currently covered by carbon pricing measures²¹. As a results, prices do not fully reflect the external costs, meaning that producers and consumers are not yet properly incentivized for a low carbon transition.

As both an alternative and complement to carbon pricing, consumers should be informed about the full lifecycle emission footprint of products and services they buy, similar to other ways in which consumers receive product information, e.g. energy labels for electric equipment or nutriscores for food products. The idea would be to mandate companies in sectors with significant carbon footprints to publish the lifecycle greenhouse gas footprint of each of their products. For products with no use-phase emissions, this is identical to the e-liability, therefore requiring no extra work. For products with use-phase emissions, companies should publish both the estimated product life-cycle emissions as well as the expected product lifetime on which their calculation is based.

Providing this information will empower consumers, enabling them to make better informed product choices. Mandated transparency on product lifecycle emissions will also stimulate competition and innovation between producers based on product carbon footprints.
 

3. Business transformation metrics
 

Most of the climate metrics reported by companies are either backward looking (e.g. historic emission footprints of companies), or targets that are very distant (e.g. net-zero by 2050). We need to fill this information gap with “hard” facts that reliably indicate how a company plans to change its product portfolio and business model over the next 3-5 years, i.e. within the term of current company management.

This is where business transformation metrics come in. As an example, for oil and gas companies these metrics could be the proportion of R&D, pre-FEED²², CAPEX and marketing expenditure allocated to business areas other than fossil fuels: all four provide credible evidence of whether or not a company is truly transforming and allocating its resources away from fossil fuel exploration and production.

The TCFD, SASB and other reporting frameworks already propose some of these metrics, but companies should be encouraged to go beyond disclosures mandated by standard setters and develop additional bespoke metrics that explain how their business is evolving. Standard setters tend to be reactive and work on the basis of consensus; companies that consider themselves leaders in their sector should therefore take the initiative and transparently disclose a more granular picture of their business transformation, thereby building external support and credibility.

Deloitte’s NSE Sustainability practice and Deloitte’s Center for the Edge developed the Sustainability Fellowship to build a European network of external advisers who are affiliated to Deloitte. With this collaboration, we aim to bring differentiating perspectives, proven experience and an innovative mindset to accelerate an organisation’s sustainability transformation.