Canada is about to sign onerous new standards for reporting emissions that will likely kill the fossil fuel industry. This proposed global core standard, called “one of the most significant innovations in accounting since the 14th century,” is currently in draft form and open for comment through July 29. As currently written, International Financial Reporting Standards (IFRS) and sustainability and climate disclosures are heavily biased against any type of emissions and will double compliance costs and increase the risk of lawsuits.
There are several ways the new standards penalize any company that produces any type of emissions.
The most obvious are the petroleum companies. The IFRS standard requires reporting of the total potential emissions included in a company’s hydrocarbon reserves to calculate its total emissions. The effect of this ruling would be to jeopardize energy security. What incentive should a company invest in exploration, development and addition to its reserve base if it means that lenders, insurers, and investors must calculate new reserves against it, making financing less likely? What needs to be calculated is net, not total emissions, but the standards do not provide any opportunity to calculate net emissions in the context of total 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 numbers. Such an approach does not enhance net zero, but rather codifies absolute zero.
Emissions metrics must take into account energy security, political stability, regulatory environments, and carbon capture technologies. The proposed standard does not. In fact, the stringent regulatory environment is seen as a risk, which makes it a liability for hydrocarbon companies, even though it is an asset for wind and solar energy. This approach may mean that a company operating in a country or region with less stringent regulations will be considered more preferable than a company operating in Canada, where the regulatory standards are more stringent.
The IFRS standard is intended to apply to the entire economy, not just large emitting industries. As Brian Moynihan, CEO of Bank of America, recently explained, “It has to apply to the entire economy…once you get it into accounting, all businesses have to do it, and there’s no debate.” This point was echoed by John Graham, CEO of the Canada Pension Plan Investment Fund: “It’s not about transitioning from fossil fuels to renewables, it’s about transforming the entire global economy.” To this end, the IFRS standard includes industry-based disclosure requirements in 11 designated sectors covering 68 industries, from consumer goods to agricultural products and health care to consumer services. Every aspect of business in the community will be affected in striving to report and ultimately reduce total emissions.
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Detailed accounting of total emissions is complex, with three different “bands”. Scope 1 emissions are those produced directly by the company; Scope 2 are the indirect emissions from the acquired energy used by the company; More importantly, scope 3 is all indirect emissions that can be associated with an entity through it The entire value chain. The IFRS standard requires companies to report on all three of these bands. Companies large and small are suddenly required to have detailed knowledge of the emissions input and output tables of all other companies with which they have any interaction, no matter how far away.
When reporting Scope 3 emissions, a company must calculate emissions from 15 different regions, including how its sold products are used and disposed of, with no requirement to address double accounting, or how to accomplish this complex and harmful exercise. The cost of compliance — the manpower and money expenditures to track and report all of this — would be staggering, especially for small and medium-sized enterprises. As always, the higher fixed costs of large regulatory commitments will benefit very large companies.
Another costly and time-consuming requirement is scenario analysis. This is a computer simulation to predict what could reasonably 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 all of this will affect the company’s strategy and bottom line. The potential unforeseen consequence is that the Company could be financially liable for any perceived errors regarding emissions, future economic developments, the weather, or the behavior and actions of those who use its products. Companies must also abide by the Paris Agreement’s arbitrary goals and accept responsibility for not meeting them, thus removing responsibility from governments that set these impossible goals.
By demonizing carbon dioxide emissions, any industry that produces or uses hydrocarbons will be seriously compromised, some reaching the point of extinction, which is why it is imperative that Canadian hydrocarbon companies and other affected industries provide feedback to IFRS before closing Comment cycle July 29th. As the ancient wisdom says, “He who is understood from silence agrees.”
Tammy Nemeth is a UK-based energy strategist. Her most recent report is the Counting of Carbon Molecules.