Carbon accounting is becoming more and more popular among businesses and financial institutions. It’s a critical tool in the fight against global warming.
Carbon accounting enables organizations to respond to growing pressure from regulators, customers and investors to report and reduce emissions. By getting their carbon accounting right, organizations can stay resilient and gain a competitive edge in the transition to a net-zero economy.
Carbon accounting is the process of quantifying an organization’s greenhouse gas (GHG) emissions (also known as its corporate carbon footprint*).
This includes emissions resulting from the organization’s direct operations and activities (for example, heating office buildings), as well as indirect emissions (for example, emissions generated by a company’s suppliers or by end consumers using its products).
*As well as corporate carbon footprints, organizations can use carbon accounting to quantify their product carbon footprints or the carbon footprints of their portfolios, trades or cargos. Carbon accounting can also be used for cities and projects.
The standard unit in carbon accounting is CO2e (carbon dioxide equivalent). CO2e allows quantities of different greenhouse gases emissions to be expressed as a single unit. It includes carbon dioxide (CO2) plus all other greenhouse gases (such as methane and nitrous oxide) converted into CO2 using their global warming potential. For example, methane is 28 times stronger than carbon dioxide in its warming potential.
Scope 1 + Scope 2 + Scope 3 = Corporate carbon footprint
Scope 1: Scope 1 emissions are direct emissions. They result from direct activities of an organization, as well as assets like buildings and vehicles that the organization directly owns or controls.
Scope 2: Scope 2 emissions are indirect emissions resulting from purchased electricity, heating, steam and cooling.
Scope 3: Scope 3 emissions are all other indirect emissions across the organization’s upstream and downstream value chain. Scope 3 is usually the largest source of a company’s GHG emissions, so it represents the biggest opportunities to reduce emissions. However, measuring Scope 3 emissions accurately is the most challenging part of carbon accounting.
*Note: Although corporate carbon footprints / GHG inventories are categorized into Scopes 1, 2 and 3, product carbon footprints are typically not.
Like financial accounting, carbon accounting is a process that needs to be done rigorously, transparently and frequently, in line with international best practice and standards.
The Greenhouse Gas Protocol is the global standard-setter for carbon accounting. It provides methodological guidance for different types of carbon accounting. For example, there are different Standards for a full corporate GHG emissions inventory, for corporate value chain (scope 3) emissions, and for a product lifecycle.
However, all carbon accounting exercises will typically involve:
The quality of the input data is important; the more comprehensive and accurate the input is, the more reliable the carbon accounting output is.
The basic outcomes of carbon accounting typically include:
Carbon accounting can also lead to:
Carbon accounting enables businesses to succeed in the net-zero transition and manage climate-related risks. Organizations with robust carbon accounting practices are better placed to meet demand from regulators, investors and customers, and can identify risks and competitive opportunities. However, there are limitations to carbon accounting if it’s not done properly.
1. Carbon accounting is an ESG imperative
Today’s business leaders take sustainability seriously, and climate action is a core part of ESG (Environmental, Social and Governance) leadership. Carbon accounting underpins all credible climate action strategies by enabling organizations to identify, reduce and track their emissions towards net zero. Investors are evaluating ESG performance alongside financial performance.
2. Regulators are demanding carbon accounting across the value chain
Mandatory carbon disclosure is already coming into force in major economies in the world, including the UK and G7. The US Securities and Exchange Commission (SEC) will require companies to disclose carbon emissions from 2024, including Scope 3. The EU’s Corporate Sustainability Reporting Directive (CSRD) will soon apply to over 50,000 companies.
3. Carbon accounting can provide a competitive edge
Companies representing $6.4 trillion in purchasing power requested their suppliers to disclose their emissions in 2022. Suppliers are stepping up to the challenge to report their corporate emissions and to provide product carbon footprints to demonstrate their goods are lower carbon than competitors’.
4. Carbon accounting reveals risks
Environmental risks in supply chains could cost up to US$120 billion by 2026. Carbon accounting enables organizations to pinpoint risks related to climate change and carbon regulation, from cost shocks and logistical impacts, to regulatory burdens and reputational damage.
5. Measuring GHG emissions reveals reduction opportunities
Calculating greenhouse gas emissions enables companies to clearly see their carbon footprint and find opportunities to reduce emissions across their value chain.
When done right, carbon accounting can be a silver bullet for corporate climate action. However, comprehensive carbon accounting is extremely challenging. Inaccurate calculations can cause reputational risks like greenwashing, and can misinform carbon reduction plans.
Furthermore, carbon accounting alone is not enough. What’s measured must then be managed. Organizations need to use their carbon accounting data and insights to take the right steps. This includes:
More businesses than ever are measuring their emissions, but 90% are doing it incorrectly, and less than half are measuring their supply chain emissions. Therefore, there’s an opportunity for organizations to show climate leadership and gain a potential competitive advantage by accounting for their carbon accurately and comprehensively.
Ready to start carbon accounting and accelerate your net-zero journey?
Improve and automate your carbon accounting efforts with CarbonChain’s software. CarbonChain provides accurate calculations, using a verified methodology and asset-level data.
With a specialist focus on supply chain emissions — the trickiest part of carbon accounting — organizations can use CarbonChain for product carbon footprints, corporate carbon accounting or commodity trade emissions accounting.
Join the companies taking action:
Broadly, the three main methodologies of carbon accounting are:
That being said, the menu of methodologies can vary, depending on whether the organization is developing a corporate GHG emissions inventory or a product carbon footprint or calculating its portfolio emissions. In each case, the relevant Standard from the GHG Protocol details the methodology(ies) that should be followed.
What is the difference between those three carbon accounting methodologies?
Without carbon accounting, the world can’t decarbonize quickly and deeply enough to prevent the worst impacts of climate change.
This is because companies, governments, individuals and financial institutions need to measure what they’re managing. They need to be able to identify their biggest emissions sources and evaluate options to reduce them. Then, they need to be held accountable by calculating their year-on-year reductions and setting quantified targets.
Organizations need carbon accounting in order to grow competitiveness, show investors they’re mitigating climate risk, and comply with regulation.
The difficulties involved in carbon accounting are mainly related to calculating Scope 3 or supply chain emissions, because of:
This is where tools like CarbonChain can help.
There are five core principles of carbon accounting and reporting set out by the GHG Protocol: Relevance; Completeness; Consistency; Transparency; Accuracy.
These carbon accounting principles stem from widely accepted principles for financial accounting and reporting.
What do the five principles of carbon accounting mean?
Carbon accounting is the process of calculating GHG emissions. The resulting calculation is known as a carbon footprint. In the private sector, a carbon footprint generally refers to the total quantity of a product’s embedded emissions, or an organization’s full Scope 1, 2 and 3 GHG emissions. Sometimes a product carbon footprint is represented as a carbon intensity (for example, X tonnes of CO2e emitted per tonne of product) rather than the absolute carbon emissions generated.
An example of corporate carbon accounting in action would be a software company measuring its Scope 1, 2 and 3 emissions following the GHG Protocol. See a step-by-step example here: ‘How we calculated CarbonChain’s carbon footprint’.
Carbon accounting, when done right, is complex and time-consuming. Carbon accounting software can help. When choosing the best carbon accounting software for their needs, organizations should consider:
For more information, read our full guide to choosing the best carbon accounting software for your business.