In an ever-changing climate landscape, greenhouse gas (GHG) emissions measurement and management must continue to adapt and evolve to stay relevant as new opportunities and challenges emerge. There is no shortage of ideas. More than 1,400 survey responses and 230 new proposals were received by the GHG Protocol, the world’s most widely used GHG accounting approach, as part of its two-year update process.

One such proposal is E-liability accounting. But for numerous reasons, which I unpack in this article, E-liability is not a replacement for the GHG Protocol.

E-liability and the GHG Protocol serve different purposes, adopt different approaches to accounting, and are in different stages of maturity. E-liability aims to deliver mutually exclusive, comparable, emissions data to support a liabilities approach to holding companies accountable for emissions. The GHG Protocol supports comprehensive corporate GHG management, value-chain wide emissions disclosures and ambitious target-setting. The E-liability concept was first introduced in 2021 in a management magazine. The GHG Protocol is a widely used family of codified standards developed through multi-stakeholder processes over the last 20 years.

One of main criticisms of GHG Protocol by E-liabilities’ authors is the double-counting inherent in the design of its scopes. Yet this is one of GHG Protocol’s greatest strengths. It supports comprehensive GHG management by incentivizing cradle-to-grave value-chain GHG reduction efforts.

Many questions remain on whether and how E-liability could support GHG management. The E-liabilities approach would likely require a regulated system to drive the universal participation necessary to deliver its aims while GHG Protocol can and is used in both voluntary and regulated systems.

This article describes the E-liabilities approach, compares it to the GHG Protocol Corporate Standard, explores how it might be implemented in practice and discusses its potential to support GHG management. 

What Is E-liability Accounting?

First introduced in 2021 by Professors Robert S. Kaplan and Karthik Ramanna, E-liability accounting aims to deliver mutually exclusive and comparable product and entity-level emissions data to enable “well-functioning green-finance and carbon-sequestration markets.” In E-liability accounting, “E” refers to environmental, and one metric ton of E-liability is synonymous with one metric ton of GHG emissions. Similar proposals by other academics include the carbon emissions statement by Reichelstein 2022, the carbon balance sheet by Jia et al. 2022 and consequential impact-based accounting by Ballentine 2023.

How Might the E-liability Approach Work?

E-liability is envisioned to work like a company’s financial cost accounting system, transferring emissions down supply chains with the sale of products. Each company in a value chain would calculate its own direct GHG emissions (scope 1 in GHG Protocol) using primary data and allocate these to its products, together with the cradle-to-gate supply chain emissions of the purchased inputs used to produce them. The upstream cradle-to-gate emissions would be transferred to the company by its direct (tier 1) suppliers. While financial liabilities can include future services owed to others or unsettled obligations from previous transactions, E-liability uses liabilities to refer exclusively to historical or cradle-to-gate emissions ex-post.

The idea behind the approach is that emissions information, referred to as “E-liabilities,” would be transferred sequentially along supply chains to downstream customers. Each company in the supply chain would deduct the E-liabilities attributable to its sold products from its cumulative record of E-liabilities and transfer them to the downstream company buying its products. The buyers would add these cradle-to-gate E-liabilities attributable to the products it purchased to its cumulative record of E-liabilities. With this approach, each metric ton of GHG emissions would be “owned” by only one company at a time.

If companies reduce their cradle-to-gate emissions by sourcing less carbon-intensive inputs (upstream) or decrease their own direct emissions, then they will incur and pass on fewer emissions — “E-liabilities”— to their customers. A company’s cumulative E-liabilities would not reflect the emissions it caused over a period; rather, it would be a point-in-time “owned” E-liabilities value on a “carbon balance sheet,” or “E-ledger.” Companies could also record cradle-to-gate emissions for a given period, like the corporate inventory approach, separately from point-in-time E-liabilities, but this would be limited to cradle-to-gate emissions and direct emissions. 

How Does E-liabilities Relate to Emissions Liability Management? 

