Canada is about to sign on to onerous new emissions reporting standards that are likely to kill the fossil fuel industry. This proposed global baseline standard, which has been called “one of the most important innovations in accounting since the 14th century,” is currently in draft format and open for feedback until July 29th. As currently written, however, the International Financial Reporting Standards (IFRS) Sustainability- and Climate-related Disclosure is heavily biased against any type of emissions and will multiply compliance costs and expand the risk of lawsuits.
There are several ways the new metrics penalize any company that produces any kind of emissions.
The most obvious involve petroleum companies. The IFRS Standard mandates reporting of the gross potential emissions embedded in a company hydrocarbon reserves to count against its overall emissions. The effect of this provision will be to jeopardize energy security. What incentive will a company have to invest in exploration and development and add to its reserve base if doing so means lenders, insurers, and investors must count new reserves against it, thus making funding less likely? What should count are net, not gross emissions, but the standards provide no opportunity to account for net emissions within the context of overall emissions. So, even if a company uses carbon capture or offsets that make it net-zero, there is no place in the standards to report this in the numbers. Such an approach does not promote net-zero, it codifies absolute-zero.
Emission metrics should take into account energy security, political stability, regulatory environments, and carbon capture technologies. The proposed standard does not. In fact, it regards a stringent regulatory environment as a risk, making it a liability for hydrocarbon companies, though an asset for wind and solar. This approach could mean that a company operating in a country or region with less stringent regulations would be considered more favorably than one operating in Canada, where regulatory standards are tougher.
The IFRS Standard is meant to apply to the whole economy, not just large emitting industries. As Brian Moynihan, CEO of Bank of America, recently explained, “It’s got to apply to the whole economy… Once you bring it into accounting, all companies have to do it, there’s no debate.” This point has been echoed by John Graham, CEO of the Canada Pension Plan Investment Fund: “This is not about transitioning from fossil fuels to renewables, it’s about transitioning the entire global economy.” To that end, the IFRS Standard includes industry-based disclosure requirements in 11 designated sectors covering 68 industries, from consumer goods to agricultural products, health care to consumer services. Every business aspect of society will be affected in the quest to report and ultimately lower gross emissions.
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Detailed accounting for gross emissions is complicated, with three different “scopes.” Scope 1 emissions are those produced directly by a company; Scope 2 are indirect emissions produced from acquired energy used by a company; and, most significantly, Scope 3 are all indirect emissions that can be linked to an entity across its entire value chain. The IFRS Standard requires companies to report on all three of these scopes. Businesses large and small are suddenly required to have detailed knowledge of the emissions input-output tables of all other companies they have any interaction with, however distant.
In reporting its Scope 3 emissions, a company must account for the emissions from 15 different areas, including how its sold products are used and disposed of, with no provision to address the duplication of accounting, nor how that complex and pernicious exercise would be accomplished . The compliance cost – the expense in manpower and money to track and report all of this – will be staggering, especially for small and medium-sized enterprises. As always, the high fixed costs of substantial regulatory obligations will advantage very large businesses.
Another costly and time-consuming requirement is for scenario analyzes. These are computer simulations to predict what could plausibly happen in Canada and the world between now and 2050 (using inputs ranging from potential future emissions to weather changes based on IPCC assessments) and how it will all affect a business’s strategy and bottom line. A potential unforeseen outcome is that a business could be made financially liable for any perceived misstatement about emissions, future economic developments, weather, or the behavior and actions of those who use its products. Companies must also commit to the arbitrary Paris Agreement targets and accept liability for not meeting them, thus removing responsibility from the governments that set these impossible targets.
Through the demonization of CO2 emissions, any industry that produces or utilizes hydrocarbons will be seriously compromised, some to the point of extinction, which is why it is imperative that Canadian hydrocarbon companies and other affected industries submit feedback to the IFRS before the comment cycle closes on July 29. As the old maxim says, “One who is silent is understood to agree.”
Tammy Nemeth is a UK-based strategic energy analyst. Her latest report is Counting Carbon Molecules.