The pros and cons of using financial accounting to explain carbon footprints
Using how we count money to explain how to measure carbon reduction is helpful, but risks missing the point by using something we made up when dealing with something we’re made of.
Money vs Carbon
It’s weird. Our carbon-based ecosystem has been around for billions of years. We only invented money around 5,000 years ago.
So why use something we’ve made up, in order to explain something we’re made of?
After all, economists themselves have attributed putting profit before people and planet as the root cause of global heating.
If we treat money so much more seriously than we treat carbon, it behoves us to be wary of using how we measure the former with how we go about reducing the latter.
So what are the pros and cons of using financial accounting to explain carbon accounting?
The Value of Metaphors
The big advantage is familiarity.
Consider three basic concepts every human ‘knows’ from infancy.
- Gravity: The moment hands support us as we exit our mothers, we feel the force the Earth exerts on us. When placed on the ground, we ‘know’ there’s a hard thing that stops us falling.
- Perception: As our vision develops, we learn that things look bigger the closer they are. Big face coming. Big Mummy. Small Daddy.
- Size: When we realise we can control the grabby things at the end of our arms, we start experimenting with size. Experiment One is sorting Category 1 (Things We Can’t Fit In Our Mouth) from Category 2 (Things That Fit In Our Mouth But Not Up Our Nose) from Category 3 (Things That Fit Up Our Nose).
Such lessons are, quite literally, ‘common sense’, but as our brains develop, modern science requires us to ‘unlearn’ them, because things are not always what they seem.
Because it’s invisible at our lived scale, the fact that we live on a planet in a solar system is impervious to ‘common sense’. ‘Knowledge’ passed on via language replaces hunches with science. The more familiar the language, the easier the knowledge transfer.
So, when our children are a bit older and ready for us to explain the solar system, we look around for familiar objects to use as props.
If, at the dinner table, the eldest child asks ‘why is the Sun so small?’, we might reach for, say, a fruit bowl.
This child probably won’t have heard the word ‘astronomy’, but we know their infant experiments have taught them the difference in size between a watermelon (Category 1), a grape (Category 2) and a blueberry (Category 3).
This makes them useful tools to explain that the relative sizes of the Sun, Jupiter and Earth are not what they appear from our Earth-bound perspective.
Once a child grasps the fact that one object represents another, they’re on their way to such detail.
Verbal comparisons are so embedded in our language we barely realise we’re using them: high as a kite, big as a whale, pea-brained. Similes, metaphors, and comparisons are pathways to wisdom, paved with the familiar.
Today, a fruit bowl is all an adult needs to convey to a child unintuitive facts that for almost all of human history eluded our wisest elders, equipped only with ‘common sense’. The ‘ground’ is the surface of a sphere. Our sphere is much smaller than the tiny speck in the night sky. That tiny speck is itself tiny compared to the hot yellow thing in the sky.
The capacity for abstract thinking remains one of the few remaining superpowers we believe unique to Homo sapiens.
A watermelon may not be exactly as much bigger than a grape than the Sun is to Jupiter, or even close. Nor is a blueberry an accurate fruity representation of Jupiter vis a vis Earth. Plus you’d need a kitchen table the length of the street to represent the actual distances between them.
Still, so long as you’re not left with the impression that the Sun is actually a giant yellow watermelon, comparison by analogy is a useful, if imperfect, tool. The more familiar the analogy, the more helpful it is.
Just like using the financial accounting system to explain carbon accounting.
The Value of Money
The importance we place on money has made financial terms as familiar as fruit.
In some cases, we’re more familiar with abstract money metaphors than we are with real-world, but exotic, types of fruit.
Not all of us can create a balance sheet that would satisfy a government auditor. We might delegate drawing up a cash flow diagram. Explaining the principles of double-entry bookkeeping might be a bit harder than we thought.
Yet give us a fruit bowl, and most of us could explain to a child the difference between credit and debit, assets and liabilities, costs and income, profit and turnover.
This wasn’t the case for the first 295,000-odd years of our existence. Before the invention of debt, our ancestors would only have been able to use nuts and berries to explain barter, i.e. the exchange of real things at the same time in the same place.
