I have written quite often about my ideas on sustainable cost accounting now. A fair number of comments have come in on it. Many, admittedly, because of their tone and abusive nature look to simply be trolling. Most have the feel of climate change denial around them. But three issues persist.
One is the claim that I am double counting by requiring that a company account for its Scope 3 climate change emissions.
The second suggests that companies are not, in any event, responsible for these emissions.
The third is that I am not accounting for climate change because I am not requiring that carbon be priced.
The last is for another blog. I will deal with the first two here.
The standard on greenhouse gas emission measurement is set by the Greenhouse Gas Protocol Standard. I have some issues with this standard (some noted below), but let's accept it for now. They say:
The GHG Protocol Corporate Standard classifies a company's GHG emissions into three ‘scopes'.
Scope 1 emissions are direct emissions from owned or controlled sources.
Scope 2 emissions are indirect emissions from the generation of purchased energy.
Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
That's it. I am accused of being brief in what I say in my suggested standard. They manage to be much more sparse. But the suggestions are enough: standards are meant to be guidance.
As they also say:
Most of the largest companies in the world now account and report on the emissions from their direct operations (scopes 1 and 2).
The claim made by many commentators that this is not possible is, then, not true: it is happening.
Scope 3 is harder to measure, of course. It requires that the emissions in the products an entity buys for use and the emissions that their use gives rise to when sold (including those in the eventual process of disposing of them as waste) all be taken into account. I am told by a PLC I discussed this with recently (because despite claims made, I have researched this issue) that the range of answers this can give rise to are wide, partly and even precisely because how you define use and what part of the overall emissions of the user the company making the supply is responsible for can give rise to many different answers. But this does not mean Scope 3 cannot be measured. What it does mean is that the protocols around measurement need refining. That will, I suggest, inevitably happen. As too, in due course, will the standards around auditing these figures be developed because that is always the way. That current variation is really nothing very surprising then. Nor does it mean answering these questions is something I need do: the process of doing so is already very clearly well underway whatever I might do.
So then, is this Scope 3 reporting double counting? I have to admit I find this question rather bizarre. It's like saying that because one company has recorded a transaction in which two entities are necessarily involved then the other should not. But of course, they should: accounting requires it. What it does not require is that both account for it as the same thing. So if it is a sale in one it is a purchase in the other. That's how accounting works. And so too is it with Scope 3. If a company treats the emissions arising from its sale as a Scope 3 customer chain output another company can treat it as a Scope 3 supplier chain input. That's what should happen. It's not double counting. I'd rather they became Scope 3 and 4 to avoid the complication of being called the same thing, but this is not an issue. If both are called Scope 3 for now, both must be counted.
And nor is this in any way an issue creating conflict for sustainable cost accounting. Sustainable cost accounting is about micro accounting issues i.e. it's about information about which the decision making entity itself has to decide. The fact that it makes an externality an internal issue is beside the point. That is the intention of sustainable cost accounting. What SCA does is recognise that the full cost of a company's activity has not been accounted for to date and now it has to be, and it does so by estimating the cost of eliminating that externality. And since Scope 3 emissions are an externality the company creates they have to be covered by sustainable cost accounting, as a matter of fact or the requirement to decide is not recognised.
And, as a matter of fact an entity that really wants to be net carbon neutral has to consider what the carbon emissions in its supply chain are, and how it can impact them e.g. by changing its own buying behaviour or product design to mitigate their impact. And it has to also make decisions on whether it wants to sell products with high greenhouse gas emissions inherent in them and decide how it might help its customers to mitigate or eliminate those emissions, again by product redesign, providing longer product life, improving recyclability and so on. To pretend that these are not issues the company should not think about is absurd. Of course it should do so. And if they are within its scope then necessarily they must be within the scope of sustainable cost accounting.
In addition, in a great many cases (but not all, I know) the purchaser of the product sold and which will have to be accounted for is the end consumer. Since they will never report their Scope 3 emissions if their supplier does not then no one ever will. The risk of not reporting Scope 3 is, then, under and not over-reporting, but this is not real issue of concern; that is that the company has to make decisions on Scope 3 and so it must report on them: the logic is as simple as that.
