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During one of the first episodes of this show, we mentioned the carbon accounting concept of environmental liability (E-liability). E-liability introduces a simple, accurate, and verifiable calculation for the total cradle-to-gate emissions of any product or service. On that earlier episode, we voiced a bit of skepticism about the concept … and guess what … the people at the E-liability Institute were listening. They got in touch and offered to have one of their co-founders join us on the show to do a deep dive on a concept that stands to revolutionize the carbon accounting landscape.
Karthik Ramanna is the Co-founder and Principal Investigator at the E-liability Institute. He’s also the Professor of Business & Public Policy and Director of the Master of Public Policy Program at the University of Oxford’s Blavatnik School of Government. Karthik explains the basics of E-liability and makes the case for why companies, standards setters and regulators all around the world should be familiarizing themselves with concept of E-liability.
More resources
Inaugural E-liability Conference
Harvard Business Review: Accounting for Climate Change
Harvard Business Review: Getting a Clearer View of Your Company’s Carbon Footprint
Show Segments
Sustainable or Suspicious – (2:39)
Paris skyscraper ban
Top Headlines from SmartBrief on Sustainability – (13:05)
The kids have had enough — climate lawsuit comes to trial
Fungi play a major role in combating climate change
York, Pa., works to eliminate plastic waste
Here and There – (24:56)
European soccer and sustainability
Highlights from Karthik Ramanna
What is E-liability? – (31:51)
Smartphone supply chain as an example for E-Liability – (33:57)
Pilot project with Giti Tire Group (40:03)
E-liability vs. Other carbon measurement approaches – (43:00)
Plugging supply chain carbon accounting gaps – (43:48)
If Karthik was king for a day – (46:02)
E-liability’s compatability with existing standards – (48:40)
What is preventing wider adoption of E-liability? – (50:22)
Engaging with regulators – Upcoming conference – (53:46)
Karthik’s bold predicitons – (58:10)
Sign up for the SmartBrief on Sustainability newsletter
Transcript
(Note: This transcript was created using articficial intelligence. It has not been edited verbatim.)
Sean McMahon 00:09
Hello everyone and welcome back to the sustainability smart pod. I’m Sean McMahon and I’m joined by my three co hosts, Evan Milberg, Jaan vanValkenburgh and Karen Kantor. How’s everyone doing today?
Evan Milberg 00:22
I’m doing fantastic. Sean, my daughter just graduated a three year old preschool class. So we’re in high spirits here.
Sean McMahon 00:30
Nice. Jaan, how are you?
Jaan vanValkenburgh 00:32
I’m in high spirits without having a graduation.
Sean McMahon 00:36
Karen, what’s new?
Karen Kantor 00:38
Not anything interesting here, but I’m great, Sean, thank you.
Sean McMahon 00:42
Well, it’s always great to have the whole sustainability smart pod gang together. And we’ve got a great show lined up today. For our usual roundtable discussion. We’re gonna go to the City of Light, Paris for the sustainable or suspicious segment, checking with Karen for the top headlines, and then talk about the beautiful game of football, aka soccer, during Jaan’s here in their segment, then be sure to stick around for an interview that will bring you up to speed on a method for tabulating greenhouse gas emissions, that might become a hot topic in the very near future.
You see, during one of the very first episodes of this show, we mentioned the accounting concept of environmental liability, or E liability. E liability introduces a simple, accurate and verifiable calculation for the total cradle to gate emissions of any product or service. On that earlier episode, we voiced a bit of skepticism about the concept. And guess what the people at the E liability Institute were listening. It’s true. Their CEO Michael Mahoney got in touch and offered to have one of their co founders join us on the show as a guest. Well, we accept it. So coming up, you’ll hear an interview with Karthik Ramanna, Karthik is the co founder and principal investigator for the E liability Institute. And he also just happens to be the Professor of Business and Public Policy and Director of the Master of Public Policy Program at the University of Oxford’s Blavatnik School of Government. So yeah, Karthik has got a hefty resume, and he’s a busy guy, but he found time to join us. And I gotta say, he made a very clear case for why companies, standard setters and regulators from all around the world should be familiarizing themselves with the concept of E liability as soon as possible. So stick around for that conversation with Karthik. But right now it’s time to kick off our sustainable or suspicious segment. Jaan, I believe you have today’s topic for us.
Jaan vanValkenburgh 02:39
Yes, today’s article comes from the architectural magazine Dezeen. Paris has outlawed new skyscrapers, basically high rises above 12 storeys or 37 meters. The mayor has said this is part of her bioclimatic urban planning that sustainability for the rest of us. She has said it is to ensure Paris remains quote, attractive and pleasant in coming years despite the acceleration in the temperature. The public however, or at least many people who have been vocal believe that this is simply to protect Parisian aesthetics after they feel that it was threatened by the recent construction in central Paris of the tour triangle, which is 180 metre tall, mixed use thin glass triangle which they find a blight on the city. It should be completed in 2026. After a lot of controversy over it.
Evan Milberg 03:50
Yeah, I’m not terribly surprised by this not just from an aesthetic point of view, but also Paris’s positioning itself as as a car free city. And also its standing as the world’s eighth most sustainable city in 2022, according to Arcadis that said, I’m I’m pretty iffy on this particular idea. From an engineering perspective, building smaller makes sense because taller buildings face higher lateral forces from wind and seismic loads. And going smaller also means from a liability standpoint, you’re building risk into the process for the end user. So I like it in that sense. What I don’t necessarily agree with is this idea that building smaller means that you’re reducing emissions, you can still build a small structure with high embodied carbon going smaller doesn’t always mean going green. Karen.
Karen Kantor 04:44
Well, I did a little reading. And I found an article in a report in Nature magazine from last year. And it actually said that there was some sense in this. One thing that it pointed out was that this skyscrapers need heavier structures, thicker foundations and generally more materials with a higher carbon footprint than the lower buildings. So they seem to feel like that would be, you know, a good thing. And further, giving a little thought to this, having a bunch of skyscrapers in one place, as we New Yorkers know, can create some heat islands, especially if you’re surrounded by a lot of concrete, which they tend to be. And so the heat gets trapped and it’s warm. And last week, when we had the wildfires in Canada sending down some smoke, it was very clear that the smoke was not clearing out of New York City. The red sunsets were a big clue. Even just a few miles away in upstate New York, we didn’t have anywhere near as much smoke.
