By Michael Kraten, PhD, CPA
September 23, 2023
Business lobbyists, in their efforts to persuade regulators to decline to require Scope 3 carbon emission disclosures, have been leaning heavily on the argument that the category is inherently impractical because it double-counts what it purports to measure. The argument, though, has failed to prevent the State of California from adopting that very disclosure requirement.
Because so many public and private firms in the United States consider the California market “too big to ignore,” they’ll inevitably need to disclose their Scope III emissions. So what went wrong with the double-counting argument?
According to the EPA, “Scope 1 emissions … occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles). Scope 2 emissions are … associated with the purchase of electricity, steam, heat, or cooling.”
Scope 3 emissions, though, are very different. The EPA defines them as “the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain.”
Thus, as Thomson Reuters notes, “double counting may occur when a manufacturer and a retailer both account for Scope 3 emissions resulting from the third-party transportation of goods between them.”
Likewise, Investment News explains that “there is the potential for double counting … car manufacturer(s) could conceivably report emissions … that come from the vehicles after being sold, as well as those of the fuel supplies needed to power them … meanwhile, the materials providers and energy companies might also be reporting emissions tied to the same car … “
So let’s assume that the chief regulator of a political region wishes to compute the total emissions of all of the organizations in the region and compare the sum to a regional emissions target. The regulator couldn’t complete the task because of this double-counting problem.
That sounds reasonable, doesn’t it? And yet this argument didn’t dissuade California from adopting its Scope III disclosure requirement. Why not?
It’s because this regulatory budgeting activity is not the sole purpose of a Scope 3 mandate. Indeed, the primary purpose of requiring comprehensive disclosures across Scopes 1, 2, and 3 is to enable comparisons across multiple organizations or across multiple time periods for individual organizations.
For an analogous situation, let’s assume that several heavy drinkers vow to reduce their whiskey consumption. Let’s also assume that certain drinkers occasionally come together to share a bottle. If one asks each individual to estimate the number of times (s)he drank from a newly opened bottle of whiskey last week, the shared bottles would be double counted in their aggregate responses.
Nevertheless, each drinker would produce a meaningful individual measure. Comparisons of measures between individuals would likewise be meaningful. And each individual could meaningfully utilize his or her individual measure to (hopefully) track a decline in consumption over time.
Thus, the double counting argument (though valid) failed to deter California from adopting a Scope III disclosure requirement. For the same reason, it’s not very likely to be effective with other regulatory authorities.
Originally published at michaelkraten.blogspot.com. All rights reserved by author.