Measuring Greenhouse Gas Emissions: What Are the Costs and Benefits?

Lucas Mahieux, Haresh Sapra and Gaoqing Zhang

Journal of Accounting Research, 2025, vol. 63, issue 3, 1063-1105

Abstract: We adopt a financial‐materiality approach in studying the costs and benefits of measuring greenhouse gas (GHG) emissions on social welfare. Production by firms internally generates direct GHG emissions (Scope 1 emissions) whereas outsourcing to suppliers generates indirect emissions (Scope 3 emissions). Our analysis incorporates two frictions: (1) long‐term negative environmental externalities caused by emissions and (2) fragmentation in regulating emissions disclosures across jurisdictions. We show firms' failure to internalize the environmental externalities provides a rationale for mandating Scopes 1 and 3 emissions disclosures. However, such disclosures induce emissions leakage. Disciplining emissions leakage calls for setting complementary—rather than independent—disclosure requirements for Scopes 1 and 3 emissions. Our analysis underscores the importance of improving the reliability of Scope 3 emissions measurements given that measurements of Scope 1 emissions are highly reliable for public firms in Europe and the United States. Regulators can further enhance the disciplinary effects of Scope 3 emission measurements by requiring the allocations of Scope 3 emissions in supply chains to individual firms, especially when allocating Scope 3 emissions is more reliable, and for firms/industries that are more prone to transition climate risk relative to physical climate risk.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:63:y:2025:i:3:p:1063-1105

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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