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Brief | 2023

Toward a Technology Ecosystem for Carbon Accounting

By John McGrath
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During the browser wars of the late 1990s, many websites only worked with one browser — Internet Explorer or Netscape Navigator — but not both. There were no common standards for web programming, so each vendor created their own way of doing things, and they were incompatible. It was frustrating for users and a drag on innovation, and slowed the adoption of the web.

web view of the beta Walmart video downloads

Greenhouse gas emissions data is in a similar place today. A lack of universally accepted standards for collecting, managing, and storing emissions data makes it difficult to exchange and compare. This slows progress toward the measurement and, ultimately, reduction of emissions.

Research conclusively ties disastrous floods across Pakistan, droughts across the northern hemisphere, extreme heat and drought in China, and rapid intensification of hurricanes, among many other calamities, to climate change. In much of the world, the lazy days of summer are now danger season. Making emissions data interoperable and comparable via open standards is an absolute requirement if we are to lower greenhouse gas emissions and secure a clean, prosperous, zero-carbon future.

The browser wars played out over six years and ended only when standards bodies such as the World Wide Web Consortium (W3C) and ECMA defined standards that, among other things, made conformant websites interoperable across browsers. These standards were successful in part because the largest technology companies contributed to and supported them.

Carbon data standards and the technologies based on them can have a similar catalyzing effect on our ability to use data to reduce emissions, and this needs to be accelerated if we are to achieve the results we need in the time we have. This brief describes how making data comparable, interoperable, and machine-readable is necessary and explores how data standards, open-source collaboration models, and enlisting the support of the software industry are the means to achieve it.

Importance of Accounting

Traditional accounting took around 5,000 years to evolve. Accounting does not just predate writing, it is why writing was invented: the earliest written artifacts, such as this cuneiform clay tablet, were records of commodity trading.

cuneiform tablet of accounting
Image source: Met Museum

However, carbon accounting at the company level has only been around for about 20 years. And though we are beginning to see more efforts like RMI’s steel emissions accounting guidance, efforts at the product level are only just beginning to take shape. While informed by earlier forms of accounting, a new set of carbon-specific building blocks is needed to allow buyers and sellers, auditors and entrepreneurs, software companies, and sustainability professionals to build and deploy interoperable systems that are as accurate and ubiquitous as those for traditional accounting.

As climate awareness increases along with social and regulatory pressure, over 800 of the largest publicly traded companies have made net-zero commitments to reduce their emissions. For companies to make good on these commitments and know where to focus their reduction efforts, they need emerging carbon accounting systems to understand their current emissions and the broader climate impacts of their decisions.

No company would launch a new product, make a strategic decision, or make capital investments without fully understanding the financial implications. With better carbon accounting, the same can and should be true for emissions. Understanding the carbon implications of decision-making should become an expected and required part of any business process, and creating an ecosystem of interoperable carbon accounting technologies is a means to that end.

These technologies are needed to give teeth to green procurement policies, such as those required by the Inflation Reduction Act, to know if companies are making good on their net-zero commitments, and to guide corporate strategy. We will not achieve meaningful decarbonization without them.

How It’s Done Today

The Greenhouse Gas Protocol, or GHGP, is the most common method of tabulating emissions. First released in 2001, over 92% of the Fortune 500 companies reporting emissions follow it.  Although the GHGP is being revised, and innovations such as consequential accounting are advancing the state of the art, the foundations of how to do carbon accounting are becoming established.

However, as with the web in the 1990s, there is no widely used common standard — no data format — for describing and exchanging emissions data. It is as if every phone took pictures in its own format, unreadable by that of anyone else. As a result, different companies cannot readily share emissions data, and when they do, it is difficult to use in decision-making.

Existing platforms for reporting carbon data, such as CDP and EcoVadis, are valuable tools, but they are geared toward annual reporting. Data released through them is inherently out of date by the time it is shared. Additionally, they focus on the organizational level rather than the product and transactional levels, where better data can help companies make operational decisions to lower carbon emissions.