Sean McMahon 05:52
Okay, well, from my perspective, I think it’s just a matter of human habits that form around this building skyscrapers. We talked about the structural needs and the hydrocarbons involved. But ultimately, if you think about things like traffic, and where people are going to live, you know, if you have something like a downtown center in like New York, for example, you mentioned Karen, and everyone actually lives there and walks and doesn’t drive great. But if everyone’s driving around, traffic is a nightmare. That’s not good. So I don’t know, I think if you’re building taller buildings with houses, more people who actually live there and kind of keep their lives there. I don’t know. I think it’s, I’m on the fence on this one. I guess I’m always on the fence on a lot of these things. But I do kind of want to circle back to the point about the aesthetics of Paris and the tour triangle, you’re talking about Jaan. If memory serves, I think the Eiffel Tower was initially considered an eyesore.
Jaan vanValkenburgh 06:42
Everything is an eyesore in Paris, except for Paris. Except if it’s from if it’s Notre Dame.
Sean McMahon 06:51
Yeah, it’s I think the tour triangle just needs to wait, you know, a few decades or maybe a century and people will see it as like, this majestic place where romantic couples go to hang out. And, you know, little known fact I’ve never shared with you guys, I proposed to my wife in the shadow of the Eiffel Tower. So oh, maybe next century people will be. There’ll be marriage proposals right next to the tour triangle.
Jaan vanValkenburgh 07:14
A great picture of potential on that.
Evan Milberg 07:17
I definitely liked the im Pei aesthetic to the triangle. We have a lot of that in Washington, DC. So I like the aesthetic. Center. Why?
Sean McMahon 07:27
Okay, well, I think it’s time to go to the judges on this one, to see whether it’s sustainable or suspicious. Jaan, did you introduce this? Why don’t you go first,
Jaan vanValkenburgh 07:36
it is suspicious only because I do understand that building taller, takes more materials and so forth. But you can be sustainable and still build up and building low, doesn’t make you more sustainable, it makes you low. I think this is for aesthetic purposes, because Paris doesn’t want any skyscrapers anymore. And they like it to be the romantic, centuries old feel that it is. And I can completely understand that. But just say it just be clear. Because if the mayor’s got a great plan to make Paris climate friendly, or, and reduce carbon emissions, taking cars away from shampoo, to say all of these different things that she’s been doing, are really fantastic. You know, increasing the green space, all of these things are going to make Paris fantastic. It’s going to make it a great place to visit and a great place to live all of the changes that she’s making, and it’s going to be good for the environment. However, I don’t think she’s doing this for the environment. She’s doing this because some poor regions got upset, because it’s got a new building. Everybody gets upset about a new building in their backyard, everybody, it when it’s modern, when it doesn’t fit, but that is being genuine to the period that you are in. And so I can appreciate different architectural styles. This is an architectural taste question. And it’s not about sustainability. So I don’t think that this is sustainable
Sean McMahon 09:11
care. What’s your vote?
Karen Kantor 09:13
I always Buck everybody. I am going to say sustainable, but because I think my definition of sustainable might be a little broader than Jaans. I think that considering how it affects airflow, as well is how it is built is you know, I think it’s a reasonable thing to do and the fact that skyscrapers especially if they’re grouped together, cause these heat islands even if you don’t have a lot of cement below them, and the air becomes trapped and you have problems with air quality. You know, I don’t think keeping the Height of Buildings down is a complete solution, but I also think it could be part of the solution.
Sean McMahon 09:56
Evan, where do you come down on this one?
Evan Milberg 09:59
I’m back surely gonna, I think surprise a couple of you guys, and I’m gonna say it’s sustainable. And I know, everything I just said sounds counter intuitive to that. But hear me out. When you’re building smaller, you’re reducing the risk of rework, you’re reducing the risk of catastrophic failure. So anything that you can do in my mind to reduce rework, and reduce having to build things up again, in the event of a hurricane, or, or what have you, I think that makes it very sustainable. I do agree with Jaan, though, that the reasoning behind it is suspicious. I do think they need to be more upfront about the fact that they just want to preserve the Parisian skyline. So that part, I think, casts a shadow on what is otherwise a good idea.
Sean McMahon 10:54
All righty, I’m going to come down on this one on the sustainable side as well. Sorry, yeah, you’re on your own here. I do think the motivations that you laid out Jaan are true, I think Persians want to keep the skyline as clear as possible. Ave mentioned Washington, DC, I happen to think Washington DC as one of the most beautiful Skylines because it doesn’t have dozens and dozens of massive skyscrapers, it’s just very unique. And when you’re in that city, you’re never feeling like you’re in a canyons of concrete, there’s an intimacy to DC. Yeah, if it’s a sunny day, you might actually see the sun. So I think that’s what people are kind of going for in Paris, and the mayor is kind of hiding behind the sustainability part of it. But I do think we’re all gonna be better off if we have smaller buildings, what I wish is that some organization out there around the world or, you know, Green Building Council or something like that, would tell us what’s the Goldilocks height? Right? At what height is the building kind of tip past being optimal, you know, for all the reasons we’ve talked about here requiring too much concrete and all these things. And then anything up to that, we could kind of feel like we’re in a good spot.
Evan Milberg 11:59
So I love that point, for a number of reasons. One is that there is no such thing as a Goldilocks number in engineering, there just isn’t, because you have different ground conditions to consider different material availabilities that you might be working with. I would also note that this is happening in Paris, where the Paris Agreement happened. So yes, yes, Jaan and eyes point about building smaller doesn’t necessarily mean you’re reducing carbon, I would certainly hope that there are enough builders in the city of the Paris agreement to know that you need to have proper airflow within a building, that you need to use solar reflective materials that you need to use low embodied carbon concrete. So I think there’s a little bit of common sense that maybe we’re not assuming Paris has with this, but they probably do.