As we became more dependent on the abstract notion of ‘debt’, i.e. transactions mediated by tokens that separated the two traded items in time and space – understanding money became more important. Money freed us from needing to know the intrinsic relative value of, for example, one big fish vs 5 small fish, or how many big fish were ‘equivalent’ to different types of animal hides.
Most of us no longer know the names of trees, which mushrooms are edible, or where to find clean water, let alone retain a dynamic mental tariff of current fish/hide exchange rates.
We still carry these tariffs, but they’re now filled with money-based equations: how many euros to the dollar, variable mortgage rates, collateralized debt obligation futures.
We still need to eat, drink and find shelter, but money has enabled us to construct an elaborate, self-balancing financial eco-system that permits us to worry about higher requirements in Maslow’s Hierarchy of Needs, such as celebrity split-ups, internet memes, holidays or diets.
Don’t knock it – it’s called ‘civilization’. Anyone struggling for food, water and shelter has every reason to be a big fan.
But the more money-literate we are, the more intricate and complex this money-edifice supporting our civilization has become. The money construct that forms our civilised livestyle’s foundation requires every penny to be accounted for, because it’s imaginary. Brick-promises are stuck together with mortar-trust.
When we replaced ‘real’ assets, like fish and hides, with representative wealth tokens, like cowrie shells or gold coins, we started building these imaginary foundations.
Shells and gold exist in the real world, but when we started using paper to represent ‘wealth’, we moved further from the real and towards the abstract.
Now we use ones and zeros represented on a screen, we’ve strayed even further.
The integrity of our house of make-believe cards depends on precisely balancing one promise against another promise. It requires us all to deeply internalise the notion that something our collective imagination has made up doesn’t just represent ‘wealth’, but is wealth.
We’ve so normalised this idea that we’ve stopped reminding ourselves money isn’t ‘real’, like a fish or a berry. Paper money still reminds us, in tiny font, on each bill, ‘I promise to pay the bearer on demand the sum of X’.
Maybe similar reminders exist, in even smaller font, buried in the small print when we click ‘Agree’ on our mobile banking apps. It no longer matters, as clicking ‘Disagree’ is hardly an option and it’s increasingly impossible to live even a cash-based ‘civilized’ existence.
Treating ‘paper’ wealth as if it were a real thing means we’ve grown to regard Rich Lists, bank statements, or GDP rankings as if they were chemical equations, or the laws of physics, rather than visualisations of an elaborate network of self-cancelling promises.
Like children who conclude the Sun is actually a giant yellow watermelon, we’ve forgotten the difference between what’s real, and what’s not. We’ve mistaken the metaphor for the object.
This is the drawback to using money to explain carbon accounting.
Money As Metaphor for Carbon
Our familiarity with financial accounting is undeniably useful when it comes to explaining the basics of carbon accounting.
By now most educated people have a loose notion of what our ‘carbon footprint’ is, but for most of us, our understanding doesn’t bear much scrutiny.
Try this Carbon Accountancy Pop Quiz.
- Q1 What unit is used to measure carbon footprints?
- Q2 Define Scopes 1, 2 and 3.
- Q3 What is ‘double materiality’?
- Q4 Compare the pros and cons of project vs life-cycle methodologies.
- Q5 Evaluate offsetting vs. insetting.
- Q6 What is the CSRD and why is it a game-changer?
The answers are easily searchable online for anyone curious enough to want to know. For a one-stop-shop, try the See Through Carbon and See Through News websites.
This article’s point, however, is that if you explain them using the vocabulary of financial accounting, it becomes child’s play.
Or, more accurately, adult’s play. Instead of reaching for the fruit bowl, just reach for the vocabulary of Money.
Deploy balance sheets as a metaphor, and curious adults grasp the basics of carbon accounting faster than most children understand the solar system via the medium of fruit.
Tell an intelligent adult that tonnes of CO2e are like dollars, the emissions you produce are like liabilities, and any carbon you remove from the atmosphere and return to the ground are like assets, and they’re off and running.
Not only does the financial model enable us to ace carbon accounting 101, but within minutes we become forensic auditing experts.
Substitute ‘greenhouse gas emissions’ for ‘liabilities’ and ‘carbon offsetting’ for ‘assets’, and novices who scored zero on the Pop Quiz start rigorously interrogating the frailties of carbon accounting in its current form.