But to turn to the second point it is also rather more than that. To say that a company is not responsible for its Scope 3 emissions is just wrong. That's like saying a company is not responsible for the goods it sells and their impact. We know that they are. For example, companies are responsible for selling goods of merchantable quality. And they are responsible for making sure their products cause no harm. We know that liability to not cause harm can extend to those who also never actually acquired their products. Issues around products such as faulty drugs and asbestos, as well as smoking, have clearly proved this. So to pretend that Scope 3 emissions have nothing to do with a company is just wrong. And that is precisely why a company must report them and how they intend to mitigate them because as a matter of fact they are responsible for the goods that they sell either alone, or as a potential party to a group action, with others. So the argument that they are neither material or do not need to be reported is just wrong.
I am sure some will always disagree with these views. In time I am also quite sure society will consider those who think Scope 3 to be irrelevant now to be wrong. That's the way these things always progress. Scope 3 is a company reporting issue, and in due course no one will doubt the fact. It's just a rearguard who pretend otherwise now.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“If a company treats the emissions arising from its sale as a Scope 3 customer chain output another company can treat it as a Scope 3 supplier chain input.”
So a bit like VAT?
If, say, BP work out the cost of getting to zero CO2 of the emissions of the fuel burnt by businesses they sell fuel to and have to account for it, BP puts that cost on their balance sheet and those businesses get an equivalent credit on their balance sheet for sustainable cost accounting purposes?
Given that this cost would appear in the accounts, it could, as you say, make BP ‘CO2 insolvent’ but the credit in those other businesses could have the effect of making an otherwise insolvent business have a positive balance sheet?
No, it is nothing like a VAT chain
That assumes only the end consumer is liable
But in this case the end consumer frequently has no choice but use what is available
It is the responsibility of the supplier to change what is on offer then
So this is nothing like a VAT supply chain at all, and not intended to be. VAT is meant to be neutral on the intermediate supplier. This is meant to be the exact opposite.
And there is no credit in the other businesses: they are also responsible for carbon production
Hello Richard
Forgive me but I’m now confused (and no, not be cause I am ‘lobbying’ for anyone but because I am confused).
You say that the “another company can treat it as a Scope 3 supplier chain input.” but they don’t get a credit for it because they also have to account for the cost – presumably upstream and downstream too.
What then is the purpose or the function of the ‘input’?
If it were akin to VAT I could see that all the double-counting argument goes away. But if the downstream party is “also responsible for carbon production” then (to carry on my original scenario) both BP and the business they sell fuel to must work out the cost of reducing that to zero and each put the full cost on their balance sheet.
I’m not the only one who can’t seem to see how that isn’t double counting. We can’t all be ‘lobbying’!
No one gets a credit cor carbon in SCA
Because SCA records the cost of eliminating carbon
Which is not the same as accounting for carbon
And that’s the key point
The purpose of recording the Scope 3 input is not to cost it, or claim credit for it, but simply to show that a decision has to be made on how to eliminate it
I am not sure why it is so hard to understand that
Scope 3 is not accounting pe se
Recording Scope 3 is to have a criteria for measuring the consequence of actions
And no, I cannot see why you are having difficulty with that
A quick query involving outputs:
Let’s say I sell trees. I don’t know what the buyer of the trees is going to do with them, might burn them, might use them in construction. Is it a requirement under this new accounting guidance that I find out.
I can see a few customers saying to me that it’s none of my business.
In some countries if you sell palm oil you don’t know if the end customer is going to use it as an ingredient or burn it in a car, as you’re probably selling to a middle-man. Again, would you need to know this, and if so you or your accountant would need to know an awful lot about what’s going on in economies far away.
As far as I know people who sell trees don’t sell them to construction. There is an intermediate process in that chain, and I would have thought that was obvious. Trees are sold to plant. Lumber is sold for construction. It’s not hard to tell the difference.
As for palm oil, if there was doubt, an average profile of use would work, quite acceptably. What is wrong with that?
On trees, let’s say I’ve got a mature plantation and sell – I don’t know if the merchant who fells the trees and takes them away will in turn sell them on for wood chips in power stations or for roof frames. The key point is that you don’t know what the end use will be.
The petroleum industry has this too – something that hasn’t yet been refined could end up in manufactures or in a combustion engine or furnace.