Today, the typical process for exchanging product emissions data is as follows: someone on a company’s procurement or sustainability team figures out who to contact at each of their vendors, often not a mean feat. They then email each vendor to request emissions data. A vendor may or may not have that data, may or may not be willing and able to share it, and may or may not include (or even know) the methodology by which it was collected. Do they include all three Scopes? What boundaries do they use? Do they share the emissions factors they use or the proportion of direct data to be modeled or estimated data? Each vendor is likely to have different answers to those questions, have answers of varying quality, or provide no details at all — as a result, it is difficult to compare data across vendors.

Companies seeking carbon data will typically receive it in assorted formats: some vendors send spreadsheets, others send PDFs, some fill in vendor surveys, and some just copy and paste their data into emails. As the systems used by vendors and buyers cannot communicate with each other and do not use the same formats, they are not interoperable — meaning what in the financial world would be an automated and instantaneous exchange is instead highly manual and can take months. Once data is collected, someone on the receiving end needs to consolidate all this and make sense of disparate, often unstructured data. They are more than likely to then put it into an arbitrarily formatted spreadsheet of their own. When one of the company’s customers, in turn, requests carbon data, the process will be repeated.

Due to all these barriers, getting emissions data from suppliers is often an annual ritual timed around the release of a yearly sustainability report. This is not very useful for business decisions. Can you imagine trying to make a budget but only being able to see your bank balance once a year?

How It Should Work

Instead, imagine buyers logging in to their vendor’s system and simply downloading the data they need. They can do this knowing the data was gathered according to standard methodologies and is being supplied in a standard format, so it can be uploaded into the buyer’s system without having to be converted or poured over.

New standardized cloud-based process

Likewise, vendors who once had to manually field dozens to thousands of individual requests for data can now provide high-quality data automatically at any time with much less effort. With the data they supply now being more easily compared with that of their competitors, they know they are evaluated on a level playing field and have an incentive to improve their scores.

Now imagine buyers’ and sellers’ systems being connected and data transferred automatically like the direct deposit of a paycheck — and buyers connecting to all their vendors and getting comparable data in the same format from each of them. With the benefit of standard formats, they do not have to use the same software — just software that supports the standard, the way word processing programs from Microsoft and Apple can read the same files (because they both read OpenXML — an open standard).

Using existing business intelligence software or a new generation of dedicated carbon accounting software, buyers could see the emissions consequences of their purchases in real time. They could more easily make low-carbon purchasing decisions, helping them meet net-zero targets and comply with a growing wave of product-level emissions regulations. By aggregating data from multiple suppliers, they could more accurately describe the embodied emissions of their own products and supply that data to their customers, allowing them to qualify for green procurement benefits.

No single piece of technology will accomplish all of this by itself. But as an ecosystem of standards and related technologies coalesces, they combine to make this vision possible. There are, however, several problems that must be addressed:

Comparability

To make better choices, you need to compare things. If a package of Twinkies contains 1,176 joules of energy and a blueberry muffin contains 470 calories (also a measure of energy), which should you choose? It might be a surprise that Twinkies would be the slimming option, which would be clear if the units were the same — one calorie equates to about four joules.

For food labels to be useful in letting you compare options, they need to include the data you are looking for (here, energy) and be in consistent units — calories or joules, but not both. Food labels require a standard — in this case, the FDA’s Food Labeling Guide.

Comparability can provide clarity by telling you to avoid (or eat) the muffin. Having a format does not ensure a vendor will provide the data requested, but just by creating the possibility, a format can act as a carrot and a stick, nudging vendors in the right direction.

🥕 The carrot: That a format asks for or requires certain fields lets the vendor know what is important. You do not get what you do not ask for, often for the simple reason that the other party might not know you want it. Just seeing that a format has space for a piece of data may prompt a vendor to provide it.

🏒 The stick: Conversely, when something is asked for and explicitly not provided, that tells you something too. One way to incentivize the sharing of data is to make conservative assumptions when it is asked for and not provided. This already happens in practice. For example, when someone outside the producing company estimates the emissions of a product, they may use grid intensity to calculate energy-related emissions. If the company has power purchase agreements (PPAs) with renewable energy providers to reduce emissions attributable to energy, those may not be factored in, resulting in an inflated emissions estimate.