Sean McMahon 13:02
All righty. Well, we’ll see how this one plays out over in Paris. Now it’s time for the next segment of our show. This is where Karen comes in with top headlines from the smartbrief on sustainability, which is the newsletter you can sign up to receive by clicking on the link in the show notes. Karen, were the hot topics this week. Okay,
Karen Kantor 13:19
Shawn, I’m gonna start out with the article that I think was the most interesting this past week. And that is that as I say, in the headline, the kids have had enough and there is a climate lawsuit in progress in Montana. Now lawyers for the environmental group, our Children’s Trust, are suing the state of Montana. And that’s being covered pretty much everywhere, but where we pulled it from was the Associated Press in the New York Times. So these kids ages from five to 22 are saying that the state is harming them and their futures by choosing the interests of fossil fuel companies over the health of the citizens of Montana. And in this state, they may actually have a case because Montana’s constitution says that officials should maintain a clean and healthful environment in Montana, for present and future generations. Now, the outcome of this trial is really going to be pretty much symbolic because the judge can’t tell the officials in Montana to stop with the drilling or the chemicals or anything else that’s going on that these kids are pointing to. But I think that companies and governments around the world are paying attention to this because they’re bringing up some pretty good points. And this is not going to be the last lawsuit. It is in fact, the first of a series of them being brought by our Children’s Trust across the country. The kids may not get very far, but they’re going to make a lot of people uncomfortable.
Jaan vanValkenburgh 14:54
I remember seeing an article before this, and the quote is from one of the your articles, but there was it’s been mentioned. And another thing that I read, Montana’s emissions are simply too miniscule to make any difference is what the Assistant Attorney General for the state said, climate change is a global issue that effectively relegates Montana’s role to that of a spectator. Talk about shooting yourself in the foot. I mean, that’s just ridiculous. I mean, I thought the whole idea was, everybody kind of plays their part. And that’s, that’s their argument, which is hysterical and alarming. To me.
Evan Milberg 15:38
What I love about this is, is that in general, kids don’t have a ton of means to hold adults accountable, really, for anything when it comes to their bad and selfish decisions. I think even if kids haven’t fully matured, their voices matter. And having that acknowledged legally is important. However, the idea
Sean McMahon 16:01
of and you always have it, however, and I love it, bring it on,
Evan Milberg 16:05
I have the best. However, in the game shine Did you are the best however, in the game, don’t sleep on me know. Now. However, the idea of enlisting a five year old in a legal battle is really giving me the IQ, especially if that kid doesn’t have the wherewithal to fully consent, same up. So that aspect of the trial, I think, feels very performative on behalf of the kids parents, but I do think it’s a great learning experience for older kids who genuinely understand and care about the science behind climate change.
Sean McMahon 16:41
However, I’m gonna push back on you that for one specific reason that just happens to be timely. Just this morning, I saw a news story about Greta Thornburg, right, the youth climate activist, and I say youth because she’s getting older. Right? And so when she first hit the scene years ago, oh my gosh, there’s this young teenager, whatever, this is amazing. But as we all do, she’s gotten older. And so suddenly, she doesn’t get that little kind of mention all the time. She’s just gonna be this total force of a young woman like out there doing things, but the cuteness factor is gone, and the novelty wore off. So I think that by selecting a five year old, and knowing how long court cases take to whine their way through the system, these attorneys were like, hey, if this takes 10 years, this kid will still be 15. Oh, my God. Are you and I’m absolutely suggesting that lawyers could be that cynical because I think it’s totally true.
Jaan vanValkenburgh 17:44
Wow. I think you got cynics on both sides.
Evan Milberg 17:47
Next Level exploitation?
Karen Kantor 17:49
No, I think the oldest the oldest kid in this is 22. So I think Sean’s right. Yeah. And I don’t think it’s I don’t think it’s necessarily, you know, a bad thing. Chances are this five year old would like to breathe clean air.
Evan Milberg 18:04
But does the five year old want to be involved in a drawn out legal battle that consumes most of their childhood? That’s my question.
Jaan vanValkenburgh 18:12
It’s a gimmick. Of course, it’s a gimmick. And so what it’s a gimmick, the fact is this organization has filed suit the same suit basically, in every state, most of them have been thrown out. They never made it to court. It’s only Montana that has this this clause in their state. And I think it’s it’s going to cause a good discussion. What it’s going to actually create an actions. I don’t know. We’re talking about it.
Sean McMahon 18:42
Well, I guess we’ll see how that court case plays out. Karen, what’s our next story?
Karen Kantor 18:47
This story comes from the hill, also a fun one. And that is about fun, guy. Fun guy apparently are playing a major role in combating climate change. Fungi absorb 36% of the world’s fossil fuel emissions every year. According to a study in Current Biology, the level is enough to offset China’s annual carbon emissions, which I just can’t even picture all the fungus that must be involved to be doing that. Just incredible to me. The authors of this study are saying that this is a blind spot in carbon modeling, just because nobody thinks of it. They’re all underground doing their little fungi thing.
Jaan vanValkenburgh 19:29
You don’t hear about it because you think of mushrooms as smelling bad. And they’re moldy and disgusting. And that’s actually one of the problems with it because they’re bad with water. The fibers in fungus are in the mushrooms don’t have a good water resistance. And over time, they mold so it’s great as long as they don’t get wet, which is a major problem everywhere.
Karen Kantor 19:56
But mold is also a fungus.
Evan Milberg 19:59
Go Oh Well, we have we have good fungus and we have bad fungus. Of course,
Jaan vanValkenburgh 20:03
that’s an excellent point. But I’m not going to build my home out of mold.
Karen Kantor 20:07
But you don’t need to. Because the mold? I mean, I think a lot of the fungus is underground. I mean, sure, they are coming up with bricks and integrated circuits that use fungus. And that’s very exciting. But I think most of the fungus is underground. Doing things like connecting everything. And if you’ve read about the trees, the largest organisms on Earth are fungus. And, you know, I’m glad they’re doing their part because they live here too. And they should pull their weight.
Jaan vanValkenburgh 20:37
Back. That’s good. That’s big of you.
