Managers manage what is accurately measured. The E-ledgers system puts specific, timely, and verifiable information on the net emissions of inputs, processes, and outputs in the hands of decision-makers allowing them to buy and build products in ways that give them a competitive edge on energy efficiency.
What is E-liability?
E-liability is an accounting algorithm that allows organizations to calculate the greenhouse gas emissions embedded in any product or service in as close to real-time as practical, in a manner that is auditable to the highest standards used in financial accounting. It is a simple, open-source, free-to-use set of principles that should be the basis of any sound emissions-accounting standard.
The E-liability approach produces, for every product and service in the economy, an accurate and auditable measure of its total “cradle-to-gate” emissions. This allows any purchaser – whether a company acquiring a batch of cement, a consumer buying a movie on their tablet, or an investor looking for their next project – to see the total emissions impact of creating that specific product or delivering that specific service.
The approach was developed by Professors Karthik Ramanna (Oxford) and Robert Kaplan (Harvard), co-founders of the E-ledgers Institute. Professors Ramanna and Kaplan first published the idea in the November/December 2021 issue of the Harvard Business Review and it won the journal’s 2022 McKinsey Prize for “groundbreaking management thinking.”
Watch this short video to see the example in practice
How does it work?
In a nutshell, the E-liability algorithm works as follows:
- A company measures the direct emissions from its own operations.
- The company obtains from its immediate (or tier-one) suppliers the emissions embedded in products it has purchased.
- The company then allocates the sum of (1) and (2) to its outputs.
- The company transfers those emissions to its customers when those outputs are sold, akin to inventory accounting.
A key advantage of this approach is that all direct emissions are recorded and audited once, and only once, at source (i.e., step (1) above). Thereafter, these direct emissions are apportioned to products transacting through value chains using principles similar to how cost accounting functions (i.e., step (3) above). This approach keeps compliance costs low and, crucially, enables the production of emissions accounts that are auditable to the high (“reasonableness”) standard used in financial accounting.
The E-liability algorithm improves upon current commonly deployed methods for reporting product-level emissions (such as from the Greenhouse Gas Protocol) where, in the absence of using inventory-accounting precepts to transfer embedded emissions of inputs and outputs through value chains (i.e., steps (2) and (4) above), every entity in a value chain must separately estimate the emissions of its suppliers, its suppliers’ suppliers, and so on. This latter process is inefficient and also hampers auditability, as an entity’s estimates become progressively less reliable the further up its supply chain it has to contrive the embedded emissions of its (indirect) inputs.
To see the E-liability algorithm in action, consider a car door manufacturer:
The company has many suppliers for the sheet steel, glass, plastics, fabric, and electronic components that are assembled into the door. Under the E-liability method, as each of these components arrives at the car-door factory, their accumulated emissions are transferred from the suppliers’ E-ledgers to the company’s E-ledger. The company next adds to its E-ledger its own direct emissions from its production and assembly stages, such as emissions from on-site energy conversion that it uses to process the materials. All of the relevant E-ledger emissions, both transferred in from suppliers and generated on-site, are then assigned to its various outputs (i.e., the door products), similar to a standard accounting practice that assigns the cost of materials and overheads to finished products.
The total emissions incurred to make and transport a finished car door are finally transferred from the door company’s E-ledger to that of the next company in the value chain – the car assembly factory – when the door is sold to that factory. Thus, in a method similar to how value-added taxes work, the E-liability approach also resolves the multiple-counting problem in current emissions-counting approaches like the GHG Protocol’s Scope 3 standard.
Information technologies such as blockchain, combined with existing inventory and cost-accounting systems, can record, transmit, and provide an audit trail for E-liability transactions. And the emissions data for each product will automatically aggregate into company-level accounts – just like in financial reporting. The data can be presented in a similar format as a financial balance sheet, making it easy for independent analysts to assess and verify.
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How does it improve on status quo approaches?
The E-liability method improves on current approaches, like life-cycle assessments (LCAs), environmental product declarations (EPDs), and the GHG Protocol’s Scope 2, Scope 3, and Product Life Cycle standards, by providing real-time, auditable, decision-relevant data.
Unlike static LCA or EPD reports – which are typically updated only every few years and rely on averages – the E-liability approach measures a product’s emissions based on current sourcing, processes, and designs. This enables continuous optimization and targeted emissions reductions in actual operations. E-liability doesn’t replace LCAs and EPDs: it enhances them by supplying granular, real-time emissions data at the product level, making them more useful for decision-makers, auditors, and regulators.
