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.
‍

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 *.

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, categorizing 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.

View our how-to guide for calculating a corporate carbon footprint.

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.
‍

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.
‍

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.