Evan Milberg 20:39
Know, Jaan, I’m, I’m glad you said you wouldn’t build your house with fungus? Because obviously, you wouldn’t build a house with fungus on its own. But what if you put it in concrete? I mean, you know, we’ve had, we’ve had plenty of articles in smartbrief for civil engineers that that focus on studies that focus on bacteria as a catalyst for self healing concrete. So what I would personally love, I know, this is about just just the raw underground fungi. But what I would really like to see is a more comprehensive study about the estimates of emissions reductions, using fungi across multiple industries, I think that could have a lot of value.
Jaan vanValkenburgh 21:24
I think the most interesting part to me, and the possibility is the self healing, which you just mentioned, right? The self healing bricks of funky, because that’s a big trend, if you had self healing, that would be amazing. Think of the bridges and everything like this. And I did mention that it’s bad with water. Obviously, that’s something that has to be considered. But it’s also a really incredible insulator. So it’s going to support sustainability, your heating, your climate control inside whatever building it is, for example, would benefit.
Sean McMahon 22:01
Well, before we move on to the next story, Karen, I want to point out Jaan, you’re gonna get a lot of hate mail from all the Smurf fans out there. I mean, they got no problem building homes out of mushrooms on that show.
Karen Kantor 22:13
And they were adorable. All right, carrying what’s next. What’s next is a story from the York dispatch in Pennsylvania. Now, that town is trying to make themselves the first plastic free municipality in the US. The city has given residents bags and drop off sites where they can collect plastic waste, and I mean, all kinds of plastic waste that you can think of. They don’t just want to take the ones and twos, they’re going to take everything. They’re working with an organization in Costa Rica, called the Center for Regenerative design and collaboration. And they are going to take all of this plastic and use it to make building materials.
Jaan vanValkenburgh 22:57
This sounds fantastic. I love that they’re getting people involved. Sometimes you need a specific goal, to get people to recycle. So fantastic. However, the her goal to be the first plastic free municipality in the United States, as my dad would say, fat chance. And for once, I would agree with him on that.
Karen Kantor 23:20
However, let’s give them credit for at least trying something. Yeah. And the fact that they’re pulling in plastic films and teeny tiny plastic whatnots probably, you know, old toys and whatever. The fact that they’re tossing all of this in there and making something useful out of it. That can itself be recycled. I’ll give them some credit there. I am reluctantly impressed.
Evan Milberg 23:45
Yeah, no, I mean, like many stories we come across here, I love the idea. I hate the marketing to support it. Right, you’re not going to be as Jaan said, You’re not going to be a plastics free city, just like Amazon HQ to is not going to be a fossil free building. That said, scaling up the use of recycled plastic as an additive and concrete is a great idea and should help in reducing consumption of emissions heavy Portland cement. But Karen, as you’ve mentioned before, like anytime you bring up shredding and plastics, in the same sentence, you have potential to exacerbate the emissions issue, especially if you’re crushing operation leads to these mass releases of microplastics. So I have to say from an engineering perspective, using plastics in this way is also relatively unproven. So I just hope that they have a plan to ensure the seismic and water resistance of all of these structures. But yeah, I also like from just a governmental collaboration standpoint, the idea that this this small town in Pennsylvania is is teaming up with Costa Rica so that that warms my heart.
Sean McMahon 24:56
Okay, now it’s time for a segment we call here and there Jaan always takes us somewhere around the world where there are cool things happening when it comes to sustainability. Jaan, where are we going today?
Jaan vanValkenburgh 25:07
This episode we’re going back to Western Europe. Now all of you know about soccer. But outside of the United States, professional football has almost cult status. It’s like if you took American baseball and American football and combine them together, and then you had rival towns next door to one another, at a professional level, combating on the playing field, the players are rockstars, they are paparazzi fodder. It is a real lifestyle. And it’s it’s hard to understand it think the TED lasso show that’ll give you a taste for it. But it’s big. So recently, in the last, say, 12 months, European football, soccer, has been doing some what some are calling sustainability posing, which is trying to show that they’re being sustainable. You could argue, though, that the things that they’re doing are not reducing any carbon emissions, or they’re doing it only in small levels. I would argue, however, that their actions can be uniquely influential just because of who they are and the influence they have in every day. This is why advertisers love them. So sustainability needs some rock stars have their own look to these football players. Just some points. Last year, there was a UK team reading that added the climate stripes to their uniform onto the arm. You remember the climate stripes, the warming stripes, each little line that’s vertical is either blue, and then it gets red. It’s representing 1850 to 2018. When it came out before the pandemic, that was pretty cool, but I haven’t thought about it recently. Now I am thinking about it. Because of that. It’s getting it into the conversation. Again, stadiums are advertising that they’re not advertising, but letting us know that they’re using LED lights stadiums are using renewable energy. This year, there’s a Spanish team, a football club, Barcelona, that for the first time the players ditched their private jet that I mentioned rockstars and took the train to a match which was outside Milan. That’s a two and a half hour train ride. It was chartered. And so that’s less sustainable. But this club now has a sustainability director. Last year, the club started calculating its emissions, which again, doesn’t cut emissions. But that’s a step and they’re letting people know about it. There’s another Spanish team in Seville, that the football teams are now going to be traveling to all Spanish matches on high speed train the same train that Barcelona is taking. And fans are given discounted train tickets to the matches. There are also been some symbolic climate friendly actions, vegan food served at stadiums, players cycling to training. Again, this seems like a really small thing. But they’re photographed everywhere they go, somebody notices if they’re not taking their Ferrari to the training, they’re actually cycling instead. In Germany, the train system has this new system that for the region around a stadium, in a large region in Germany, for the three hours before the match. And immediately after the match. The train tickets are free. So they’re trying to well support their teams. Did I say that this was a cult, it is serious. But it’s also encouraging the use of public transportation. Now, if this feels a little bit, here and there, like a scattering of sustainability ideas, that is entirely true. And it’s one of the reasons why it feels genuine, and it should be building. On the other hand, you have FIFA, and you have the Union of European Football Associations. Both organizations have signed the UN’s sports for climate action pledge. However, I haven’t heard too much more about that. So for now, what we’re looking at is these piecemeal things and different clubs. When I say clubs, it’s professional teams, but they call them clubs, different clubs, taking actions and trying to do good. I do think that there’s an impact there.
