How a new carbon accounting system helps reduce emissions

By testing out the e-liability carbon accounting system, Chevron hopes to accelerate the process of greenhouse gas (GHG) emission reductions

As the world works towards a lower-carbon future, fundamental challenges around current reporting regimes are limiting emission reduction efforts. A new accounting system could be the solution that empowers real emissions reductions – and some companies are already working to make a new method the standard, according to the method’s architect.

The work of Professor Robert Kaplan, Senior Fellow and Marvin Bower Professor of Leadership, Emeritus at Harvard Business School, in developing the new e-liability system of accounting for greenhouse gas emissions was the centre of the recent Bill Birkett Memorial Lecture, hosted by the School of Accounting, Auditing and Taxation at UNSW Business School.

The event, which marked 20 years of the annual lecture, began with Prof. Kaplan explaining the advantages of the new e-liability method, which uses fundamental accounting science and principles to count emissions just once, when they are created, eliminating multiple-counting problems inherent in the current standards set forth in other standards.

Prof. Kaplan also discussed the progress his E-liability Institute has made with the system thus far, including its work with companies piloting the system, such as Chevron. David Fallon, General Manager of Energy Transition at Chevron Australia, shared his company’s experience following Prof. Kaplan’s presentation, beginning by noting the necessity of addressing  emission reductions and of the private sector’s important role.

Photo gallery: The 20th annual Bill Birkett Memorial Lecture

^{The 20th annual Bill Birkett Memorial Lecture. Photos: Stanley Images}

With a 70-year history in Australia producing oil off the western coast and two world-scale Australian liquefied natural gas (LNG) assets, Chevron is in a leading position to pilot GHG reduction efforts. Its participation in the e-liability program was therefore a common-sense move as it seeks to accelerate carbon transparency and competitive emission reductions in the sector.

“We do believe the future of energy is lower carbon,” Mr Fallon said. “We believe that companies really need to play to their strengths to help deliver the lower-carbon future the world requires.”

Tackling emissions from LNG

As one of the world’s leading integrated energy companies, Chevron is taking a two-pronged approach to advance lower carbon efforts through its operations and products. “We’re looking to lower the carbon intensity of the oil and gas we produce today to meet the world’s energy demands, and at the same time, we’re developing new, lower-carbon products and technologies to play a role in the future lower-carbon economy.”

Australia is a major producer of global LNG, which accounts for about a quarter of global electricity generation. One of the challenges in decreasing greenhouse gas emissions associated with LNG is that it’s produced and used in many countries, all of which have unique ways of quantifying and measuring emissions.

Read more: Can accounting fix global climate disclosure challenges?

“We believe that carbon accounting provides a necessary basis for comparison and competition,” Mr Fallon said. “If you go into a store and look at a chocolate bar, it will show you the calories or kilojoules of energy content of that piece of chocolate. The same thing doesn’t really exist for energy products today.

“Equally, if you wanted to know the carbon intensity of that chocolate bar, that information doesn’t exist. The variation in the production techniques, the exact place that chocolate came from, where it was produced and how it got to the store where you’re consuming it – all will play a key role. And it’s very hard to quantify or compare them.”

The same thing is happening with global emissions at an international level. “We monitor greenhouse gas emissions by measuring what’s happening in the atmosphere; in theory, national greenhouse gas inventories such as those developed under the Paris Agreement should add up to that international inventory,” he said.

“At a practical level, in many countries, industrial facilities are required to report their emissions, but that’s not the case everywhere in the world. While facility-level data is commonly reported, the accounting methods to develop product-level data do not exist, or at the very best are inconsistent. Facility-level data is commonly included in corporate inventories, but those often do not connect to the national inventories.”

The importance of primary data

The world needs to move “from counting emissions to having an accounting system for emissions, where there’s a reasonable level of alignment from products to facilities to corporate to national to international”, according to Mr Fallon. “This will allow a level of reconciliation of knowledge and also allow customers to make discerning choices.”

