E-liabilities: a fresh or fantasy proposal?

January 31, 2024, by Michael Gillenwater

What do you get by mashing together ideas from corporate cost accounting with dreams of a universal carbon pricing mechanism and try to apply it through sustainability disclosures of corporate value chains? I am not totally sure, but it might look something like the E-liability concept (Marc Roston et al., 2022; Robert S. Kaplan and Karthik Ramanna, 2022, 2021; Roston et al., 2023). What is this concept? Put simply, it involves assigning an E-liability (“E” for emissions or environment) certificate to a company for each unit (e.g., carbon dioxide equivalent tonne) of greenhouse gases (GHGs) they directly emit (i.e., Scope 1 emissions). These E-liabilities are then passed on downstream through product and service supply chains (i.e., to a company’s customers) such that the retailers (or consumers) of final products and services receive the cumulative number of E-liabilities that have piled up with all the companies along the value chain that are involved with the production of the final product or service. Consequently, the concept’s application requires every company in a value chain to quantify and register its GHG emissions so that E-liabilities can be assigned.

If such a registry was put into action, then it is possible to dream-up all sorts of schemes for assigning value to E-liabilities as a form of carbon pricing mechanism or to structure a new approach to corporate target setting that focuses on company’s minimizing or eliminating their E-liabilities. The apparent goal  is that the tracking of E-liabilities could replace the existing GHG Protocol corporate standard for GHG reporting (WRI/WBCSD, 2011, 2004).[1] Expectations then extend to visions of an entirely new framework for regulating GHG emissions, achieving a form of carbon pricing, and incentivizing investments in emissions reductions and atmospheric carbon dioxide (CO2) removals (e.g., CO2 direct air capture). The latter incentive, as described, would occur because companies that end up stuck holding E-liabilities (i.e., as a combination of those that are passed down to them from suppliers as well as those registered to them due to their own direct GHG emissions) would be expected or mandated to offset the liability through an exclusive demonstration that an additional tonne of CO2 has been removed from the atmosphere, such as through direct air capture.

To justify the need for their proposed alternative, the authors’ of the E-liability concept point out a range of problems with the current approach to corporate Scope 3 GHG emissions reporting (see here for a more detailed discussion of problems).[2] Their proposed alternative is offered as a solution and is, in some ways, theoretically enticing. However, there are a number of practical problems with their proposed alternative that call for some reflection before leaping into planning for a whole new GHG accounting infrastructure built upon transferable E-liabilities.

The introduction of indirect emissions (e.g., Scopes 2 & 3) vastly increases the data collection and methodological complexity of estimating GHG emissions and allocating responsibility for those emissions. A clear benefit of the E-liabilities proposal is that it simplifies the work for each individual company of estimating corporate GHG emissions because each company is required to only quantify its direct (i.e., Scope 1) GHG emissions. However, the e-liability system is brittle, as each company depends on every other company operating upstream of it in a value chain to also estimate emissions and engage with the E-liability registry. Further, the proposal does require companies to have clearly defined and non-overlapping GHG accounting boundaries to avoid multiple companies reporting the same direct emissions and double counting of E-liabilities. Or more likely, companies selectively crafting their boundaries in a manner that some emissions are left unaccounted for by any company. The current GHG Protocol guidance provides companies flexibility in what consolidation approach they use and thereby what their Scope 1 emissions accounting boundaries will be. Yet, the proposal lacks an approach to solve this existing problem of comparable organizational boundary setting.

The proposal also idealistically relies on an unbroken structural chain of corporate participation. Yet, the proposal fails to address the real-world situation, which lacks universal global participation in corporate GHG reporting either through voluntary or mandatory reporting. Given that the proposal requires companies to impart E-liabilities throughout every tier of a value chain, what happens to the chain of custody for E-liabilities when numerous links in value chains are missing? Further, value chains in the real-world are not structured in a nice simple linear fashion. They are instead more accurately described as complex, and oftentimes recursive, networks that span numerous companies across the globe (see section on “Bad boundary beliefs” here).

Potentially the most vexing question for the proposal is how a company is to allocate its E-liabilities to its myriad products, services, and downstream customers. Developing E-liability allocation rules addressing every possible type of product, service, and other producer/consumer relationship is daunting. The potential biases in how this downstream allocation is done seem massive.[3] It would seem rational for a company to bias its downstream allocation of E-liabilities to its customers that simply do not care about climate change (e.g., those customers that do not even engage in corporate sustainability reporting) and away from its customers that do care.