Sean McMahon 29:50
All right, Jaan. You’ve touched on a sport that is near and dear to my heart. I know a few things about about the beautiful game of soccer and even a lot about FC Barcelona. I’m having lived over there and gone to a handful of matches. But there’s one team out there that I think you’re going to want to look up and maybe add to your list of clubs that are doing more on the sustainability front. And that’s the Forest Green Rovers up in England. In 2018, Forest Green Rovers became the first club in the world to be certified as carbon neutral. And this is under the guidelines of the UN’s framework convention for climate change. They also have a partnership with a clean energy and AV company called fully charged. And that’s actually the name of their field where they play. And so this club is trying to lead the way. I mean, they’re at a smaller, much, much lower level than FC Barcelona or Sofia and stuff like that. But they are leading the way and how game day operations and things like that can be carbon neutral, so I would point our listeners to that club as well. Well, hey, everyone, this was fun. I always enjoy catching up with everybody. Thanks a lot.
Now it’s time to learn more about environmental liability from Karthik Ramanna, as a bit of additional background information. In late 2021, Karthik and Professor Robert Kaplan from Harvard Business School, co authored an article all about E liability. That article which is entitled accounting for climate change, appeared in the Harvard Business Review, and really got the momentum going for the conversation around reliability. So we’re including a link to that article in today’s show notes, as well as a link to an update the team provided earlier this year. So if you care about climate change, dive on into those links, and enjoy this conversation. Hello, everyone, and thank you for joining me today. My guest is Karthik Ramanna, from Oxford. Karthik, how’re you doing today?
Karthik Ramanna 31:45
Doing? Well, thank you for having me.
Sean McMahon 31:47
Yeah, I appreciate you taking the time. And what I guess is the afternoon over in your timezone. It’s still early morning over here. We’re here to talk about E liability. We mentioned the liability on one of the first episodes of this podcast, and we had a few listeners kind of reach out and get get in touch and say, what is that? I want to learn more about that? So you’re a part of the organization. That’s the driving force behind this potential new concept in accounting? So walk us through it, what is the liability? Yeah, so
Karthik Ramanna 32:14
E liability is stands for E stands for environmental. So environmental liability, it’s an approach at measuring the carbon footprint embedded in any product or service anywhere in the economy. So as you think about sort of the standard approaches to GHG measurements, most people might be familiar with the GHG Protocol and the various scopes, these attempt to measure emissions at the levels of entities or even products. But from a top down perspective, they start with say approaches which look at estimates for particular regions or particular industries. And then, you know, try to imagine who are the suppliers and the suppliers, suppliers, and likewise, the customers and so forth, for any given entity. And then from that, they try to sort of assume what might be the emissions of a particular entity or indeed a product, ie liability, on the other hand, takes a very bottom up approach to this problem, it’s uses the same logic as say value added taxes, or uses the same logic as the financial accounting system to construct carbon footprints of any product or service from the bottom up. What that means is, in practice, we measure emissions at the level of individual transactions in the economy, rather than at the level of entities. And as you measure emissions at individual transactions, then you can aggregate them up to entity level emissions reports, you can aggregate them up to emissions at the level of entire economies, for that matter. And so in that sense, an E liability system can become a system that runs in parallel to GDP as a way to measure the environmental performance of economies in parallel to the economic performance of economies.
Sean McMahon 33:57
Okay, so let’s give an example here for the listeners, like pick a product, and how would it change as it moves through its supply chain? And how would the accounting for its emissions change from the system’s already in place?
Karthik Ramanna 34:09
Sure. So you know, take your smartphone, most of you probably have a smartphone on your desk or in your pocket. And that smartphone, let’s say it’s an Apple phone has 1000s of components in it. And those components are probably sourced across dozens, if not hundreds of layers of supply chain. And if you’re trying to say, well, what is the total emissions footprint of that smartphone when you bought in from the store? You might think that that is like a problem of insurmountable complexity that you will never be able to understand. What is that emissions footprint at a level of accuracy that would be needed to get what we call a full scope audit of that statement. And yet, somehow we are able to figure out what is the cost associated with that iPhone, although the figuring out what the cost of that iPhone is, involves the same level of complexity, right, so now let’s just take the process involved in assembling an iPhone. So let’s just say you You know, in an iPhone, you’ve got a certain amount of steel. And that steel in turn is sourced from some metallurgical coal. And that metallurgical coal is mined in a factory somewhere, let’s say in Australia, now and the process of mining that coal, I’m emitting a certain amount of emissions into the atmosphere, let’s say on a given day in a mine in Australia, I’m mining one tonne of metallurgical coal, and that one tonne of metallurgical coal is associated with, say, one tonne of co2 emissions, then what the system would do is that at every such direct source of emissions anywhere in a value chain, it would capture that and tokenize it. So for instance, that one tonne of co2 emitted would be tokenized into something like 1 billion tokens of emissions. Now, why do we tokenize it into these atomistic units? It’s because as that underlying one ton of metallurgical coal makes it into hundreds of uses in an economy, so some of that coal will be used in that eventually, in that iPhone, some might be used to produce a thermos flask, some might be used to produce a set of keys, some of that coal might actually driving this, this this video call that we’re on. So as that coal makes it into 1000s of uses, then that that atomized 1 billion tokens will find itself traveling into those uses. Just like you know, you can think of the original cost associated with that coal, being atomized and traveling through various elements of the use of that coal, eventually, when you’re on the back end, or the end of that chain. So for instance, you’re actually dealing with the finished iPhone, then what you’re doing is aggregating the tokens across all of the various sources of direct emissions in that entire value chain. So justice, you can say with a level of precision, that the cost of this iPhone is say $862, or whatever it might be, you can say the emissions associated with this iPhone is 400 million tokens or something like that you can you can put a really good number, a really precise and accurate number that can be audited. And you can do this, by the way with the underlying technology with any product or service in the economy. And the beauty of this is that this system can be basically assured are verified, just like financial statements are verified. And why does that matter? That matters because then you can start writing supply chain contracts to tell your suppliers and their suppliers, what are the you might have, say, for instance, a minimum quality specification, you might have a maximum cost specification. Likewise, you can write into those performance contracts in your supply chain, a maximum emission specification, something that can be assured and audited. So then this basically helps drive decarbonisation in a value chain. So basically, if you understand how vat or value added taxes work, then immediately you understand how the liability system works. And first and foremost, the liability system you want to think of as a management information system that provides you real time information on emissions of any purchase product or service in your supply chain so that you can drive decarbonisation decisions. So that’s how we want people to think of it.