Emissions Liability Management, introduced by Roston, Seiger & Heller, 2023, builds on E-liability accounting to create an E-liability Management framework, or “carbon solvency,” whereby a company’s emissions liabilities are matched on a balance sheet (E-ledger) with “duration-matched removal assets” (E-assets). A company’s E-Ledger would net E-liabilities and E-assets. A company with more E-liabilities than E-assets would show net E-liabilities; and a company with more E-assets than E-Liabilities would show net E-assets. E-assets are carbon removal offsets that certify permanent carbon sequestration. The E-asset system aims to tackle some of the existing carbon-offset market challenges, such as inconsistent reporting and lack of audits, by using financial accounting principles to define what constitutes an allowable carbon-offset asset.

A company could buy offsets that are “nettable against liabilities,” effectively counterbalancing their E-liabilities — much like the carbon-neutral concept. Emissions Liability Management authors initially suggested that the liability duration for E-assets be 1,000 years, but in a subsequent paper acknowledged that in practice companies would choose their own liability duration. No limit is set on the use of E-assets, meaning that a company could theoretically buy removal offsets for all its E-liabilities and never decarbonize. This contrasts with the Science-based Target Initiative (SBTi), which only allows a very limited quantity of residual emissions (5-10%) to be neutralized with high-quality carbon removals once a company has achieved its long-term science-based target. 

How Does the E-liabilities Accounting Concept Differ from the GHG Protocol Corporate Standard?

The differences between the E-liability approach and the GHG Protocol Corporate Standard reflect their different goals and maturity.  Five differences are discussed below, noting that E-liability is still evolving and subject to change:

  • Cradle-to-gate and direct versus cradle-to-grave emissions accounting;
  • Transferring emissions liabilities to customers versus collective value-chain emissions accounting;
  • Mutually exclusive versus double-counting of emissions;
  • Use of primary versus estimated data; and
  • Concept versus codified standard.

While this comparison focuses on E-liability and the GHG Protocol’s Corporate Standard, it should be noted that allocating emissions on a product-level basis, a key feature of E-liability accounting, was standardized over a decade ago in the GHG Protocol Product Standard (2011). Further, allocating (e.g., depreciating or amortizing) cradle-to-gate emissions of capital equipment on a product-level basis, per product generated, is not a new concept. Such practices have been commonplace in lifecycle analysis for decades.

1) Cradle-to-gate and direct versus cradle-to-grave emissions accounting

E-liability focuses on accounting for a company’s cradle-to-gate and direct emissions. An oil and gas company, for example, would not account for the downstream emissions from the combustion of its sold products by end users (where most of their cradle-to-grave emissions occur). The authors’ rationale for omitting downstream emissions was threefold: including downstream emissions double counts emissions, collecting emissions data from downstream customers is challenging, and companies have more control or influence over their suppliers than their customers.

A subsequent working paper by the E-liabilities authors reversed this stance and incorporated the disclosure of downstream emissions from product use by end consumers (B2C) when products require energy for their use and when a product’s sourcing and design decisions could influence product energy use. If these conditions are met, companies would disclose per-product performance metrics (GHG intensity) rather than aggregate emissions, as in the case of the GHG Protocol. It is unclear why the E-liabilities authors omitted high use phase emissions from B2B products from disclosure. Such information would likely be material to investors and other users.

The GHG Protocol’s corporate standard quantifies the upstream (cradle-to-gate) and downstream emissions attributable to a company’s activities, classified into three scopes. Scope 1 refers to direct emissions from a company’s owned or controlled sources. Scope 2 refers to indirect emissions from the generation of energy purchased and consumed by a company. Scope 3 refers to indirect emissions (not included in scope 2) that occur in the value chain of a reporting company. Scope 3 emissions are categorized into 15 mutually exclusive categories that distinguish upstream and downstream emissions. Downstream product-use phase emissions include individual end users and business users. The GHG Protocol Scope 3 Standard also provides guidance on how to report product performance metrics effectively, e.g., for long-lived products that result in significant cumulative emissions despite low-carbon on a per-product level.

