American manufacturers investing in advance, clean technologies are well-positioned to gain a decisive edge in the global market. However, current carbon disclosure mechanisms do not accurately reflect the U.S.’s lower carbon intensity compared to major emitters like China, India, and Russia. While the Greenhouse Gas (GHG) Protocol provides a valuable foundation for emissions reporting, it could benefit from additional precision and credibility to better showcase these advantages. The E-liability approach can address these gaps by streamlining burdensome requirements, offering a more effective alternative that maintains the economic competitiveness of U.S. manufacturers, and improving business decision-making related to emissions.
Globally, regulatory bodies like the European Union’s Carbon Border Adjustment Mechanism (CBAM) and the U.S. Securities and Exchange Commission (SEC) rule on climate disclosures both exclude Scope 3 emissions, a large part of the GHG protocol, from mandatory requirements due to their complexity and potential for inaccuracy. Scope 3 accounts for indirect emissions throughout a company’s value chain, while Scope 1 and 2 emissions—direct emissions from owned sources and indirect emissions from purchased electricity—are relatively straightforward to measure. Relying on estimates for Scope 3 doubles compliance costs and gives companies the appearance of being environmentally conscientious without actual changes in supplier choice. This creates an uneven playing field, undermining the incentives for companies to purchase from low emission suppliers.
The Scope 3 design, which requires each entity to report on the emissions of others, not only results in multiple counts of the same emitting activities but also permits estimations based on industry-wide average figures— secondary data—rather than actual activities. The latter feature has significant consequences, leading to unfair emission accountability. It allows companies to appear to be improving their environmental performance without changing any practices, gaining unwarranted advantages in a market that increasingly prioritizes low-carbon products. In contrast, a company that diligently sources its parts from sustainable suppliers may not appear better on paper under the Scope 3 scheme, since it still relies on industry average data for its emissions report, despite its commitment to sustainability.
Such discrepancies can restrain innovation, as companies implementing costly emissions reductions see no benefit in reporting under the existing disclosure frameworks. For instance, a cement producer using lower-carbon materials may not gain financially from the practice since its customers might be unaware of the better performing record., The lack of precise data also leads to missed investment opportunities and financial risks, with investors potentially backing companies that appear “low-carbon” but conceal high embedded emissions. To drive genuine emissions reductions, businesses need a system that provides accurate, auditable, product-level carbon accounting, eschewing unnecessary overstepping reporting that no regulatory body is taking seriously.
The E-liability framework, co-developed by distinguished business school professors Robert Kaplan and Karthik Ramanna, proposes a fundamental shift in carbon accounting. By applying the precision and rigor of financial accounting to carbon emissions, their framework ensures accurate, auditable tracking across supply chains. In this context, “E” stands for environmental, and one metric ton of E-liability equates to one metric ton of GHG emissions.
Kaplan and Ramanna argue that an effective carbon accounting framework should mirror financial accounting principles to accurately reflect a business’s true environmental performance. Their approach is based on two core principles:
- Each entity should record only the emissions induced by their production or service, and
- Each entity should obtain their tier-1 materials supplier’s carbon emissions whenever a transaction occurs.
Achieving this level of product-level granularity enables a seamless transfer of emissions liability from producers to buyersThis recursive tracking ensures that every molecule of CO₂ generated along the value chain is attributed to a single entity, preventing any over-counting or underreporting.
By maintaining a carbon ledger that distinguishes between emissions from sourcing versus production, companies can generate standardized reports that transparency document their emissions liabilities. These liabilities are inherently reducible, as they stem from the entity’s decisions, such as choosing specific sources or adopting particular production methods. The framework incentivizes companies to reduce emissions, as those with lower-carbon products gain a competitive edge.
For instance, a cement company experimenting with low-carbon cementitious materials as a substitute for high-emission clinker would benefit from E-liability accounting. This system would allow them to demonstrate, with precise data, that a specific batch of cement has a lower carbon footprint than traditional products—information that buyers seeking sustainable materials can trust. Under the current mainstream disclosure scheme, such improvements may not be fully recognized or properly credited.
E-liability offers a practical next step in how we track and address emissions. By providing clear, real-time data and promoting consistency, it empowers businesses to act decisively on their carbon footprints rather than wrestling with unrealistic obligations. By realigning incentives for accurate emissions reporting, it could bolster manufacturers’ voluntary commitments, and reduce investment risks. This, in turn, fosters greater trust in the carbon-related information, provides a foundation for other market-based solutions to address carbon emissions, and spurs investment in sustainable technologies. As sustainability and low-emissions becomes a key area for competitive advantage, E-liability supplies a reliable framework to leverage innovation and market principles—laying the groundwork for a pragmatic, forward-looking approach to industrial decarbonization.