The soy bean producers in Latin America don’t know if their individual output will end up in European animal feed, a Greggs vegan sausage roll or bio-fuel for example.
You need a lot of knowledge about the economy to work this out. And economies always change.
People who have worked out a price for CO2 have usually settled on a range of prices as they just don’t have enough knowledge, and these are world award winning economists. It’s very very difficult.
You’re not selling trees then
You’re selling lumber
They’re not the same thing
And as I said on palm oil, if in doubt an industry profile usage is entirely reasonable for use and easy to secure if the real end-user is in doubt
There is nothing hard about this, at all
I hate to disillusion me – but we really do know what oil and trees are used for, ion average, and what carbon results and can use that data in the absence o specifics
If the company does not like the result it could change its customer chain. That is precisely what SCA is meant to encourage
Two points of detail that don’t affect your overall message.
First, there has been not been an implied term for goods to be of “merchantable” quality since 1994, when the Sale of Goods Act 1979 was amended to replace that with “satisfactory” quality. It is now in the Consumer Protection Act 2015. http://www.legislation.gov.uk/ukpga/2015/15/section/9/enacted
Second, on “no harm”, lots of products can cause harm. Knives, guns, pharmaceuticals (most of which are poisons), cars, alcohol, electricity, water. Sellers do not have to prevent all harm. But they might have liability if they sell defective products, or if they fail to take reasonable steps to prevent reasonably foreseeable harms.
But a third point that might. Are you suggesting that accounting for carbon should include subjective amounts that cannot be calculated with reasonable accuracy, so there is no reliable estimate? Perhaps the answer is just to report the range of estimates so the uncertainty is clear.
First, in many cases vendors are responsible for harm: that is why restrictions are placed on the sale of many products
And of course I am saying that accounts will need to reflect the uncertainty of climate change. It’s real. And judgement will need to be made. Including by auditors who will need to appraise disclosure on the range of risks
Accounting might actually grow up and face the fact that its spurious accuracy is nothing of the sort
Richard,
If my company builds a machine, which costs say 1000 Carbon units to produce, and we sell it to another company, how use it, who pays for the 1000 Carbon and how much do we each pay?
DO we pay the full 1000 carbon, or is it split between both companies in some fashion, or do we both have to pay the 1000 carbon?
No one pays for the carbon
There is no carbon pricing in SCA
What you have to do is get rid of the carbon
As they’ve now bought the machine they will have to do so
But you’ll have to work out how to survive without building another such machine
I stress; there is no carbon pricing in sustainable cost accounting
You really are missing the point. Scope 3 is a measure of what has to be eliminated
OK let me rephrase the question.
My company builds a machine that creates 1000 units of carbon in its production. We sell it to another company.
How many units of carbon does my company have to get rid of, and how many units of carbon does the other company have to get rid of?
(just on the basis of this one machine)
You have to stop selling machines that produce carbon
They have to stop producing carbon
The provision is your separate costs of doing so
There is no reason why they need be the same
That’s not a very helpful or realistic answer. Very few if any machines don’t cost carbon to produce, maintain, run or recycle.
Are you saying that we should stop building any machines from now on? If so, you are talking about ending most of the world’s businesses, and also agriculture (which is not carbon neutral either).
But I asked you a very specific question.
If my machine costs 1000 carbon units to produce, and we sell it, under your SCA accounting who has to account for those units and how many units does my company and the other company have to get rid of?
You must have n answer to this very simple question, having thought through SCA?
I have given you a complete answer
There is no carbon accounting in SCA
There is accounting for getting rid of carbon
If you can’t understand that answer I cannot p[rovide further explanation
You are looking for an answer that does not exist
You are just repeating yourself and haven’t given me any sort of sensible answer!
Saying that we all have to stop building machines is not what most people would call sensible or realistic.
I have asked a very simple question.
If my company builds a machine, and it creates 1000 units of carbon in the process, and then we sell the machine to another company, how many carbon units does each company have to get rid of to be carbon neutral in terms of SCA?
(just based on that machine alone, no externalities, so a very simple example).
This is a very basic question about how SCA works. It it inconceivable that you, it’s creator, can’t answer this for me.
You can ask as many times as you like
I have answered the question
Very precisely
I now suggest you go and read what sustainable cost accounting is
You are joking right?