2) Transferring emissions liabilities to customers versus collective value-chain emissions responsibility

Using the E-liability approach, companies transfer the E-liabilities of their products to downstream customers. This approach risks companies offloading the burden of managing emissions (liabilities) to customers instead of encouraging collaboration and collective target-setting across value chains. A fertilizer manufacturer, for example, would transfer its production emissions liabilities to customers and would not be responsible for the downstream emissions associated with the application of its fertilizers. 

It is unclear who would require E-ledgers and whose E-ledgers, if anyone’s, would capture the E-liabilities effectively offloaded to individual (non-business) end consumers (e.g., individuals driving cars or heating homes). Even if individual consumers did maintain personal E-ledgers, what would happen to their liabilities when they die?

Under the GHG Protocol, responsibility for emissions is not transferred between companies or to end users. Instead, each company in a value chain accounts for and takes responsibility for its upstream (cradle-to-gate), direct (Scope 1) and downstream emissions. This helps companies focus their GHG mitigation efforts on emissions “hot spots” in value chains and prioritize where they can drive the biggest GHG reductions.

Incentivizing an approach like E-liability where everyone looks at their own plates first risks slowing down the decarbonization of value chains. Returning to the oil and gas company example, emissions from sold products typically comprise 90% of oil and gas companies’ total emissions. These would show up as Scope 3 emissions using the GHG Protocol Corporate Standard, creating an incentive for companies to manage and reduce them. Oil and gas companies have opportunities to reduce downstream emissions through the design of their products or by selling energy generated with low-carbon technologies. Calculating product use-phase emissions need not be challenging. Making assumptions about how products are typically used is standard practice for product development. 

3) Mutually exclusive versus double-counting of emissions

By allowing companies to transfer emissions liabilities to their customers, E-liability avoids the double-counting of the same E-liability by different companies. This supports their goal of providing mutually exclusive accounts of emissions. The GHG Protocol’s three scopes result in multiple companies counting the same emissions in shared value chains. One company’s direct (Scope 1) emissions are another company’s indirect (Scope 2 or 3) emissions.

Does double-counting matter? The answer depends on how the information is used. Yes, if the goal is to create a mutually exclusive corporate GHG liabilities framework. No, if the goal is to help companies strategically manage emissions across value chains.

The GHG Protocol scopes drive an expansive approach to GHG reductions. A delivery truck company, for example, can lower emissions by optimizing routes and selecting low-emissions vehicles (Scope 1). A truck manufacturer can lower emissions by making its trucks more energy-efficient and shifting from gas to electric vehicles (Scope 3). The energy provider can explore alternative low carbon energy sources (Scopes 1 and 3). The scopes’ design enables companies to focus on the part of the value chain where they have the greatest opportunities to reduce emissions.

The scopes’ design also ensures no double-counting within a single company’s GHG inventory. Upstream and downstream emissions are also not conflated in an inventory. The GHG Protocol’s Scope 3 Standard (2011) requires the separate disclosure of Scope 3 emissions, in 15 categories, which are grouped exclusively as upstream or downstream. 

4) Use of primary versus estimated data

Primary data is specific and traceable to a company’s products and services. It does not include the use of averaged industry or regional data. The E-liability approach initially advocated for only using primary data to improve accuracy and reliability, acknowledging that this would involve a three or six-year phase-in period. In practice, its approach, as exhibited by recent case studies, mirrors the GHG Protocol by encouraging companies to collect as much primary data as possible, especially for significant emissions sources, while relying on secondary data for less relevant or material emissions sources.

Ideally all companies would collect and share primary data. The challenges to this are multiple, especially in voluntary systems. Supply chains can have thousands of suppliers and components. Suppliers may be unwilling to share proprietary primary data. Thus, it is practical and efficient to use representative secondary (industry average) data to fill data gaps, while focusing a company’s primary data-collection efforts on emissions “hot spots” in the value chain that could make the greatest contribution to mitigating overall emissions. A CDP analysis on the relevance of Scope 3 categories by 16 high-impact sectors, for example, found that on average, companies had significant emissions in only three of the 15 GHG Protocol Scope 3 categories. 

