Understanding Carbon Accounting: A Practical Guide for 2024
With several environmental pressures placed on businesses today, companies need to change how they see greenhouse gas emissions and environmentalism. As a result, various tools and resources are now at a premium and poised to expand to meet these needs. Out of the multitude, one we'll focus on today is carbon accounting.
What Is The Meaning Of Carbon Accounting?
It’s true that carbon accounting measures carbon emissions of a company; however, it also measures carbon dioxide equivalents.
At its core, it’s a measuring tool that enables net zero efforts, but it also tracks other greenhouse gas emissions like methane, nitrous oxide, and fluorinated gases.
It’s also for this reason some call carbon accounting "greenhouse gas accounting" for its inclusion of greenhouse gas emissions (GHG emissions).
Why Does Greenhouse Gas Accounting Matter?
As we’ve become more environmentally aware about our GHG emissions and have expanded on the topic, carbon accounting matters more every day since it provides a clear scope of what a business’s environmental impact is. This information is crucial in making decisions on every level.
When we know a company's greenhouse gas emissions, it’s easier for:
Investors to decide whether a company's carbon emissions reduction efforts are working.
Investors should decide whether to continue investing in this company based on their greenhouse gas emissions.
Consumers should decide whether a company is caring for the environment enough and continue purchasing from them.
Employees to gain insight on the company's overall carbon emissions and see whether a company's green initiatives are working or need adjustments.
Beyond that, carbon accounting matters broadly because:
It highlights Scope 1, 2, and 3 greenhouse gas emissions. Understanding what those are and where efforts should be placed is crucial with upcoming environmental pledges. Carbon accounting helps make those pledges realistic.
Carbon accounting reveals more opportunities for companies to identify and decarbonize other areas of their business, thus expanding a businesses value chain.
It helps companies optimize their ESG performance further, fine-tuning carbon footprint reduction efforts.
Companies are able to future-proof their businesses against the rising costs of carbon and climate-related risks.
Further flexibility and adaptability in an ever-changing marketplace. Knowing GHG emissions will make it easier to adapt when new regulations are introduced, thus making a company more competitive.
How Is Carbon Accounting Good For Businesses?
Even with the reasons above being good reasons to quantify a business’s carbon footprint, there are more incentives for businesses to be doing this more routinely.
It Helps Develop Corporate Sustainability
With more people aware of climate change, the push for GHG emissions reduction and all around low-carbon economies is something that many desire. If companies are to be relevant in the future, they need to be looking at their direct and indirect emissions and reduce their carbon footprints. Even with corporate greenwashing, methods like carbon accounting enables businesses to more accurately assess carbon dioxide levels and carbon dioxide equivalents.
Thus, for serious players, getting this software and using carbon accounting methods shows corporate sustainability is more than just a statement.
They Stay Compliant
Even with environmental denialism rooted in the general public, environmental efforts and regulations aren't going anywhere. Several regulatory bodies are forcing companies to reduce their carbon footprints. It's to the point where companies can be sued for greenwashing or not meeting standards.
Even though carbon accounting methods and software have been used since early 2000s, ESG requirements and regulations around environmental reporting makes using this tool more appealing
Companies Save Time And Money
Companies love to be efficient and save money where they can, and an accurate carbon accounting system can help with that. Best of all, delving into carbon accounting over old business tactics like mass layoffs and union busting only makes a company more appealing.
Reducing a company's carbon footprint requires a lot of people and there will be upfront costs. However, prioritizing carbon accounting right now will make a company survive longer and thrive in many ways.
It Appeals To Investors
Between avoiding lawsuits and reputation damage, using carbon accounting will attract investors who care more about GHG emissions and companies actively accounting and reporting their indirect and direct emissions.
With a new generation of investors coming in, more are caring about a smaller carbon footprint beyond carbon offsets. They care about a company working to reduce emissions. And if they're not, they'll move on or get companies to invest in carbon dioxide emissions reduction strategies.
It Builds Loyalty
From investors to customers, a company's survivability depends on loyalty. With worries of climate change increasing, a company accurately quantifying emissions and accounting and reporting them can build trust.
On top of that, reducing one's carbon footprint can be a great company story to build a brand around.
Telling customers and shareholders you want to reduce your carbon footprint and are using carbon accounting to do so is a sound marketing move on top of helping the planet.
What Carbon Emissions Should Companies Measure?
In carbon accounting, what to measure is just as important as how to measure it. While companies are free to choose what to measure, the prevailing method is the Greenhouse Gas Protocol (GHG Protocol). This method is also backed by the world business council for sustainable development and the world resources institute.
