How carbon measurement uncertainty is impeding carbon market viability

The journey to a low-carbon future has created one of the greatest economic opportunities of our lifetime, however, this opportunity is not without its challenges. Publicly traded companies are feeling pressure to have their greenhouse gas (GHG) inventories and carbon strategies in place as both regulatory agencies and consumers demand better carbon transparency. Helping corporations achieve their net zero targets could create a $194 trillion opportunity for entrepreneurs and investors. The voluntary carbon markets, which provide a critical pathway to net zero for many companies, are expected to grow into a $10-40 billion dollar solution by 2030.

Yet, the multi-billion-dollar potential of the carbon markets may be misleading investors and buyers by ignoring the fundamental differences between financial accounting and carbon accounting.

In financial accounting, a dollar is a dollar. Uncertainty with dollars is not in the monetary unit, but it’s buying power which can fluctuate over time. We call this volatility, a measurement based on standard deviation principles from statistics. However, in carbon removal accounting, a tonne of carbon might not be the same as another tonne of carbon. The uncertainty arises with the precision and accuracy of the measurement methodology of carbon – which we call “margin of error”, a measurement also based on standard deviation principles from statistics. No one would argue they shouldn’t consider volatility when making financial investments, but we are ignoring volatility of measurement certainty when making carbon investments.

How bad can the problem get Unfortunately, uncertainty of over 250% is not unheard of. This is because of a concept called error propagation. Measurement error gets amplified by the errors within mathematic models (i.e. registry methodologies), combining carbon units (i.e. in the creation of carbon portfolios), or dividing them (i.e. creating derivatives). The large uncertainty in the current system means we can’t tell if we are merely comparing apples to oranges or apples to orangutans.

The problem with error propagation occurs in both carbon accounting itself as well as accounting for carbon offsets. In the subsequent sections, we show how error propagation creates challenges for accounting for what we emit as well as what we withdraw. As the SEC emissions reporting requirements evolve, it’s critical that climate products, services, and markets address accounting and measurement error to enable better market and product transparency, investment comparability, and an overall clear pathway for corporations to achieve net zero.

Deploying capital effectively requires reasonable certainty. An executive deciding how to better scale their company’s operations to become net zero, an investor deciding which technologies and sectors provide the best risk profile and return on investment, or buyers just trying to make better climate choices when offsetting their carbon activities, are not being provided with the fundamental information necessary to make an informed decision, let alone compare products or investments.

Accounting for Emissions: Greenhouse Gas Inventory and Emissions Factor Error

The error is larger than what most people think. Corporate emissions are measured and accounted for as Scope 1, 2, or 3. Scope 1 encompasses direct emissions, such as burning gas for cooking and fuel for driving. Scope 2 represents energy indirect emissions, such as the carbon from procured electricity from a utility. Scope 3 represents value chain emissions, including upstream and downstream carbon from the products we buy, sell, and discard. These emissions are calculated using emission factors from extensive databases. A strength of the system is that it is highly flexible to adapt to the unique situation of any company.

However, the system’s strength is also its weakness. The flexibility of reporting means that results can vary between 38 – 250%, and sometimes up to 4000%, depending on the databases used for emission factors and accounting choices made by the reporting entity. As shown in the below highlighted section of the IPCC guideline chart, emission factor uncertainty estimates range from a minimum of 1.5% to upwards of 150% for national-level inventories.