Sean McMahon 38:03
Okay, thank you that that even clarifies tremendously for me, I’ve been trying to wrap my mind around this concept. And one thing I want to jump into there, you talked about kind of writing the contracts for suppliers and things like that. So I guess one approach would be you could also motivate those suppliers to drive down their emissions by saying, Hey, I know right now you’re using, you know, this source of energy for your plants. But if you turn to a renewable or something like that, that’ll drive the, I guess the total down is that correct?
Karthik Ramanna 38:29
Exactly, exactly. So you can use this basically, to motivate your suppliers and their suppliers to start decarbonizing their operations. You can also use the system to motivate your own production managers to start decarbonizing their operations. So one of the things we’ve been doing and we can talk more about the role of the institute that we found it to advance this practice, this method into practice is we’ve been working with organizations that want to actually pilot this approach. And sometimes organizations come to us with a problem. For instance, we’ve got a pilot that we’re just wrapping up with a large industrial company that makes electric generators. And one of the key components in electric generators is copper wire. And so part of the question that they were trying to figure out is, is it better to use recycled copper? Or is it better to use virgin mined copper in these electric generators? And the answer is, of course, it depends on the underlying process used to insulate the copper and its first use, and therefore, the underlying sort of incineration related emissions from recycled copper versus the processes used in the mind for Virgin copper. But if you start measuring these things, and holding basically suppliers in your chains to account for them, then you actually start driving this down. So what you might start off as initial bids on recycled versus virgin copper, you’d say, well, actually in a dynamic situation in real time, as you drive the system into your supply chain, people start saying, Well, next time around, I can give you a lower number because I figured out what the key sources of emissions are in my own processes, and I can cut back on those And that’s what we do with these pilots with companies now,
Sean McMahon 40:03
do you have example of any of those pilots or when you could walk us through? Yeah, sure. So
Karthik Ramanna 40:06
one of the first companies that did a pilot in this space was a tire company in Indonesia called GT tires. And I’ll talk about GT because their results are now in the public domain. And GT tires, basically, large manufacturer of tires for very large auto companies, and so forth. And their CEO saw the paper that we wrote the underlying reliability paper that we published in Harvard Business Review, they saw it and they said, Wow, this is great, we should try this. So they got their head of quality and innovation, to call us and say, I’d like to try this out. And of course, that guy was like, you know, how do I even begin, I’ve got hundreds of suppliers, and they’ve got a hundreds of suppliers and so forth. So we said, well, you know, in the first pass, if you’re the only tire company in the world that’s doing this, you don’t need to boil the ocean. So what we did was actually, we figured out that four of their 196 suppliers accounted for about 85% of their supply chain emissions. So he said, let’s just work with those four in the first instance, that’s the low hanging fruit, if you’re the only company doing it, just work with those four. And of those four, three, we’re actually quite interested in working with this company and saying, Well, if you want to start measuring stuff at the level of individual batches that we sell to you, then we can even offer you some emission savings in the next batch. That’s exactly the kind of conversation we want to see. And then when GT finally finished this pilot, they figured out well, this is what the emissions associated with standard passenger sedan car tire that we sell, say to a large automaker is, and then they were able to take that to the automaker, and the automaker was saying, Okay, well, what would it take to bring us lower emissions tire? Right? Okay, well, here’s what it would cost. Additionally, here’s where, you know, you could sort of build sort of a value added marketing around this with your customers and so forth. And so that then became, again, part of this dynamic conversation in the supplier customer relationship, where emissions becomes another unit of engagement, right? So one of the things that really excites me about this approach is it uses the competitive dynamic in companies and in supply chains to actually solve the most urgent problem on the planet, which is climate change. It says, rather than assume that companies will all come together and somehow magically hold hands and suddenly wish away the climate crisis that says, No, what companies are really good at doing is competing with each other over the performance of their products. So let’s build a real time accounting measurement system that allows them to do just that. And as they do that, then suddenly, their competitive instinct, their killer instinct, as companies is aligned to actually solve this problem. And that’s the kind of innovation that we’re seeing in companies now, especially in the leads to companies that are paying attention to this this approach.
Sean McMahon 42:53
You know, I can see how, you know, driving companies to compete with one another is one of the biggest, you know, biggest appeal of this, are there any other ways where E liability is better than standard carbon measurement approaches that are in place right now.
Karthik Ramanna 43:05
So look, the approach we take is the way at the end of the day, we say this is just basic accounting, financial accounting, that we’ve used for 500 years to measure inventories. And in sort of, you know, market societies, we’ve applied that to the climate space. So rather than measure things in, say, dollars, or euros, we’re measuring them now in kilograms of co2 emitted. So in some sense, without overstating the point, I mean, it’s hard to imagine how else you would do this, if you wanted to do proper accounting for GHG emissions, then this is the only way to do it. Because at the end of the day, this is just basic accounting that you would learn in an accounting 101 course applied to solve or applied to be addressed to the climate problem.
Sean McMahon 43:48
So there any issues with where, you know, going back to your coal example, there’s many, many links in that supply chain from getting into that phone? What if two or three other companies in that process aren’t participating in this? Like, how do you overcome those gaps?
