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Carbon Accounting

The what, why and how of carbon accounting, explained

 

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. 

 

What is carbon accounting?


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.

What does carbon accounting measure? GHG, CO2 and CO2e

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.

In cases where carbon dioxide is the only GHG included in an organization’s carbon accounting, the unit CO2 is used.

Scope 1, 2 and 3 emissions

In corporate carbon accounting, the globally-accepted practice is to categorize an organization’s GHG emissions inventory into Scope 1, Scope 2 and Scope 3*. 

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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. 
 

How does carbon accounting work?


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:
  • Defining organizational boundary (e.g. reporting period; consolidation approach, identifying any subsidiaries, joint ventures or investments included)
  • Establishing reporting boundary (e.g. identify relevant emissions sources; transparently justifying the rationale for exclusions, categorising emissions under the three Scopes, and 15 Scope 3 categories)
  • Collecting and quality-checking data (e.g. raw input data about operational activity, facilities, purchased goods/services and supply chains, as well as emissions data from supplier reports, primary sources or secondary sources, following the relevant methodological requirements)
  • Calculating the carbon (undertaking calculations according to the appropriate methodology and emissions factors)
The quality of the input data is important; the more comprehensive and accurate the input is, the more reliable the carbon accounting output is.

 

What is the outcome of carbon accounting?


The basic outcomes of carbon accounting typically include:

  • A calculation of the organization’s carbon footprint (whether at the organizational-, product-, trade- level or other);
  • Internal summary reports (including absolute emissions and carbon intensity figures, GHG emissions inventories, performance against previous years, and progress against targets);
  • External reports (for regulators, customers, financial institutions, shareholders). Preparing these reports usually requires some additional work. Different reporting and disclosure frameworks have different format and content requirements.

Carbon accounting can also lead to:

  • Setting science-based targets according to global standards
  • Identifying and acting on opportunities to reduce emissions
  • Calculating how many offsets to purchase, to compensate for residual emissions
  • Trading carbon credits in the carbon market (where one carbon credit is equivalent to one tonne of CO2e emissions)
  • Fulfilling regulatory requirements for carbon disclosure
  • Demonstrating transparency to investors and customers
  • Developing verifiably low-carbon products 

 

Why should my business invest in carbon accounting?


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. 

Benefits and limitations of carbon accounting

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. 

Limitations

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:
  • Making deep and rapid emissions reductions across their operations and supply chains
  • Improving transparency and communication of carbon data, to inform decision-makers
  • Engaging with their industry peers, financial institutions, suppliers, policymakers and customers to build decarbonization mechanisms, from sustainability-linked financing to carbon policies 
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.

 

Carbon accounting with CarbonChain


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.

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Frequently Asked Questions (FAQs)

Broadly, the three main methodologies of carbon accounting are: 

  1. Using supplier-specific emissions data
  2. The activity-based approach
  3. The spend-based approach 

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?

  1. Supplier-specific data means using emissions data (intensity or absolute) directly reported by an organization’s suppliers. This approach is the most challenging, but generally increases accuracy.
  2. The activity-based approach applies activity-based emissions factors to activities (e.g. distance traveled, water consumed, waste generated, electricity consumed).
  3. The spend-based approach applies an emissions factor (based on the amount of emissions produced per financial unit) to the financial value of a purchased good or service. This results in less accurate estimates than the other approaches, but can be an easier and quicker starting point for companies to estimate their emissions. However, today there are tools and software solutions that allow both improved accuracy and speed. 

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:

  • the challenges involved in sourcing emissions data from suppliers who don’t respond to requests, or who provide unverified or incomplete data;
  • the difficulty and time burden of applying complex methodologies to accurately performing calculations.
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?

  • Relevance: The GHG emissions inventory should appropriately reflect the company’s GHG emissions and serve internal and external decision making
  • Completeness: Within the chosen inventory boundary, all GHG emissions sources and activities should be accounted for. Any exclusions must be disclosed and justified.
  • Consistency: Organizations should use methodologies consistently, to allow for meaningful comparisons. Changes should be disclosed.
  • Transparency: Any issues, assumptions, methodologies, data sources should be easily identified in a clear audit trail.
  • Accuracy: Organizations need to ensure they aren’t systematically over or under accounting for emissions, and to reduce uncertainties as much as possible. 
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:

  • Does the software provide the calculations required for the organization’s reporting or target-setting needs?
  • Does the carbon accounting software cover Scopes 1, 2 and 3?
  • Does the software use asset-level data and independently verified methodologies to increase accuracy?
  • Can the carbon accounting software provide retrospective as well as forward-looking and real-time reports?
  • Does the software provide useful data visualizations, snapshots and summaries?
  • Does the software benchmark an organization’s emissions performance against industry averages and global sustainability standards?
For more information, read our full guide to choosing the best carbon accounting software for your business.