Some would be justified in critiquing the proposal based on how it effectively assigns no responsibility to a company for any indirect emissions occurring downstream (e.g., resulting from the use of its products). As E-liabilities are only passed down the value chain, not up. The proposal’s authors justify excluding, from their new GHG accounting framework, the assignment of responsibility to a company for its downstream emissions with the argument that companies do not have control over downstream emissions. Although companies have incomplete control over how and how much their products are used, they do have enormous control over product design choices (e.g., how energy efficient the product is, its default settings, its durability).

Now, imagine the unrealistic scenario in which an E-liability type scheme was mandated for all companies globally. Is it something that national regulatory agencies would be enticed to then utilize for government GHG mitigation policy? The answer is not clear. But, we can say that such a scheme is not in keeping with existing preferences for assigning points of regulation for mobile source fossil combustion, which is typically done upstream of where direct emissions occur (i.e., fuel wholesalers).

Lastly, the proposal’s authors correctly criticize the current Scope 3 reporting practices by companies as highly subject to manipulation, gaming, and greenwashing. However, their proposed solution seems no less susceptible. For example, if company A has market power relative to one of its suppliers (company B), it would be rational for company A to pressure company B to bias its allocation of E-liabilities such that more are assigned to its customers rather than company A. Given the ubiquitous use of shell companies in business, there would also need to be a range of guardrails preventing a company from simply allocating some of its E-liabilities to a downstream shell company and then a few years later simply declaring that shell company bankrupt, shutting it down, and making the E-liabilities disappear. Stepping back, the challenge is that if E-liabilities represent a meaningful financial liability to companies (or companies for reputational reasons care about how many show up on their books), then they will create ways to evade being allocated them by their suppliers or will offload them to other companies.

In sum, it is not obvious that introducing E-liabilities to GHG accounting solves any of the existing problems in corporate GHG reporting. For example, the proposal does not address the major reforms to corporate GHG accounting that would be needed to prevent assigning E-liabilities for the same tonne of GHG emissions to two companies as well as those that would prevent the manipulation of accounting boundaries such that some tonnes are left unassigned to any company. Further, the required level of policing and enforcement of corporate emissions estimation, reporting, and E-liability transfers to utilize the proposal would seem fantastical. And with little humor intended, it would surely be a salesperson’s nightmare to have to convince their customers to accept a bundle of E-liabilities with each purchase.

From a regulatory standpoint, much would need to be explored before seriously considering structuring a new type of carbon pricing mechanism around E-liabilities. In the context of environmental pollution (e.g., GHG emissions) using corporations as the point of regulation, versus individual facilities, is generally not seen as legally or administratively practical given the amorphous and dynamic nature of a company. A company is a socially constructed term for entities that can be defined in a myriad of ways and structure themselves differently based on many factors whereas facilities, which are defined by their physical properties, do not deal with these issues and have a long history of being an operative target for regulation.


[1] The E-liabilities proposal is modeled on activity-based costing (ABC). I have argued, however, that physical GHG emissions inventory (i.e., physical allocational) accounting should not be modeled on financial accounting.

[2] The authors offer a critique of the existing use of industry average data in corporate GHG emissions estimation. Although, the critique is largely correct for much of Scope 3 estimation, especially where spend-based data is used, industry average emission factor data is not inherently problematic for GHG accounting. Average emission factors are often referenced in the IPCC guidelines for national inventories. These references are scientifically justified based on evidence. For corporate emissions estimation, the use of industry average data can also be scientifically justified in cases where emission sources exhibit low variability across companies (i.e., are representative of company-specific conditions).

[3] There is also the unanswered question of how many of the E-liabilities that a company itself generates it should retain on its books versus pass on to its customers. Lenzen et al. (2007) includes a discussion on a proposed formula for downstream allocation based on financial data.


Lenzen, M., Murray, J., Sack, F., Wiedmann, T., 2007. Shared producer and consumer responsibility — Theory and practice. Ecological Economics 61, 27–42. https://doi.org/10.1016/j.ecolecon.2006.05.018

Marc Roston, Alicia Seiger, Thomas Heller, 2022. The Road to Climate Stability Runs through Emissions Liability Management.

Robert S. Kaplan, Karthik Ramanna, 2022. We need better carbon accounting. Here is how to get there. Harvard Business Review.

Robert S. Kaplan, Karthik Ramanna, 2021. Accounting for Climate Change. Harvard Business Review.

Roston, M., Seiger, A., Heller, T.C., 2023. What’s Next After Carbon Accounting? Emissions Liability Management. SSRN Journal. https://doi.org/10.2139/ssrn.4430164

WRI/WBCSD, 2011. Corporate Value Chain (Scope 3) Accounting and Reporting Standard. Washington, DC and Switzerland.

WRI/WBCSD, 2004. The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (revised edition). World Resources Institute and World Business Council for Sustainable Development, Washington, DC and Switzerland.

Cover image courtesy of https://e-liability.institute/

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