Karthik Ramanna 44:02
That’s a great question. So part of the theory of change your is at this stage to work with leads to your companies. And that is to say, with companies that have a competitive production process, visa vie carbon emissions, so that they are able to produce the same output, but for lower emissions with the same quality and sometimes the same price even and to use them basically to drive the adoption of this, not just internally, but in their supply chains. But for this system to work at scale. And eventually, we do need to get to a place where standard setters and regulators start embracing this as well. I think the challenge with the current approach right now, the GHG Protocol, which is the dominant measurement approach in this space, is that it’s very well intentioned. I mean, certainly the the approach of the protocol and our approach is aligned in that we’re trying to address the climate crisis, but it has taken an approach that’s based really on what we call inspirational disclosure, rather than actual Well, accounting, right. So now if you give companies the choice of well, we can hold you to account for what it is, you’re saying, Your the progress you’re making on climate change versus will allow you to produce some, you know, sort of fuzzy top down estimate that, by the way, no one can ever assure in a true and fair sense, because it’s a fuzzy top down estimate, then, of course, most companies will choose the easier route, I mean, unless there is really sort of an internal intrinsic, competitive differentiation, or there’s some sort of regulatory mandate, you will choose the easier route. So this is where we say that we need to really get the standard setters in this space, to recognize that if we want to make true progress on climate change, we need to take away that easy, cheap option away from companies in this space. And I think that that’s part of the long term transition that we need. Now, it can’t be very long term in the sense of, you know, we’ve got an urgent climate crisis to solve. So when I say long term, I mean, three to five year agenda. So somebody recently asked me, one of the regulators asked me if, if we were to make you king for a day, how would you implement this system. And basically, this is what I’ve suggested, by the way, no one’s offering to make me king for a day, this was just a hypothetical. But I said, Look, number one, announce as soon as possible, maybe as soon as next month, that for all fiscal years, starting after July 1 2026. So three years from now, any company in your jurisdiction that has over a billion dollars in revenue or equivalent, we’ll have to report under the liability system announced further as a second point that for all fiscal year starting after July 1 2029. So three further years after that, all companies will have to get full scope audits of their reliability reports. So you’re basically giving companies three years to produce their first statement, and three further years to get a full scope audit of it. That’s the six year runway, the third step is really critical to make this work, which is that for any company to whom you are a customer, that is any company that’s supplying into, that doesn’t happen to be using this system, then their inputs will be transferred onto your E balance sheets at the 99th percentile, or the 95th percentile of that products emissions category. Now, that’s the turbo incentive to work with your high emission suppliers to make sure they’re on this system as well. You don’t need to boil the ocean and make all your suppliers comply at once. But you say, Okay, who are those four suppliers that I really need to get on board, and I give them an ultimatum. And I say, Look, you may be in a jurisdiction that’s not embracing this. But if you want to conflict continue to supply to me, I’m giving you a six year window to get on this, if we’re able to create that sort of those rules of the game starting next month, then basically the competitive spirit and sort of you know, the competitive instinct that you see in companies will produce the decarbonisation incentives will produce the software that’s needed for this will produce the assurance products that’s needed for this. And in fact, we’re even already seeing a number of software providers that are producing solutions that will work for the liability principles. So I think we’re moving in the right direction, we just now need to overcome this sort of regulatory cheat option that’s available, where you can continue to sort of, you know, make up a number under scope tree, we have to take that option off the table.
Sean McMahon 48:25
I like how that using the 99th percentile will motivate companies to close that gap, like I was talking about if they have one or two holes in their supply chain. I also love your phrase, I think it was inspirational disclosure, is that we said? That’s correct. Yeah. Nice and cheeky, like that. But if we’re talking about disclosure, obviously, folks in this space know everything about scope one, scope two and scope three. So how does this change the game? And in terms of some of those, you know, protocols that they’re already following? Can you take this EA liability accounting practices and just plug it right into that?
Karthik Ramanna 48:55
Absolutely. So II liabilities, think of it sort of like as machine language code, right? It sits below all of these various disclosure standards, whether it’s the GHG Protocol, whether it’s tcfd, whether it’s IFRS, or the new issb, or whether it’s the new CSRD, you know, you name it, all of these, ultimately, if they if the focus is accuracy, they need to operate on an accounting system, which is basically what the liability principles are. So if for some reason a company says, Well, I really liked the scope, one scope two, scope three taxonomy, that’s fine, you can run the liability system, and then you can, you know, aggregate all of the various inputs, you get into a scope, one scope, two scope, three bucket, in fact, you can automate that process and you can do that you can do that up to scope three upstream. Obviously, anything that happens scope, creep downstream, is effectively what we call prospective rather than retrospective in the sense that anything that is scoped to the downstream for a company is in the future. And that’s, that’s where you leave the realm of accounting, and you move into the realm have sort of, you know, marketing, and companies can continue to sort of put that out there as part of their sort of, you know, again, aspiration or inspiration for what it is they like to do. But then that that goes out of the realm of what is accounting?
Sean McMahon 50:12
Okay, well, I gotta tell you, you sold me on this, it makes perfect sense. You know, the way you draw the analogy of we can track the cost of something that financial costs, why can we track the emissions cost? What’s preventing a wider adoption of reliability?
Karthik Ramanna 50:25
That’s a fantastic question. And, you know, one of the first people that hold us after we published the paper in November 2021, was the head of one of the large securities regulation agencies in the world. And he said, Hey, guys, this is a really interesting idea who’s doing this? And we have to say, well, as far as we know, no one’s doing it. We just ramped it up in our offices. And he said, Well, that’s a problem. You can’t build regulation around something no one’s ever done before. So why don’t you go get a few people to try it out, get a few companies to try it out. So that’s really what we’ve been focused on. So about six months ago, we created the reliability Institute, as a way to actually help companies and not just for profit companies, we help not for profit organizations, so health systems around the world, a small governments, etc, embrace this, our institute is, as I said, a not for profit, we give our time free to this initiative. And in return, what it is we want is to be able to publish the results of these pilot studies with organizations for wider consumption so that we can get other people to say, hmm, I could do this too. So now obviously, when we publish those results, we anonymize the actual emissions levels, because those might be proprietary, we have no interest in, you know, disclosing proprietary data, our goal is to get more and more people. So to sort of embrace this. So our theory of change is really to work with leads to your organization’s to drive the adoption of this, and then to be able to share the results of that with regulators with standard setters, so that they feel like this is the way to go. And my sense is that in I mean, the Institute is only six months old. So the institute was basically created as a 501. C three, we are incorporated in California, mainly because our founding donor was based there and very generously gave us the support of their legal resources to incorporate it, we run on a shoestring budget. And we have hired now our first full time CEO to drive the volume of pilot requests that are coming our way. And our CEO has actually been able to triple that volume very quickly, which is good news. We also have a small research staff to support effectively our activities. Because you know, my co author and I Bob Kaplan is my co author at Harvard Business School. And I’m here at Oxford, we’re both professors, we have day jobs. And you know, I mean, we we’ve said actually to all the regulators and standard setters we’ve spoken to, we have zero interest of wanting to be standard setters, we’re academics. So the sooner they embrace this, the better because then we can go on to write our next papers. But until they do, we’ve made this a priority for our action research, which is to get as many people into this and embracing this so that we created a critical mass. And obviously, because we are supporting the pilots pro bono, which is to say that we don’t charge the companies for the advice we give them. And the reason we don’t charge them is we want to be able to have complete integrity and publishing whatever it is, we find rather than, you know, the company’s sort of feeling like they can control what we say. So we have to find some way of paying the bills. And we’ve basically relied on philanthropy. So if you have any wealthy friends or foundations that are interested in supporting our work, then please email us. If you can go to E dash liability dot Institute, you will find out more about how to reach us.