You haven’t answered anything at all. That is the only precise thing here.
The title of this blog post is “Why financial accounting for Scope 3 emissions is essential”
But at the same time you have also said above that:
“There is no carbon pricing in SCA”
Which would be financial accounting. Then when I asked in non-financial terms, just purely about getting rid of the carbon produced you then said:
“There is no carbon accounting in SCA”
So if you can’t account for the carbon, you can’t price the carbon, and you are unwilling to tell any of us who should be responsible for scope 3 emissions – as per my example -what is the point of SCA at all? It starts to look like nothing more than a garbled mess.
You can’t even answer a very simple and basic question about it.
Who is responsible for those 1000 units of carbon produced? I’ll even give you some options to make it quicker for you to answer:
1. ) Company A produced the machine, so is responsible for 1000 units. Company B (the buyer) is responsible for none.
2. ) Company A is responsible for zero units, company B is responsible for 1000.
3. ) Both companies are responsible for a share of the 1000 units total.
4. ) Both companies are responsible for 1000 units EACH.
Please give us all an answer, because at the moment it looks to me that all you are doing is trying desperately to avoid having to.
With respect, you are like the student who insists on answering the question that was not set and then wonders why they fail
I have very precisely answered your question
But you refuse to note what sustainable cost accounting does and in that case I cannot help you
I suggest you stop wasting my time, which I am quite sure is your real objective
If that is an answer then you will not get far with your proposition nor is your proposition very useful
Just as once I was told that country-by-country reporting was really never going to be of any use
Except those who said so were wrong
As are you
Now please stop wasting my time – which is exactly what you are really seeking to do
With respect, you have done no such thing.
You have actually gone out of your way to avoid answering the question.
My guess is because you know that whichever way you answer it you are going to get found out.
And before you start, I have read through SCA, most of your blogs on the topic and most of the comments as well.
On the one hand, if you say company A is solely responsible for Scope 3 emissions, then this whole blog post and most of SCA is immediately wrong.
On the other, if you say that both companies have to account for it, then you immediately get the problem that you either end up double counting, or in more complicated cases the vendor company has no real idea what it is accounting for, because it doesn’t know what it’s products will be used for in all but the most basic and simple cases.
Either way, your inability to answer a basic question marks you out ass either a coward, because you are too scared to answer, or as a hypocrite who knows he is wrong but is trying to hide it.
Either way, the idea that the creator of an idea is unable and unwilling to answer questions about it (and you really haven’t) isn’t likely to help sell that idea. If anything, it’s totally farcical.
Do you think the idea is going to fly ahead when better qualified people start asking you these very same questions? Or are you just going to ignore them and pretend that you have answered?
Or is it that you don’t really care as long as you get paid to write this stuff?
I am, and will be, more than happy to engage with those who wanty to intelligently engage with sustainable cost accounting, and I have been already, which is why the issue has traction.
But you are, as I have pointed out, engaging with something that is not sustainable cost accounting, and I can’t help with that.
Further posts from you will be deleted.
Richard
I don’t think I am the only one who thinks that you are acting very childishly. You aren’t answering anyone’s questions in any meaningful sense. Claiming you have answered something when it is obvious to any reader you haven’t is not a good way to make people take what you are saying seriously.
Other people have pointed out the contradictions in what you are saying and claiming, and that is before we have to hear things like
“You have to stop selling machines that produce carbon”
Which in just fanciful. Nobody can take statements like that seriously.
With SCA, you might want to start by explaining exactly how it works, how carbon is measured and what happens to those measurements when they hit the balance sheet of the company. I’d also suggest that you have to answer the questions people have asked you about scope 3 emissions as these questions won’t go away, and as it stands make SCA totally unworkable.
It is very strange how many people have arrived here to comment on SCA who have never arrived before
It is as strange that they all think:
a) I am childish
b) I know nothing about what I am saying
c) I am just money-grabbing (you’ll get there soon, I am sure: all the rest have)
d) None seem to have read what sustainable cost accounting is
e) All think carbon is priced on the balance sheet in SCA, and the whole point of SCA is it never is
So let’s answer the questions:
a) Scope 3 is measured as the greenhouse gas protocol says it is. I did not make it up. They did. I am using their standard. Take it up with them.
b) However Scope 3 is measured does not make SCA unusable: SCA requires a company have a plan to be net carbon neutral without offsetting and with a precautionary principle in place. If I can’t make it, so be it, I say. Life is more important than any company. That does not make SCA wrong. I’d suggest it makes it right.
c) SCA per se does not mention carbon – Scope 3 does
d) SCA never puts carbon on the balance sheet. It puts the provision to eliminate carbon on the balance sheet. That’s it. It’s incredbly straightforward. It’s really easy to understand.