The transformation is magical. Like the eldest child, delighted at their new insight, grabbing the fruit bowl to explain the solar system to their younger siblings, we can’t wait to pass on our new knowledge.
But that’s when the trouble starts.
The Problem with Metaphors
Explaining carbon accounting using financial accounting just means we run into the three big downsides: literal-mindedness, nitpicking and double-counting.
Literal-mindedness
We laugh when we overhear our child, not quite getting it right when they rush off to lecture their baffled younger siblings on their new insight into the solar system:
- ‘the Sun is actually 99% water!’
- ‘Jupiter is the same distance from Earth as the salt is from the pepper’
- ‘Jupiter will turn brown and go rotten before the Sun does’
These are funny because they confuse the metaphor with the object.
But the same thing tends to happen when adults apply financial accounting logic to carbon accounting.
Greenhouse gas emissions as ‘liabilities’ works pretty well. Carbon offsetting as ‘assets’ less so.
This is not simply because paying a small sum of money to someone to pass a bit of it on to other (usually distant, poor and brown) people to plant trees that may not last a year, let alone start being net absorbers of atmospheric CO2 for decades, or even paying them to not cut down trees that already do so, in order to keep emitting CO2 here and now, is nonsense.
It’s worse than that.
To continue our fruity metaphor – we’re mistaking apples for oranges. Thinking carbon accounting exactly mirrors financial accounting creates a multitude of what logicians call ‘category errors’.
Money-talk lulls us into a false sense of security, engendered by familiar terms. This has been exploited by those who profit from carbon trading, squeezing carbon-reduction square pegs into financial-system round holes.
We’re conditioned to accept carbon offsetting nonsense because any mention of a ‘liability’ triggers an expectation of a balancing ‘asset’. We ‘know’ what assets are, because they can be acquired not by reducing our emissions, but by purchasing them with money. It’s as if it’s the only language we know.
In finance, every liability implies a balancing asset, but remember it’s all imaginary. In the real world of atmospheric physics, it’s infinitely more complex.
The carbon ‘debt’ we’re now using money-based markets to balance is in fact the net transfer of billions of tonnes of carbon from the ground to the air by combusting fossil fuels since the Industrial Revolution.
The Gaia hypothesis explains how Earth’s homeostatic, synergistic, cybernetic system self-regulates. It’s now doing just that, but the ‘balancing mechanisms’ – floods, droughts, storms, mass extinctions etc. – undermine our civilization.
From a human perspective there’s no balancing ‘asset’, in the sense the financial metaphor encourages us to believe.
We’re just digging a deeper hole.
Nitpicking
Once we’ve passed through the financial accounting gateway to carbon accounting, we’re quick to pick up clipboards, and start deploying calculators, measuring tapes and microscopes.
Within minutes of scoring zero on the Carbon Accounting Pop Quiz, we’re picking holes in the answers.
No longer child-like recipients of new information, we’re now experts complaining to the pub quiz announcer that their questions are ill-formed, and their answers inaccurate.
Take the Carbon Accounting Pop Quiz. The nitpicking starts as soon as novices learn the answers – usually starting with a ‘but’.
- Q1 But how can you really measure ‘reduced’ or ‘sequestered’?
- Q2 But what about your supplier chain’s supply chain?
- Q3 But what’s the point in just making a to-do list?
- Q4 But don’t you have to stick with one approach?
- Q5 But doesn’t that mean carbon offsetting shouldn’t count?
- Q6 But what about all those big companies claiming to be ‘carbon neutral’?
To be clear, these are all excellent questions. That’s not the point.
The point is that using the metaphor of our watertight financial reporting system, designed to keep the edifice of promise-bricks held together with confidence-mortar from collapse, is an excellent way to demonstrate how primitive our carbon accounting system is in comparison. This is not the same thing as understanding carbon accounting on its own terms.
Nitpicking is understandable. We’re accustomed to our financial advisors, accountants and tax lawyers having all the answers for our money nitpicking. This makes the realisation that our carbon accounting system is still in the Stone Age all the more shocking. Imagine an accounting system that doesn’t even measure 70% of liabilities, or allows us to claim credit for money our infant cousins may inherit in future!
Those looking for an excuse for inaction to continue business as usual for as long as possible welcome such nitpicking. By comparison, the ‘carbon credits’ they buy to earn ‘carbon-neutral badges’ are discussed in reassuringly familiar financial language.
