What is Carbon Accounting? What You Need to Know

Article Overview

Carbon accounting is the process of calculating, analyzing, measuring, and reporting an organisation's greenhouse gas (GHG) emissions so that it is fully auditable. It’s sometimes called greenhouse gas accounting, carbon auditing, a carbon inventory, or greenhouse gas inventory. organisations, businesses, cities, and many other entities use carbon accounting to manage their carbon footprint.

Carbon accounting quantifies the amount of GHGs produced by private and public organisations to understand how much carbon they emit. It also measures which part of their operations is responsible for those emissions.

This information is essential for organisations to disclose their climate impact, communicate their broader environmental, social and corporate governance (ESG) strategy, and facilitate informed decision-making as the world races to net zero.

Today, organisations and reporters have many guidelines explaining what to measure, what data to collect, and how to measure their carbon footprint. Many tools and solutions are also available to streamline the process and make the data accessible and usable.

Climate impact disclosure isn’t only for big corporations. To truly reach net zero, every organisation must measure its carbon footprint to make a global impact. In this guide, we’re going over everything you need to know about carbon accounting and why it’s important to start now.

What Do organisations Need to Measure?

organisations need to measure their scope 1, 2, and 3 emissions to understand their impact. The Greenhouse Gas Protocol (GHGP) established these scopes to streamline how we categorize and measure emissions.

Scope 1 covers direct emissions created on-site from an organisation's operations, like heating on-site for the office buildings.
Scope 2 covers indirect emissions from purchased energy, like the emissions created to power the office heater.
Scope 3 covers all other indirect emissions in a company's value chain, like emissions generated from employee commutes.

Many governing entities require scope 1 and 2 reporting, while scope 3 is typically voluntary.

Scopes 1 and 2 are more easily mitigated with changes like switching to an electric vehicle fleet or purchasing renewable energies. These scopes can offer a straightforward way to begin your carbon accounting journey.

Scope 3, on the other hand, is notoriously difficult to calculate and mitigate. Emissions on the value chain can come from any entity, from your suppliers to your customers. However, this complexity creates opportunities to engage with others to find ways to reduce your collective carbon footprint.

Several major companies have made public strides to reduce emissions while also recognizing the severity of scope 3 emissions. For example, PepsiCo committed to achieving net zero. They also said that their scope 3 emissions accounted for 78% of their global GHG emissions in 2020.

When looking at other companies, the Energy & Climate Intelligence Unit (ECIU) found that only 11% of companies in the Forbes Global 2000 list have achieved their net zero targets so far.

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Reporting Avoided Emissions

Avoided emissions, also known as 'scope 4 emissions,' are decreases in emissions that occur outside of a product's value chain, but are caused by the usage of that product. Fuel-efficient tires are one example — there's no requirement to measure or report the emissions saved by using fuel-efficient tires compared to regular tires. The GHGP provides guidance for estimating and reporting avoided emissions for interested organisations.

Who Needs Carbon Accounting?

Carbon accounting and reporting are primarily required by an area's government and other governing entities. Requirements can vary, but most require reports of scope 1 and 2 emissions, with some encouraging (but not requiring) scope 3 emissions.

For example, the Greenhouse Gas Reporting Program (GHGRP) in the U.S. requires GHG data from CO2 injection sites, fuel, and industrial gas suppliers, and other big emissions sources. In the U.K., they require large businesses to report their energy and carbon emissions under the Streamlined Energy and Carbon Reporting (SECR).

On a broader scale, the EU also requires all EU countries to report on their GHG emissions along with their climate policies, measures, and progress toward their goals.

What Are the Standards, Initiatives, and organisations That Companies Need To Know?

Reporters should get familiar with organisations and initiatives that provide direct guidance on reporting, like the GHGP, and broader ones that have influenced many areas and industries, like the Paris Climate Agreement.

There are many to understand, some more relevant to your organisation than others. Your organisation may also have local guidelines that you need to follow in addition to best practices set by larger ones. Below, we'll cover some of the most important standards, initiatives, and organisations.

Intergovernmental Panel on Climate Change (IPCC)

The United Nations Environment Programme (UNEP) and the World Meteorological organisation (WMO) created the Intergovernmental Panel on Climate Change (IPCC) in 1988. Their goal is to provide scientific information to all levels of government to create climate policies.

Although they don't directly set standards for carbon accounting or anything similar, their projections and assessments may influence policy change that requires carbon accounting. They set up the Task Force on National Greenhouse Gas Inventories (TFI) to manage the National Greenhouse Gas Inventories Programme (NGGIP).

Greenhouse Gas Protocol (GHGP)

The most recognized and utilized standard is the GHGP. Created in 1997 off the back of the Kyoto Protocol, the GHGP is the first international treaty for GHG reductions. This is a joint effort between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).