It was fully developed in 2001, and its aim is to give companies a global standard for how companies can measure carbon emissions. It also provides comparisons between businesses, giving people reference points to compare carbon footprint reduction performances.
The reason it’s most widely used though can stem from the fact it divides total greenhouse gas emissions into three scopes—the same scopes that ESG reporting uses.
Scope 1: Direct Emissions
The first scope only cares about GHG emissions that you own or control. GHG emissions from machinery, burning fossil fuels from vehicles, fuel combustion, fugitive emissions (greenhouse gases from valves, pressure-containing equipment, etc.), and any emissions that stems from manufacturing products you'd use carbon credits for are examples.
Scope 2: Indirect Emissions
The second scope is the company's emissions produced outside of a company's inner circle, though they still are connected to the company in some way. A GHG accounting program could point to third-party heating or cooling systems for buildings or for products or services.
Scope 3: Indirect Emissions, But Aren’t Related To Your Value Chain
The toughest of the scopes are greenhouse gases that are made outside of a value chain and are vaguely connected to companies. Examples of these are emissions from a supply chain that links to the corporate value chain (think suppliers of raw ingredients for a restaurant), leased assets, or other emissions that don't fit Scope 1 and 2.
The bigger the company, the more carbon accounting will be needed to track and manage corporate carbon footprint data points, but it is also more challenging. While Scope 1 and 2 emissions are easier for accounting and reporting, Scope 3 emissions are tougher.
This is before looking into how to reduce emissions from each scope.
Regardless, having carbon accounting makes reducing greenhouse gas emissions easier due to providing accuracy and emission factors to businesses looking to reduce greenhouse gas emissions.
How Can We Measure Carbon Emissions?
As mentioned above, implementing reduction strategies via carbon accounting requires what to measure but how to measure it. Carbon accounting as a whole is an estimation-based method, but there are some based methods that can make accounting and reporting greenhouse gases more accurate and realistic.
The Spend-Based Method
The first method is the spend-based method. The spend-based method multiplies the financial value of purchased goods or services by an emission factor. These emission factors are based on the volume of greenhouse gases that are produced per unit.
From there, the emissions data this based method produces is based on that math.
Out of the three methods to provide emissions data, this based method is the simplest and purest form of carbon accounting for one reason: These emission factors are based on an industry average GHG level that any reporting company can get access to.
It's an easy method to get into, especially if the reporting company is starting to look at how to reduce carbon emissions. However, it's not the most accurate form of carbon accounting.
Because these are industry averages, they might not represent the true emissions that a reporting company produces. And if these are used in reducing carbon emissions on a large scale, this could lead to corporate greenwashing.
Despite this though, this can provide a birds-eye view of the industry average of carbon dioxide equivalent emissions. It can allow companies to compare their carbon accounting process and carbon management methods to the industry average.
Activity-Based Method
Unlike the spend-based method, the activity-based method of carbon accounting doesn't look at industry average emissions. Instead, it accounts for variances that your company might be doing.
For example, this form of carbon accounting will consider the emissions produced from not just clothing but the material that's being used. It'll consider whether the farmer is growing organic food or not, as growing methods vary drastically.
This form of carbon accounting has more accuracy than the other based method. All of this ensures that emission reduction targets are more accurate and other indirect emissions are more properly assessed.
That said, ensuring complete and total accuracy using this carbon accounting method is more intensive. And considering the difficulties and reliability of getting certain Scope data points—especially Scope 3—the activity-based method is an ideal method rather than preferred.
Hybrid-Based Method
For carbon removal projects, using the hybrid-based method of carbon accounting is the golden standard. It's the go-to method that the GHG Protocol encourages to get the most accurate carbon footprint. As the name suggests, this takes a company's environmental impact and provides emission estimates based on a combination of the activity-based method and the spend-based method.
By default, this method will lean into the activity-based method to measure a company's carbon footprint. However, if it can't or there are missing data points, the hybrid model methodology will turn to the spend-based method to provide carbon reporting.
When it comes to reducing emissions and addressing climate change, this method provides the most general accuracy and begins real discussions on addressing global warming. Even if it's not completely and totally accurate, getting close enough data points is better in carbon accounting than getting nothing at all.
How Can We Ensure Total Compliant Carbon Measurement?
Ideally, using the hybrid method to do carbon reporting is the best. It might hit snags with supply chain emission, but corporate carbon accounting can take further steps to mitigate accuracy issues.
For more accurate carbon accounting, the Greenhouse Gas Protocol offers five principles to help with carbon accounting decisions.
Relevance
From government bodies ensuring compliance to investors and the publics global warming concerns, companies need their emissions estimates to be relevant in several ways. The GHG accounting methods used should be relevant for those it's intended for.