5) Concept versus codified standard 

The E-liability approach is not a codified standard. In their September 2023 updates, the authors indicated that they were not working to “standardize their methodology” because they are still “field testing” their concepts. As a result, it does not specify the GHG accounting and allocation rules, quantification methods, emission factors, and other key elements needed to ensure comparability between companies. E-liability will either need to develop these rules or draw on the GHG Protocol’s existing, codified guidance, as the authors appear to be doing with their recent addition of downstream emissions estimates and disclosures. 

The GHG Protocol is a family of codified standards developed through multi-stakeholder processes involving thousands of experts and stakeholders from business, academia, NGOs and governments over the last 20 years. These include the Corporate Standard (2004), Project Protocol (2005), Scope 2 Guidance (2015), Scope 3 Standard (2011), Scope 3 Technical Guidance (2013), Product Life Cycle Standard (2011), and the forthcoming Land Sector and Removals Guidance (expected in 2024).

In What Ways Is E-liability Like the GHG Protocol?

Both the E-liability and the GHG Protocol’s Corporate Standard involve collecting emissions data and passing it sequentially along a supply chain. E-liability passes along liabilities as mutually exclusive emissions information. The GHG Protocol passes along information, not the associated “ownership” of emissions liabilities.

The E-liability primary data collection methods and principles of allocating supplier-specific, cradle-to-gate emissions to sold products mirrors the specifications from GHG Protocol’s “corporate suite” of standards and guidance. 

The activity-based costing method of assigning overhead and indirect costs to products and services recommended by E-Liability resembles the physical allocation methods (including mass, volume, energy, chemical and unit sales) specified in the GHG Protocol Scope 3 and Product Standards, which build on long-established guidance on allocation within attributional lifecycle assessment (ISO, 2006).

Other similarities include:

  • Both allow a reporting company to collect data from its immediate (tier 1) suppliers and its own activities. The GHG Protocol’s Scope 3 Standard states that reporting companies should use product-level cradle-to-gate GHG data from suppliers to calculate their emissions. Detailed guidance on how to do this is provided in the GHG Protocol’s Product Life Cycle Accounting and Reporting Standard.
  • Both include direct emissions and indirect upstream emissions (cradle-to-gate); GHG Protocol also includes indirect downstream emissions (cradle-to-grave).
  • Both encourage primary data collection.
  • Both specify supplier-specific emissions data transfer.
  • Both use similar data sources and calculations. 

How Practical Would it Be to Implement E-liability?

E-liability is still being prototyped. An E-liability case study of a tire company, for example, included the GHG emissions from only four of the 200 raw materials used to produce tires, and even then had to rely on estimates from environmental product declarations. 

E-liability is not a standalone GHG accounting system. It does not provide methods for calculating emissions. It is not a codified standard. Nor has it specified data formatting or data transfer rules to tackle data-sharing problems and the need to link-up supply chains to facilitate emissions sharing among companies using different technologies and platforms. This data sharing problem is being addressed by GHG Protocol’s co-convenor, World Business Council for Sustainable Development, through its Partnership for Carbon Transparency (PACT). PACT develops a standardized approach for calculating and exchanging consistent, comparable and credible Scope 3 emissions data across value chains. It has two elements: the PACT Framework,  which provides guidance on how to calculate primary product GHG footprints, and the PACT Network,  which facilitates peer-to-peer exchange for ensuring interoperability between technology solutions.

To achieve its goal of only using primary data to calculate emissions, the E-liability approach would need each company in a value chain to quantify and register its GHG emissions liabilities. Such a universal approach is unlikely to be feasible in a voluntary system. Companies with diverse product portfolios or deep global supply chains touch many small- to medium-sized enterprises. Large-cap companies, for example, can have supplier pools of up to 100,000 businesses that span the globe. 

Lastly, and most importantly, it is unclear why companies would be compelled to create E-ledgers, purchase E-assets and treat E-liabilities as costs or legal responsibilities in the absence of regulations or punitive carbon taxes. Liabilities will not matter without regulatory teeth.