What you’re arguing about is something that is not SCA
As I keep say9ing, I can’t help you with that. I created SCA to address that whole issue.
Now why not ask me about SCA?
Richard,
Your manner of not answering questions is probably why people are taking a dim view of you.
Regardless, let us pass that by and look at your answers:
a) Scope 3 is defined as “Scope 3 emissions are all indirect emissions (not included in
scope 2) that occur in the value chain of the reporting company, including both upstream and downstream
emissions.”
This is directly from the GHG protocol. Link below:
https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf
There is nothing controversial in this itself. The problem comes when you try to make a company liable for emissions out of it’s own control.
b) There are several problems here. You require a company to be net carbon neutral. But you require this to be done without offsetting. This is in itself an almost impossible task for almost every sector of every industry.
Then you make it even harder for a company to do this by including not only scope 1 and 2 emissions, but scope 3 as well.
I think other commentators have brought up two main problems with this.
The first is the possibility of double counting. You have avoided this topic steadfastly, which is what Toby was getting at.
The second is that scope 3 emissions are almost impossible for a company to track.They are outside the direct control of a company and are going to be very dependent on usage. It is not good accounting to make a company potentially insolvent based on data and usage it has no control over.
c) SCA does mention Carbon – specifically by saying it has to be net carbon neutral.
d) This distinction is fairly immaterial. You still need to know the price of how much it would cost to eliminate that carbon, and how much of it is produced. As mentioned above, if you include scope 3 emissions, that is almost impossible.
More importantly, if you include scope 3 emissions AND don’t allow any carbon offsetting it makes it impossible for basically any company to survive. That makes SCA a very unrealistic set of proposals.
So I don’t think SCA really addresses the issue – if anything it confuses it even further. Certainly you need to clarify how EXACTLY the points people are asking you about are actually treated.
https://www.taxresearch.org.uk/Blog/2020/02/14/on-sustainable-cost-accounting/ answers all your questions
I know nothing about accounting–which is why I read this blog …to learn. But issue doesn’t seem to be about accounting (financial accounting.) It seems to be about thinking.
A company should be thinking through all the stages of the production and use of their product.
As in: Where do our raw materials come from? Are they being sustainably produced with minimal impact on the environment? What about the processes we use to produce the product ourselves, from the raw materials we obtain from sources outwith our company/plant/factory, etc? Are we polluting the environment to produce this product? And what about the product itself. Is its use and/or disposal going to contribute to climate change?
If a company doesn’t have AND produce data from all three scopes, they can’t make fully informed decisions on the impact of their product.
I think these are excellent principles. We have to start leaving ‘profit’ out of the equation at some point, if we’re going to turn climate change around. Of course these changes aren’t going to be as profitable (short term) as just doing whatever the hell we like and exploiting our resources and damn the consequences. But I reckon we have to accept and institute this kind of thinking. Like, yesterday….?
You get it Jan
It’s not hard, really
And you show that an intelligent person can completely comprehend the issue
It is odd that so many don’t understand the concept. It is not about x-y =z in a literal way but about a more serious issue of if my company makes a machine, sells trees or wood or anything else that has an impact on the climate or for that matter the environment my company is responsible for minimising or eliminating that impact. SCA is about how best to do that surely? Rather than simply rubbishing the idea they should engage in a more constructive debate about how best to achieve the desired outcome.
I strongly suspect I am dealing with climate change deniers
“I strongly suspect I am dealing with climate change deniers”
i doubt you are its more a case that the”solution” you provide is neither practical nor clear..and by reposting your initial hardly helps it looks like you are burying your head in the sand. I for one am not a climate change denier and indeed think it right up there as the most pressing issue of our time. But essentially to state “no carbon emissions from any business all the way up and down the chain” is frankly ridiculous
And what that shows is that you have not read what I have written