For a company whose products have low carbon intensity, making it easy for customers to see this allows them to seek a premium for providing a better product. Moreover, by gaining visibility into their supply chains, companies wanting to make green claims about their products can do so more readily. If the right data is supplied by vendors, those claims are legitimized, auditable, and less likely to be considered greenwash.

Interoperability

According to a former product manager at Google, creator of the Chrome browser, half the people on the Chrome team — half — are working on web standards, which Chrome needs to adhere to in order to support interoperability.

Web standards work because the overwhelming majority of the browser market — Google Chrome, Apple Safari, Mozilla Firefox, Microsoft Edge, and Internet Explorer — support their standards.

This interoperability gives companies the confidence they need to build applications for the open web, benefiting all standards-compliant browsers. Software developers want to be able to build web applications and know all customers, regardless of their browser, will be able to use them. Additionally, the browser companies know that by supporting standards, more applications will run on them, allowing them to expand their user base. This has created a virtuous cycle where the more the browsers adhere to standards, the more software is written for them. The more the software written for them, the larger the market becomes.

Similarly, the adoption of carbon data standards would make it easier to request carbon data and provide it. As it becomes simpler for companies to collect upstream data, it in turn becomes easier for them to provide it to their own customers downstream. As more of the vendors in a company’s supply chain provide data, the laggards who do not can be identified and made to do so. As the flywheel gains momentum, it becomes possible and increasingly easy to make low-carbon purchasing decisions.

Machine-readability

Once computers can automatically connect and exchange carbon data directly, new possibilities arise.

Systems might be programmed to solely allow the purchase of commodities or products that meet low-carbon standards. For complicated supply chains and companies with thousands of vendors, to get visibility automatically and at scale might reveal previously unknown carbon hot spots and, thus, opportunities to drive emissions reduction. It might also allow companies to compare carbon intensity and pricing in a way that lets them prioritize the highest ROI steps toward decarbonization.

Supply-chain management vendors such as SAP and Kinaxis see the opportunity and are taking steps in this direction. With broad availability of standardized, interoperable, machine-readable emissions data, carbon accounting and emissions tracking can be integrated into the broader supply chain management (SCM) software ecosystem, taking us one step closer to the goal of lower emissions through supply chain visibility.

Building Blocks

What do we need to build to get comparability, interoperability, and machine-readability?

Standardized data formats

First, and necessary to build a foundation for everything else, is the creation of open standards for the exchange of emissions data — to do for carbon accounting what the introduction of SWIFT banking standards did for international finance; what HTTP, HTML, CSS, and JavaScript did for the web; and what the shipping container did for international trade. Standardization can have profound effects.

This is starting to happen. The PACT format for product-level carbon data, created under the auspices of the World Business Council for Sustainable Development (WBCSD) and in partnership with RMI, has gone from an experimental prototype to a pilot-tested technical standard in just the past few months, increasing adoption and real-world use. The next version of PACT allows third parties to extend the format to support sector-specific carbon attributes. RMI is partnering on the creation of this extensibility framework and using it to create sector-specific data formats, allowing the exchange of carbon data in the high-emitting sectors for which RMI developed accounting guidance through the Horizon Zero project.

Supporting open-source software

Open-source software is, as much as anything, a collaboration model. It provides a way for organizations that might compete along some lines to collaborate for mutual benefit along others.

This makes the open-source development model well-suited to the creation of standards and formats. It also facilitates the beneficial accretion of supporting tools around a core project — if a data format is at the center, it might grow to be accompanied by things like validators, which can ensure a file in that format conforms to the standard, libraries facilitate the use of the format in a specific language (i.e., software development kits or SDKs), and the many other useful components and bits of code that make up a healthy software ecosystem. Because they can lift all boats, healthy open-source ecosystems can lead to robust and scalable commercial ecosystems built on them.

Eric Raymond’s classic essay “The Cathedral and the Bazaar” describes what he learned from his involvement in the early evolution of the Linux operating system and managing the open-source fetchmail project. In the ninth of the 19 lessons, he explains, “smart data structures and dumb code works a lot better than the other way around.” We should aspire to both, but it is a useful reminder of what comes first and how well-designed data standards and formats provide a solid foundation for future innovation.

