On Thursday April 24th, the Zicklin Graduate Accounting Society sponsored “Hot Topics: Carbon Accounting and Reporting on Non-Financial Risks.” The event speaker was Celine Ruben-Salama, Adjunct Professor at Baruch College, currently teaching MBA courses in Green Marketing. Her areas of specialization are climate strategy and carbon accounting. Ruben-Salama grew up as an environmentalist. She started her career as a project manager in strategic IT development and after some time, decided to move into the field of corporate sustainability and efficiency, by pursuing a MPA (Masters of Public Affairs) in Environmental and Science Policy at Columbia University. While pursuing her MPA, she did projects for the New York State Energy Research and Development Authority, which helped her to learn more about the field outside of the classroom setting. Upon completion of her MPA, she pursued an MBA in International Business and Marketing at Baruch College. Once she finished her MBA, she went to work for American Express, as the company’s first Director of Environmental Sustainability. Prior to her taking the position at American Express, although the company did have sustainability practices in place, there were no formal documentation processes, and nothing was auditable. This all changed during her time at the company, as she grew its sustainability division, made sure sustainability audits were conducted annually, and that there were formal documentation processes in place for the division.
Ruben-Salama started the workshop off by letting the audience know that she intended for attendees to walk away with a practical understanding of carbon accounting. She then began discussing the subject matter: To begin, the definition of carbon accounting is: “the process of measuring greenhouse gases emitted by an entity.” Carbon is the word commonly used for all greenhouse gases which are: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbon (HFC), and perfluorinated chemicals (PFC’s). These chemicals have various sources: carbon dioxide chiefly comes from burning fossil fuels, power plants, industrial farming, and slash and burn agriculture; hydrofluorocarbon comes from refrigerants. Chloroflourocarbon (CFC) was the predecessor of HFC, but when it was found that this chemical created holes in the ozone layer, a switch was made to HFC; all the other chemicals listed come from industrial manufacturing.
The discussion then turned to carbon dioxide equivalents (CO2e). This measure is used to compare emissions from the greenhouse gases listed above, based on their Global Warming Potential (GWP). The measure is usually expressed in millions of metric tons. For the calculation, the quantity emitted (millions of metric tons of a particular greenhouse gas) is multiplied by its GWP, calculated over a specific time interval, usually 100 years. A chart based on a 100-year time span, listing each greenhouse gas and its corresponding GWP, was presented to attendees. The chart can be summarized as: carbon dioxide = 1, methane = 25, nitrous oxide = 298, hydrofluorocarbon = 1,430, sulfur hexafluoride = 22,800, hydrofluorocarbon = 7,390. In order to get the total carbon dioxide equivalents (CO2e), the formula is applied to each greenhouse gas, and the results are summed.
The question then arose, “Why carbon accounting?” The reasons given were: (1) Greenhouse gases cause climate change. These gases remain in the earth’s atmosphere and do not let heat escape, thus causing global warming. This is also called the Greenhouse Effect. (2) Market pressures. Large segments of the population (especially in developed countries) realize how important the environment is, so companies feel obligated to comply with carbon accounting principles. (3) Regulation. The U.S. federal government has not yet mandated carbon accounting principles, so companies often undertake voluntary disclosures due to market pressures, as discussed previously. The exception in the U.S. is the state of California, where it is mandatory. Further, the only organized U.S. exchange in which carbon accounting principles are mandated is the NASDAQ. Globally, certain organized exchanges require carbon accounting principles, such as the South African Exchange. Additionally, certain governmental organizations require it, such as the European Union, which recently mandated carbon accounting for 6,000 large European companies. Most companies in the U.S. abide by a voluntary disclosure framework for carbon accounting, called the Carbon Disclosure Project (CDP). CDP has been around for about 10 years. It allows companies to communicate environmental risks and opportunities, as related to their actions in the course of business. In 2013, 4,112 companies used the CDP reporting framework, which is a significant jump from 2003, in which only 235 companies used the framework. CDP scores are now listed on Google Finance and pulled into Bloomberg Terminals, so their impact can be quite significant. The question was then posed, “How much should the public trust a voluntary disclosure?” The audience members answered “not highly.” It was then explained that external verification is needed for this reason and, thus, public accounting firms audit these disclosures. In fact, as soon as tax season ends on April 15, environmental season begins for accounting firms. (4) Carbon Trading (this reason was not discussed in detail).