Sean McMahon 53:43
Okay, great. We’ll be sure to put a link to that on our website as well, for the show notes. Is there an opportunity for you to get with more regulators? I know you mentioned one regulator who you chose to keep them nameless. So I won’t name who I think you were talking about. But is there a chance for you? I mean, obviously, Oxford, Harvard. I mean, those are some names that if you had some kind of symposium and invited all the regulators from around the world, just to kind of basically do what you’ve done here today. Let’s walk them through this process. Is that something on the radar screen?
Karthik Ramanna 54:10
Absolutely, it is on the radar screen. So in fact, we are running the first e liability workshops. So that will be on the 27th, the 28th of June. That workshop really brings together organizations that are in various stages of this pilot process that I described, really to share best practices to share candidly what’s working, what’s not working, where they’d like to see more help. And we’ve also invited a few key regulators to come attend that really on a listening tour and really also to ask questions of the pilot companies of us as well. So we’re keen to engage with anyone who’s willing to the conference itself the workshop is invitation only because we’re a small not for profit. We have no resources, really to speak up. So we can’t afford to have a large setting or anything like that. But you know, if you’re in interested, then go to our website, which is E dash liability dot Institute and there is an application form that you can apply to attend the workshop and our team there will be in touch with you, we think that there’s a way to make it work is that in person or virtual or in person in London as part of the London Climate Action Week. And so we will certainly try to do more of these workshops as we have more information to share. But we really take our initial sort of, you know, conversation with that regulator that I mentioned, who said, Get a few companies to try this out and share the results. We’ve taken that very seriously. That’s why we created this institute. So our goal is really to drive as much high quality research into this as we can, and to make that research all in the public domain as quickly as we can, so that we can get, you know, the regulatory conversation going. That said, I mean, we’re academics. So you know, it is we have no power in this process, other than the power to do research, and and then it’s really up to the political forces at play to determine how this is embraced and adapted. Someone once asked me the question, this is such an obvious solution, of course, you’re going to succeed, why wouldn’t you succeed? And I said, Well, I can imagine one reason why we wouldn’t succeed. And that’s if the world is not serious about addressing climate change, because this solution really does require organizations to be held to account for their various netzero claims. And if for instance, we imagine for a moment that we weren’t serious about those claims, then why would we want such a rigorous system in place? And that thought has crossed my mind? You know, if you think about it today, when a CFO of an organization or well, actually CFOs are really smart, they don’t make this claim. But when any kind of organization makes a net zero claim. It’s sort of like, if a CFO would say our profits in the year 2050 will be one kajillion chinchillas. And you’ll be like, wait a minute, what is a kajillion? And what is the chinchilla? Like a net zero claim today is made in an unmeasurable unit of unmeasurable quantity. What this approach does is actually bring a rigorous measurement unit and a full scope audit to that claim, in a way that if someone is claiming to be net zero by 2030, that’s just impossible. Because we know that decarbonizing supply chains, to that extent, in such a short window, is almost entirely impossible, given how certain essential supply chains in the economy work. So now the purpose of having this kind of truth telling is then we can get realistic about what the budgets are, what actions need to be taken, etc, right? So if we’re collectively fooling ourselves into thinking, we’re managing this problem, then that’s a reason not to embrace a system like this. But if we want to get serious about it, then we got to start telling the truth.
Sean McMahon 57:53
Okay, well, I think you’ve done an excellent job of outlining this reliability for our listeners, I really appreciate that. It’s pretty straightforward. And seems like it’s a no brainer. I know, you mentioned that if you were king for a day, what you would do in terms of kind of setting out those three year and six year markers, I got some bad news for you, you’re not the king for the day. So I do want to ask you for like a realistic, bold prediction of say, you know, three, six years out? How many companies do you think will be using a system like this? By then?
Karthik Ramanna 58:23
I mean, look, my sense is, if we can sustain the momentum that we have going, it’s not unreasonable to imagine that we’ll have about 200 to 250 of the Fortune 500 companies in various stages of adoption of this in three years. That’s one theory of change. Well, that’s one path to success. If you’ve got half of the Fortune 500 embracing this, and you set up a equilibrium where high quality companies are doing this, then increasingly, people will start asking investors will start asking, governments will start asking, etc. Why is it that other companies are not doing this, and then this just becomes sort of the thing that needs to be done. The other reason why I’m optimistic is that in the European Union, they’re considering what’s called the carbon border adjustment mechanism, or C, bam. And if you’re going to tax the import of inputs based on their emissions intensity, then you need a taxable basis, and you contact something like scope three, because it’s not auditable, you can make up any number currently under scope three. So then what this would do is provide that taxable basis that would allow basically a CBM to operate. So if the European Union is serious about a CBM, then that’s another reason why something like this would get embraced would get adopted. So those are the two reasons why I’m most optimistic about it.
Sean McMahon 59:41
Well, Hey, Karthik, I appreciate your time. This has been eye opening for me, and I think our listeners will appreciate it as well. So thank you very much.
Karthik Ramanna 59:48
Thank you so much for having me.
Sean McMahon 59:57
All right, everyone. Well, that’s our show for today. Thank you all for listening. And if you haven’t already, please subscribe or follow this show on Apple, Spotify, Google or wherever you listen to your podcasts. And as always, please be sure to share it with your friends and colleagues. Have a great day.