Despite widespread adoption, the GHG Protocol’s Scope 2, Scope 3, and Product Life Cycle standards suffer from well-documented shortcomings that limit their accuracy and usefulness. These problems are structural – not just a matter of implementation. E-liability solves these core problems directly:
1
Traditional Scope 2 and 3 methods rely heavily on industry-wide estimates, often using outdated or average emissions factors. They require the reporting entity to look up and down its value chain to imagine the identities of all its tier-n suppliers and customers and to estimate their associated emissions. Companies must guess or use highly aggregated data to estimate suppliers’ and customers’ emissions. The sheer impossibility of accurately calculating (and auditing) emissions numbers under these guidelines creates little incentive for companies to actually improve their reporting accuracy over time.
E-liability replaces subjectivity and speculation with direct emissions measurement and verification. Each entity measures and verifies its actual emissions at sources, allocates those emissions via causal logic to its products or services, and then passes this accurate product-level emissions data to its customers. This creates a verified chain of responsibility, grounded in primary data – not assumptions, guesses, or proxies.
2
GHG Protocol standards blend emissions a company has incurred (e.g., from its operations and purchases) with prospective downstream emissions (e.g., use-phase emissions of sold products). This muddles accountability and makes auditing nearly impossible.
E-liability cleanly accounts for actual, incurred emissions. It assigns responsibility based on what has already happened, not what might happen later. This preserves clarity and enables rigorous, audit-ready reporting.
3
Under current GHG Protocol standards, every company in a value chain must perform its own top-down emissions estimates – repeating the same effort across thousands of firms. This is burdensome, inefficient, and leads to guesstimates.
E-liability eliminates duplication. Each entity records and passes forward only its share of emissions. There’s no need to guess at others’ data – clean records flow downstream with the product itself. This reduces double-counting and lowers compliance burdens, while strengthening the reliability of reported data.
4
Today’s reporting frameworks enable systemic overcounting, particularly in Scope 2 (where electricity producers and their customers both claim “zero” emissions) and Scope 3 (where multiple parties report the same emissions). As entities do not debit emissions liabilities as they sell associated inventories down a value chain, there is an overcounting of emissions in that chain. This obscures accountability and allows freeriding.
E-liability embeds emissions as a tracked liability, which transfers with goods and is extinguished only at final consumption. This ensures each unit of emissions is counted exactly once, and by the entity that generates it.
5
Despite using the language of “accounting”, the GHG Protocol’s standards don’t produce data that is comparable, reliable, and fungible, nor mutually exclusive and collectively exhaustive. As a result, emissions accounts can’t be compared or reconciled across firms or systems.
E-liability brings real accounting logic to emissions. Leveraging best practices from financial accounting, the E-liability method produces product-level emissions data that can be aggregated, audited, and compared across entities – enabling system-wide integrity and trust, and supporting achievement of geological net zero.
E-liability is a conceptually correct and practical solution for global emissions accounting. We’ve developed a draft Proto-Standard for product-level emissions accounting and auditing using the E-liability method, which can serve as a basis for improving current emissions-counting standards. It is designed to be compatible with existing business processes and to serve as a practical input to standard-setting bodies like the GHG Protocol, ISO, and ISSB.
What are E-assets?
Just as E-liabilities refer to units of GHG emissions (into the atmosphere) that can be attributed to a given entity or product, E-assets refer to units of GHG removals (from the atmosphere) that can be attributed to a given entity or product.
Our E-asset framework establishes the conditions under which an act of removing GHG from the atmosphere can be recognized as a tradeable asset on an E-ledger and when such an asset can be used to “net” against E-liabilities (to help establish, for instance, an entity or product’s claim to be “net zero”). The E-asset framework is a set of principles, drawing from established financial accounting practice, for the robust accounting of carbon removal activities. These principles that define E-assets ensure that transactions in E-assets are accurate, comparable, reliable, and fungible, all indispensable properties of accounts.
The E-asset system brings a baseline rigor to current (largely voluntary) markets in carbon offsets. These markets have been plagued by criticisms of chicanery and fraud, owing largely to the absence of any robust and consistent system of offset measurement. Like with current carbon-counting standards for emissions, current offset-reporting approaches do not always forestall multiple counting of offsets, and they yield numbers that are not always fungible or auditable. The E-asset system can bring transformative clarity to offset markets, ensuring that only true and valid removals actually trade and are usable as offsets.
The E-ledgers system
Together, E-liabilities and E-assets provide the two sides of the E-ledgers framework, a comprehensive system for managing emissions and instruments that counteract those emissions. The duality of E-ledgers ensures that organizations are incentivized and accountable for both emissions and removal actions.
This comprehensive approach can bring order to the current haphazard efforts across myriad different markets and technologies to enhance energy efficiency. Just as the introduction of generally accepted (financial) accounting principles (or GAAP) in the 1930s brought consistency and reliability to capital markets, unleashing trillions in economic activity, the systemwide adoption of the E-ledgers approach can usher in a whole new scale to energy efficiency efforts, creating the potential for energy abundance worldwide.
Want to learn more?
For a summary White Paper on E-ledgers, how it works, and its applications in markets and public policy, please contact us with details on the nature of your interest.