Accounting for Carbon

The paper presented in this Decarbonization Seminar designs accounting that reports an entity’s progress in reducing carbon emissions (or not). In the same form as financial accounting, it reports a balance sheet where assets that reduce carbon are offset by liabilities for carbon emissions, with the difference reporting an entity’s net position in carbon and its progress in reaching milestones such as a net-zero carbon goal. The quasi-income statement reports the periodic emissions that add to the balance sheet’s net position. By recognizing assets in a balance sheet, an entity gets credit for efforts to reduce carbon that are realized only later, thus dealing with the timing problem between investing in carbon reduction and its effect. The responsibility accounting has attractive incentive and monitoring features. It provides a framework for pro forma (budgeting) of carbon reducing strategies, setting benchmarks against which actual results of strategies can be evaluated. It facilitates consolidation across entities to report on carbon for specific groups such as industries. Mirroring financial accounting, it facilitates “double materiality” assessments with the comparison of carbon metrics and financial metrics to evaluate trade-offs and “sustainability” more generally.