“How to conduct carbon accounting,” was discussed next. The so-called “carbon accounting bible,” is called the Greenhouse Gas Protocol, which outlines the steps involved in conducting carbon accounting: (1) Define system boundaries. These are defined by understanding what is being reported on, why it is important in the field of carbon accounting, and what can be achieved from such reporting. This is easier to do for larger companies, but not smaller ones. (2) Establish a base year. This is the first year that a company performs comprehensive carbon accounting, and is used for comparison purposes in later years. (3) Identify greenhouse gas sources. (4) Select a calculation approach. This approach is used to measure greenhouse gases emitted; an example would involve monitoring the flow and concentration of greenhouse gases. (5)Collect activity data and choose an emissions factor. An emissions factor is a value that represents the relationship between a greenhouse gas emission and amount of raw material processed or product components produced, to create the emission. Such factors can be found at http://www.EPA.gov. (6) Calculate core emissions. Steps 1-5 are followed to make this calculation.
Carbon accounting principles were next detailed: (1) Relevance – the appropriate scope that meets internal and external decision-making requirements. (2) Completeness – choose a financial/operational control method or equity share method and disclose and justify any exclusion(s). Estimations are acceptable, as long as they are documented. (3) Consistency – meaningful comparisons are made over time, and changes to data, methodology, boundary, and other methods are documented. (4) Transparency – documentation is auditable and assumptions are disclosed. (5) Accuracy – integrity and assurance are ever present.
The issue was then posed, “How can double-counting be avoided?” (Double-counting of emissions measurements).The Greenhouse Gas Protocol provides the solution to this problem: 3 types of “Scope” emissions: (A) Scope 1 – emissions from operations that are owned by the company. (B) Scope 2 – Any purchased electricity. (C) Scope 3- all other indirect emissions from the supply chain.
Scope 1 is the most direct form of emission. Some examples are: (a) generation of electricity on-site or heat/steam combustion (stationary combustion), (b) transportation of materials, products, waste, and employees, (c) physical or chemical processing (process emissions), and (d) fugitive emissions, which are gases that escape due to leaks and other accidents, resulting from industry.
As for Scope 2, which is purchased electricity, a handout was distributed to attendees entitled, “eGRID 9th Edition Version 1.0 year 2010 GHG Annual Output Emission Rates,” which can be retrieved from http://www.epa.gov/grid. The purpose of this handout was to help attendees determine U.S. emission factors by sub-region, in relation to purchased electricity. In 2010, the sub-region with the cleanest electricity was in and around Hawaii, and the dirtiest was in and around the Midwest. It was also noted that the table is updated every 3 years, and as more renewable energy becomes available table factors change.
In terms of Scope 3, other indirect emissions, there are upstream and downstream emissions. Examples of upstream emissions are: the manufacture of goods purchased by a company and transportation of those goods to the company. Examples of downstream emissions are: consumer use of the company’s purchased products and disposal of wastes related to the purchased product. Upstream and downstream emissions vary for different company types. For instance, Apple Computer’s upstream emissions are in areas as raw materials purchased, other purchased goods, and waste from operations; downstream, are product processing and selling, use by customers, and disposal. On the other hand, Ernst & Young has upstream emissions in areas as employee commuting, and downstream, computer disposal.
It was then explained, that when companies gather information about emissions there are a few methods which should be followed: first, they should document data-gathering processes. Second, the sources to attain such information from could be utility bills (e.g. real estate and IT), and vendors. Third, care must be taken to calculate the emissions in the correct units. For instance, emissions could be measured in metric tons or kilograms. Fourth, estimation could be used when actual data is unavailable, but estimation methods must be documented in detail.
Celine Ruben-Salama concluded her informative workshop, which included questions posed to attendees to reinforce the concepts discussed, with additional sources attendees could reference, for further information on the subject matter: The Greenhouse Gas Protocol (GHG), as mentioned, The Greenhouse Gas Protocol Corporate Value Chain, The Greenhouse Gas Management Institute, The Carbon Disclosure Project (CDP), as mentioned, The Intergovernmental Panel on Climate Change (IPCC), and The Environmental Protection Agency (EPA).
Celine Ruben-Salama’s e-mail address is Celine@nyc.com if anyone would like to contact her and discuss this significant “hot topic” further.