Overall, context matters and is the first principle to ensure accurate accounting of a company's environmental footprint. And for good reason.
After all, many companies are quick to provide emissions estimates to stockholders and in reports, and yet leave employees in the dark about what emissions occur in the company or how much. It's one thing to be for environmentalism, but another to encourage various minds into the discussion of sustainable development.
A company ensuring their emissions estimates are relevant for everyone can help narrow company goals and what to look for when doing carbon accounting.
Completeness
While looking at Scope 1 and 2 emissions factors was a focus, larger companies realize they need to have carbon accounting covering Scope 3 emissions now. There is even discussion of Scope 4 emissions, emissions factors based on implementing reduction strategies today that would alter future theoretical emissions.
For now, Scope 3 emissions are crucial, as they account for about 90% of a company's total emissions, depending on the industry. As far as we're concerned, these emissions are what is making climate change worse.
As such, ensuring companies carbon accounting methods are complete can ensure we fight better against climate change.
Consistency
Decision makers both in and out of a company can compare financial information between companies as financial reporting has largely been standardized. This can't be said about carbon accounting at the moment.
As such, a good carbon accounting method to consider is one that is updating itself regularly and allows you to recalculate previous year's data using future changes to methods or emission factors.
Transparency
Like with anything a company provides, there needs to be clarity and trust in the greenhouse gas inventories and data presented. A solid carbon accounting system solution will be providing that extra transparency for companies.
What this looks like for carbon accounting is revealing underlying data and sources so companies can audit them. The more granular breakdown of how calculations were made, the better.
Accuracy
And finally, a carbon accounting solution has to be as accurate as possible. Even though there are challenges with it, its foundation should be based on quality-controlled scientific data. Ensuring the software you’re using has accredited methodologies and is third-party certified is the way to guarantee this.
What Are Some Key Challenges To Carbon Accounting?
Despite the clear incentives for companies to be more environmentally accountable, there are several challenges that come with adopting sustainability standards. Beyond covering all three Scopes, there are other key challenges that companies can face.
Incomplete & Incompatible Data
First of which is data can be incomplete or in some cases incompatible. Data is the bedrock for these methods and approaches and so data not being able to represent a company's true emissions can be a big challenge.
Out of the three scopes, Scope 3 is the toughest as a company supply chain may not have suppliers track emissions well if at all.
In an environment where every department and aspect of a business must work together to provide data points, the one having to consolidate that information can run into several challenges. And these challenges are amplified by there being no standard in how to present this data, resulting in missing gaps or data points that don't work with methods or other information.
There Is A Time And Cost To It
Even with the savings long-term, gathering data, inputting it into spreadsheets, and transferring it to a carbon accounting program is an intensive and expensive process. With this data requiring manual labour, the whole process is susceptible to human errors and multiple inaccuracies. This is in addition to more overtime work or more staff working, thus making this a costly endeavour depending on company size.
Low Priority Among Certain Individuals
All of these challenges can provide further reasoning for those who lack an understanding in this process. Some might acknowledge that carbon accounting is necessary for compliance, they can argue that it’s more of a chore for that reason.
All around, it's an attitude that can make a company rely more on carbon credits and offset programs rather than make genuine change and improvements to business and their industry.
Regardless, the divide between arguing parties for and against carbon accounting in the workplace can result in a lack of investing in these systems and not reaping the full benefits that these systems and methods can provide.
Top Options For Carbon Accounting Software
Despite the challenges though, those can be mitigated with the right kind of carbon accounting tools. With software offering businesses to track, calculate, and manage emissions and carbon footprints, reporting becomes easier through these systems.
Even with companies already reporting carbon emissions and showing them in reports, a lot of the data can be disjointed and disorganized. A carbon accounting system helps tidy that up.
Here are some that we recommend.
edenseven
Backed by a unique team of like-minded individuals with decades of combined real-world experience, edenseven is a rising star in powerful ad quantifiable sustainability outcomes for companies. As a whole, their goal is to get companies to net zero emissions, however part of that solution is through an accredited carbon accounting software system.
Rho Impact
With over 2,500 impact models and over 1,500 verified sources, Rho Impact focuses in on carbon accounting and provides a unique experience unlike other platforms. It has changed how many companies look at environmentalism and how their company operates, making it another great option for net zero emission goals.
Getting Serious About Carbon Accounting
Despite its challenges, streamlining your company’s emissions reporting and accounting is a good idea. Companies are expected to be compliant to new environmental standards moving forward. And with tools like edenseven or Rho Impact and many others to follow after, companies can race faster to net zero emissions if they embrace it.