The problem is, in the context of carbon reduction, it’s mumbo-jumbo, defying science, logic and common sense.
Double-counting
The most common nitpick deserves a category of its own.
Explain business carbon emissions in financial vocabulary, and you rapidly encounter the ‘problem’ of double-counting, also prefaced with a ‘but’:
‘But what about double-counting?’
Assuming we know the real carbon footprints of a multinational’s thousands of suppliers, each of which has taken into account their hundreds of employees, and their sub-suppliers, all the way down the business food chain, how should we fairly allocate their emissions upwards?
Take Supplier A, which:
- makes 5 products of different embedded energy intensity
- has 10 customers, ranging from 50% to 1% of their business
How much of Supplier A’s carbon footprint should each customer assign to their own carbon liability?
The financial accounting model might suggest the following four options (there are more):
- Calculate the carbon emissions of every item sold
- Allocate it in proportion to the profit supplier A’s earns from customers 1-10
- Divide emissions using share of turnover as a good-enough rule of thumb
- Even simpler, just divide the total by the number of customers, so 10% each.
Which is correct?
Asking this question demonstrates the inadequacies of using the financial accounting model when it comes to addressing our climate crisis.
The very question comes loaded with baggage, because ‘double-counting’ is anathema to money-accounting.
Unless each asset implies an equivalent liability, balance sheets cannot balance.
It’s a ‘trick question’.
There can be no ‘right’ answer, because financial accounting is only an approximation for carbon reporting. ‘Double-counting’ illustrates why – their objectives are fundamentally different.
What’s the point?
The purpose of carbon reporting is not to make all the numbers balance out neatly on a spreadsheet, but to stop human civilization from drowning, burning and shrivelling.
Ask businesses why they fear reporting their real carbon footprints, rather than the fantasy ‘carbon-neutral’ ones they’ve paid for via ‘carbon credits’, and they tend to raise two objections, one honest, one technical.
The honest answer is:
‘But our website now says we’re carbon neutral – won’t we look foolish or dishonest if we suddenly admit our carbon footprint is massive?’
The answer is ‘Yes, but the sooner you do it, the better you’ll look, and government regulation will soon force you to do it anyway’.
Reporting regulations like the EU’s Corporate Sustainability Reporting Directive (CSRD, 2023) signal the end of the Age of Voluntary Reporting, AKA greenwash, and the start of the Age of Mandatory.
The technical objection sounds more convincing:
‘Even if we do accurately calculate, or reasonably estimate, the carbon footprints of our thousands of suppliers, each of which has taken into account their hundreds of employees, and their suppliers, each with dozens of employees, all the way down to all the individuals on Earth, how should we fairly allocate their emissions?’.
Viewed through money goggles, this ‘double-counting’ dilemma appears to be a reasonable issue with practical application of Scope 3. Here’s the logic:
- A construction company’s carbon footprint must now include the emissions of all the steel and cement that arrive at their factory gates.
- A rock band or sports competition’s carbon footprint must now include all the travel emissions of all the fans who attend their events.
- A home care company’s carbon footprint must now include the vehicle emissions from any employees, full-time or part-time, they pay mileage to use their own vehicles to visit their clients.
Where does it all end? To measure the carbon footprint of any business, institution, or country, won’t we have to ultimately measure the individual carbon footprints of all 8.2Bn humans on the planet?
To businesses, this feels overwhelmingly impossible, like measuring a coastline in ever-more fractal detail, as impossible to calculate as measuring the contours of every grain of sand.
This analogy also reveals the key difference between the make-believe world of money and the real-world challenges of carbon reduction. Financial accounting can’t permit any infinite value, or wild guesswork; the real world does.
We can navigate our planet perfectly well without knowing the length of coastlines to the last decimal place, so long as we get from A to B.
For the climate crisis we know A is where we are now, and we know B is net-zero emissions. The sooner we stop dithering, cease adding more greenhouse gases to those we’ve already transferred there, and start sucking some of the carbon back down into the ground, the less we’ll damage our human civilization.
The point of financial accounting is to get all the inputs to balance, so the system of promises doesn’t collapse. It’s just numbers.
The point of carbon accounting is to facilitate the most rapid mitigation of the worst effects of human-induced climate change on human civilization. It’s just lives.