Pricing the True Cost of Greenhouse Gas Emissions

With less than six years to reach the UN’s 2030 target of halving global greenhouse gas emissions, governments have started implementing mandatory emissions disclosures. The idea is that firms will be incentivized—or disciplined—by the market. It’s a bold idea, but will it work?

The promises and challenges of such emissions disclosures were explored at The Hong Kong Jockey Club Programme on Social Innovation’s recent Social Impact Leadership Series event, “The Economic Trade-Offs of Mandating Emissions Disclosures.”

The event featured a brief presentation of research findings from Haresh Sapra, the Charles T. Horngren Professor of Accounting at Chicago Booth and the inaugural Raymond Hung Faculty in Residence in Hong Kong. After his talk, Sapra moderated a panel discussion with experts sharing their perspectives on corporate greenhouse gas disclosure and reporting in Hong Kong. The panel featured:

• Mark Harper, Group Head of Sustainability, John Swire & Sons (H.K.) Limited
• Kamran Khan, Managing Director, Head of ESG for Asia Pacific, Middle East and Africa, Deutsche Bank
• Christine Loh, Chief Development Strategist, Institute for the Environment, HKUST
• Hendrik Rosenthal, Director, Group Sustainability, CLP Holdings Limited

Understanding Risks

Sapra’s research focused on the implications and implementation of global standardized frameworks set by Greenhouse Gas Protocol, an international organization that divides emissions into three categories:

• Scope 1 – emissions from sources controlled or owned by a firm
• Scope 2 – emissions from purchased electricity and power used by a firm
• Scope 3 – emissions produced along a firm’s supply chain

Sapra said that mandatory disclosures could give the market a better understanding of a firm’s “physical risks”—defined as the contribution to acute climate events such as flooding, drought, and rising sea levels—and “transition risks,” or the risks a firm takes when moving to a low-carbon system.

Noting that these reporting requirements paint a real picture of a firm’s activities, allowing the market to price these risks appropriately, Sapra said that it is important for firms to disclose all three kinds of emissions, despite the extra work required for Scope 2 and Scope 3.

Enforcing Emissions Disclosures

Mandatory emissions disclosures in places such as the European Union, Singapore, Hong Kong, and the US state of California focus on all three kinds of emissions. US federal regulations, in contrast, are only set to target Scope 1 emissions (from sources controlled or owned by the firm) because of the difficulty of measuring Scope 3 emissions, which are produced along the supply chain.

Sapra warned that the US approach of focusing solely on a firm’s individual emissions could lead to unintended consequences because it would not give a full picture of the firm’s carbon footprint. He noted that Scope 1 and Scope 3 emissions should be thought of as complements, not substitutes.

He said measuring emissions could also become easier with more global coordination and uniform standards. “The only way I think we can tackle climate change is to have one set of uniform standards. Uniformity comes with sunk costs, but the cost of climate change is just too high,” he said.

From Setting Benchmarks to Widespread Adoption

Loh said that setting targets is only the beginning. She said jurisdictions like Hong Kong have set mandatory reporting for publicly listed companies, but the next step is to encourage small and midsize private enterprises (SMEs) to tackle their emissions.

“There are lots of tools out there for people to calculate carbon emissions,” she said. “The challenge now for us and the regulators and institutions in Hong Kong is getting SMEs to know about and use the tools.”

Emissions as Another Business Cost

Khan said that climate risks should be accounted for in much the same way as any other business cost, such as travel to client meetings.

“We are in this mess as a global civilization because we have had a regime that has allowed people to externalize the cost of pollution, while internalizing all the gains to themselves,” he said.
Khan said that the entire financial accounting completely disregards the cost of pollution. “That’s really where we need to focus,” he said.

Setting Private Sector Targets

Harper said that the Swire Group has already felt the adverse impact of climate change across its business operations, particularly in places such as China, which saw record flooding, drought, and heat waves over the past two years.

“This focus on short-term return is dangerous for the planet, but also dangerous for the economic well-being of the businesses we operate,” he said, adding that the company had survived for 200 years by focusing on long-term thinking.

Swire is tackling its greenhouse gas emissions by setting an internal carbon pricing system within its business operations, he said, by requiring detailed energy and waste emissions plus CapEx planning from its divisions, and tying targets to CEO and management remuneration packages.

Transitioning to a Low-Carbon Future

Rosenthal said CLP Holdings plans not to invest in new coal operations and to phase out all coal assets by 2050.

He said the company was aware that global temperatures could rise more than 1.5 degrees Celsius by the end of the decade—the benchmark set by the UN to mitigate the impact of climate change—but that action can still be taken to keep temperatures as low as possible.

“We are well aware we are not meeting the 1.5 degrees target, which is very difficult for many, if not all, companies. But we have improved, and we are on the right path. We will continue to review our targets every three years, and we have set really ambitious new targets in terms of renewable growth,” Rosenthal said.