Is E-liabilities an Effective Approach to Inform GHG Management?  

The raison d'être of counting emissions is to help manage and reduce them in line with achieving the Paris Agreement’s 1.5 degrees Celsius temperature stabilization goal. E-liabilities is based on financial accounting approaches. Financial accounting was not designed to count GHGs or address GHG risks. The flow of money is unconstrained by the laws of physics and chemistry. GHG emissions are different. It is therefore reasonable to ask: Is an approach based on financial accounting an effective way to inform GHG management? The answer is unclear since E-liabilities has not been tried beyond a handful of case studies. 

Other questions remain. Would E-liabilities encourage companies to think strategically across their value chains to identify their most impactful GHG reduction opportunities? No, because it focuses a company’s accounting on Scope 1 and cradle-to gate emissions. And while downstream product use phase disclosures have now been added, these are limited to a subset of product use types and do not account for product use phase emissions. Would it help investors assess GHG risks? No, because investors want information on the full value chain risks, as evidenced by the 297 comment letters submitted on a draft U.S. Securities and Exchange Commission Climate Disclosure Rule. In these submissions, a whopping 97% of investors supported including Scope 3 emissions in the disclosure rule.

What about the Emissions Liability Management E-ledger approach that allows a company to purchase unlimited E-assets or offsets to cancel its E-liabilities? All sectors need to reduce their value-chain emissions. This includes radical decarbonization of GHG-intensive sectors such as utilities, oil and gas, transportation, banking, chemicals, steel, and concrete. 

Emissions Liability Management claims to provide a mechanism for pricing emissions to “properly reflect the cost of the externalities (emissions).” It states that price is determined by the cost to manage a portfolio of E-assets over a specified duration. This assumes well-functioning markets with regulators, enforcers, and controllers. Unfortunately, this is not the reality today. And absent regulations on emissions, such as a cap or carbon tax, it is unclear what would determine a price on emissions or E-liabilities other than the cost of purchasing voluntary offsets.

In a voluntary system, E-liabilities’ effectiveness would depend on upstream companies being motivated to reduce GHGs because they see a competitive advantage to passing lower liabilities to customers. This would only happen if end customers cared about GHG liabilities. And if they don’t care, would producers simply pass their production-related E-liabilities to customers and assume no responsibility for these emissions? 

Lastly, would regulators be likely to adopt an E-liabilities approach to drive decarbonization of the economy? The answer is unclear, given concerns around its efficacy for GHG risk management. And as Gillenwater, 2024 notes, regulators typically target individual facilities or end products rather than companies as their point of regulation.

Is E-liability Accounting a Replacement for the GHG Protocol? 

No. E-liability and the GHG Protocol serve different goals and adopt different accounting approaches. E-liability is not a codified standard and it is unclear how it would work in a voluntary system.

The world is not on track to achieve the Paris Agreement on climate change. Neither the GHG Protocol nor E-liabilities can be surrogates for GHG regulations. Liabilities will not matter without regulatory teeth. Voluntary reduction efforts can only go so far, absent a regulatory leveling of the playing field. It’s time for governments to mandate GHG reductions. This may require new forms of GHG emissions information. 

While it is important to remain open to new ideas, we shouldn’t be too quick to throw the baby out with the bathwater. For voluntary programs and regulatory systems, the GHG Protocol’s family of standards provides a policy-neutral foundation for accounting for emissions attributed to business activities.

Regulators can and do prescribe which elements of the GHG Protocol to use to meet specific objectives, including achieving comparability across companies (e.g., organizational boundary method, scope, minimum inclusion, and data quality). If regulators or others see value in new approaches to GHG accounting, these could operate side-by-side with the GHG Protocol and rely on its technical foundation.

Disclosure Statement: WRI is a co-convener of the GHG Protocol Initiative. Janet Ranganathan was a co-founder of the GHG Protocol Initiative and lead author of the GHG Protocol Corporate Standard.