But, to achieve progress by measuring emissions intensity, real data is needed. In contrast, the GHG Protocol allows companies to use secondary and average data to estimate upstream and downstream emissions. “There are many ways to estimate the real data for a facility, to use rules of thumb, to use secondary data to come up with emissions,” Mr Fallon said. “They provide a very wide range of differing answers for the same facility.

“We firmly believe that primary data is needed to develop accurate insights on actual carbon performance and assess the relative performance of multiple suppliers. The challenge was, how do we come up with something that does a better job for our facilities?”

In 2021, Chevron and several partners developed a methodology for calculating the carbon intensity of the LNG value chain, known as the Statement of Greenhouse Gas Emissions (SGE)] Methodology. “What we looked to do was create a methodology that was standardised with an accounting-type approach that could be applicable to other operators across the value chain and that was coming from a basis of using primary data to provide some verifiable and defendable LNG carbon emissions intensity numbers,” Mr Fallon explained.

Read more: ESG standards are changing. What’s the impact on business?

“When Chevron learned of the E-liability Institute a few years ago, we were very interested in the approach they were developing and looked to undertake a pilot to understand how what we were doing within the SGE methodology related to the e-liability approach. What we found from the pilot was that the SGE methodology was largely aligned with the e-liability approach. The principles were in near-complete alignment, and it was a good outcome for us all.”

As Prof. Kaplan explained, the e-liability method provides a generalised approach for supply chain accountability for emissions that can also be used for reporting on environmental, social and governance (ESG) factors beyond carbon. “We’re applying it to the most imminent threat, which is global warming through carbon emissions,” he said.

Accurate measurement for competitive advantage

For Chevron, participation in the e-liability pilot recognises the role competition can play in emission reductions. But it begins with having a clearer picture of the carbon intensity embedded in the materials and products that economies produce.

“We believe we have the potential to have a competitive advantage because we feel that the LNG we produce is quite possibly at the lower end of the carbon intensity spectrum than some of our competitors, and we’d like a transparent reporting mechanism so we can compete with them on a sound footing,” Mr Fallon said.

Prof. Kaplan agreed that more accurate reporting capabilities will allow companies to benefit from such competitive advantage. “The LNG that Chevron produces from its Australian fields, plant and shipping containers may end up having 50% lower carbon per tonne of output than other producers of LNG, based on the fields where they discovered the natural gas, how they built the pipeline, transportation, their production processes, reduction of waste, and so on,” he said.

“We didn’t know this at the beginning, but it’s a really powerful insight that the world is not binary,” he continued. “You don’t say ‘electric vehicles are all good and internal combustion engine cars are all bad; green is good and brown is bad.’ No – let’s measure the molecules of carbon that go into the atmosphere and let that be our judgment, and let companies compete on how they can produce the same-functionality product with fewer carbon molecules going into the atmosphere.”

The outlook for e-liability

Critical work for the e-liability program from here will be getting more companies involved with piloting the system. “We really want to be able to see how we’re performing on carbon intensity and if we need to improve, but equally, to be able compete with other companies on an even playing field,” Mr Fallon said.

Prof. Kaplan agreed that a key challenge is “finding more companies like Chevron that are looking ahead, anticipating where the world is going, and wanting to do it for their customers and employees. But, with the Greenhouse Gas Protocol allowing companies to use secondary and average data, many companies don’t see a compelling story for why they should be testing and potentially adopting a system that goes beyond the standards that are currently required,” he added.

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It’s an illustration of Gresham’s law in economics, that bad currency drives out good currency, he said. “Weak standards make correct, more valid standards difficult to implement. The Greenhouse Gas Protocol is a great starting point, but it’s not where we want to end up. We want to have companies thinking about starting that investment in getting accurate primary data from their supply chain and integrating it into the products and services they’re producing,” Prof. Kaplan said.

“We keep looking for the more visionary companies that are trying to get ahead of this for their customers, investors and employees, to be able to credibly say we are actively reducing GHG emissions intensity our operations and supply chains by working with our suppliers to help them reduce the emissions per unit of product that they are transferring to us,” he concluded.