Carbon accounting software

The volume of available carbon data is skyrocketing as companies do a better job of measuring their own direct emissions and satellites and other forms of remote sensing allow for much better external measurement. While many of the systems companies currently use to collect and organize this data are ad hoc and homegrown, this is changing — there is a large and rapidly growing market for software purpose-built to manage carbon emissions accounting and reporting.

Climate tech entrepreneurs are launching products and raising money at rates reflective of the demand and urgency. Money raised is not necessarily the best measure of performance or impact, but the trend is revealing: as of this writing, $114 million was raised by Persefoni, $85 million by Watershed, $36 million by SINAI, and $21 million by Sphera. Overall, in 2021, venture capitalists invested over $410 million in carbon accounting startups. Existing software giants such as Salesforce and SAP also recognize the demand and are releasing products.

By supporting open formats, carbon software vendors can reap the same rewards as browser makers have. Interoperability makes pies bigger, so every vendor’s slice grows along with it. Support for open formats also allows specialized software, like that for carbon accounting, to more easily fit into the existing landscape of enterprise software companies use to run their businesses. By creating those formats, organizations trying to drive better product-level accounting and the impact derived from it can form a mutually beneficial alliance with the commercial sector and harness the momentum and innovation flowing from it.

Industry support

Standards benefit from network effects, meaning the more people or companies use them, the more valuable they become. This means industry bodies such as the Responsible Steel Alliance (RSA), the Sustainable Aviation Buyers Alliance (SABA), the Clean Energy Buyers Association (CEBA), the Aluminum Stewardship Initiative (ASI), and like groups have an outsized role to play, in that they can marshal action across many companies, and the combined purchasing power of their members can move markets and drive adoption.

Are Incentives Aligned?

The adoption of standards and software utilizing them benefits (almost) everyone in the equation. Those it does not benefit — producers of products or commodities with high-emissions relative to other producers — will be incentivized to do better.

The incentives we expect:

Buyers: Those buying products and commodities are given the ability to collect carbon data more quickly, at a lower cost, and in a more usable format. That the format drives comparability yields more accurate accounting and purchasing decisions. In aggregate, the projected result of this is carbon-differentiated markets. Other benefits include: the ability to do better and more frequent reporting, and to see their carbon emissions with greater frequency, and ultimately, in real time (i.e., the ability to create real-time carbon emissions dashboards, which again become a powerful decision-making tool).

Green vendors: Those selling low-carbon commodities and products and benefiting from sharing data can do so more quickly at a lower cost to all customers (high-effort manual sharing often results in only providing data to large customers). By providing reliable signs of differentiation, they gain the ability to charge a premium for their low-carbon products and access to markets that require green commodities. These can be massive — the Biden administration has issued green purchasing guidelines that, among other things, require “net-zero emissions from federal procurement no later than 2050, including a Buy Clean policy to promote use of construction materials with lower embodied emissions.” This can only be achieved with better data exchange and the accounting it facilitates.

Dirty vendors: If producing high-carbon products means loss of access to responsible buyers and whole markets, and if standardized formats make it easier to see who is clean and who is dirty, vendors have a strong incentive to straighten up and fly right. This can lead to a virtuous cycle. As more vendors reduce emissions to gain access to markets, the bar for “low carbon” naturally rises — not all vendors can be above average.

Software vendors: As buyers and sellers seek to gain the advantages listed above, they will require their software vendors to support open formats and data standards. These become a selling point for vendors and a way of integrating with other enterprise software such as ERP systems.

Conclusion

To avert the worst effects of climate change, the world needs to decarbonize quickly and simultaneously on multiple fronts. Carbon accounting cuts across almost all of them. It helps us see where we are, where we need to get to, and what needs to change for that to happen. Open standards and data formats, and their acceptance by the industry accelerate and guide the growth of a rich accounting ecosystem, harnessing the power of the marketplace to monumentally shift the way greenhouse gas emissions are reported and reduced.

To learn more about RMI’s Horizon Zero project and our work supporting carbon accounting and data standards, please contact John McGrath at jmcgrath@rmi.org.

RMI values knowledge sharing, and we encourage others to reference, share, and cite our work through the Creative Commons CC BY-SA 4.0 license.