It provides guidelines and standards for organisations to develop inventories for GHG emissions. It's designed to simplify data collection, improve consistency and provide organisations with the tools to report and manage their emissions. For example, the Corporate Value Chain (Scope 3) Standard helps organisations evaluate emissions along their value chain.

E-liability Accounting System

Robert S. Kaplan, Ph.D., and Karthik Ramanna, Ph.D., introduced the E-liability accounting system to address how the GHGP allows estimates for upstream and downstream emissions. They recommend phasing out industry average data to allow organisations and regulators to adopt the E-liability system.

Guidance Built on GHG Protocol

Many industries require unique guidance that goes beyond the GHGP. Several organisations have worked with the GHGP to create those needed instructions. Below are resources that have earned the "Built on GHG Protocol" mark.

Carbon Disclosure Project (CDP)

Founded in 2000, the Carbon Disclosure Project (CDP) is a not-for-profit charity that supports companies, cities, and other entities in measuring and managing their environmental impact through its global environmental disclosure system.

This is how CDP works:

Customers or investors request companies to disclose through CDP
Companies collect information and submit it to CDP
Companies use data to identify areas of improvement
CDP sends data and findings to investors and customers
CDP also uses the data in reports, analysis and company scoring

Submitting to CDP makes it easier to compare your organisation or entity to peers. Their findings and data can uncover opportunities you may have missed. Their scores also show how you measure up against peers.

International organisation for Standardization (ISO)

The International organisation for Standardization (ISO) started in 1946 to create international standards. In 2006, they established standards for GHG management.

ISO 14064-1 has guidance at the organisation level for quantifying and reporting GHG emissions and removals.
ISO 14064-2 has guidance at the project level for quantifying, monitoring, and reporting GHG emissions and removals.
ISO 14064-3 has guidance for verifying and validating GHG reports.

The ISO standards are meant to be complementary to the GHGP. For example, the GHGP goes over best practices for GHG inventories, while ISO 14064-1 gives minimum standards to comply with those best practices. ISO 14064-3 established standards for verifying an organisation's GHG reports.

In 2007, the ISO, WRI, and WBCSD signed a Memorandum of Understanding (MoU) agreeing to promote the ISO 14064 and GHGP standards. The ISO also has additional related standards relevant to reporting organisations:

ISO 14067 has guidance for quantifying a product's carbon footprint.
ISO 14068 is under development but will have guidance on carbon neutrality.
ISO 14069 has guidance for applying ISO 14064-1.

Science Based Targets initiative (SBTi)

CDP, WRI, World Wildlife Foundation (WWF), and the UN Global Compact launched the Science Based Targets initiative (SBTi) in 2015. SBTi does many things to help organisations set science-based emission targets.

For example, they define best practices to reduce emissions, provide technical assistance and expert resources, and help companies with independent assessments. Many standards require organisations to set science-based targets (SBTs).

The Paris Climate Agreement

The 2015 Paris Climate Agreement was a significant catalyst in furthering carbon accounting regulations, policies, and reporting standards to align with financial regulations. As a result, many countries began looking for ways to reduce their greenhouse gas emissions.

Task Force for Climate-Related Disclosures (TCFD)

In 2017, the Task Force for Climate-Related Disclosures (TCFD) released a report establishing a clear and consistent structure for climate-related disclosures. The report included proposals designed to apply to all organisations in all jurisdictions and give reliable, comparable, and forward-looking information for investors to base their decisions on.

Partnership for Carbon Accounting Financials (PCAF)

The Partnership for Carbon Accounting Financials (PCAF) became a global initiative in 2019. PCAF’s goal is to support financial institutions with a standardised methodology for measuring and reporting investing- and lending-related GHG emissions. These emissions fall under scope 3, category 15, and are often called financed emissions.

PCAF created the Global GHG Accounting and Reporting Standard for the Financial Industry to assess risks in line with the TCFD, set science-based targets that align with the SBTi, and report to stakeholders like the CDP. This standard has also earned the "Built on GHG Protocol" mark.

How Can Companies Ensure They're Gathering Effective Data?

Reporters should consider how often data is collected and how transparent their data is to internal and external stakeholders. Information should be accurate and usable to inform decision-making.

Those decisions can range from investors reviewing your company's risk profile to a board member reviewing your company's progress toward its net zero goals.

Below are a few characteristics your carbon accounting data should have to be effective:

Periodically collected so stakeholders can review the information and analyze progress in real-time
Easy to collect as the business grows since some data collection methods may not scale well with larger operations
Efficient to collect to allow for timely decision-making
Aligns with established standards and includes all required data
Comprehensively covers all carbon emissions, including scope 3
Identifies emissions sources to help prioritize reductions with the biggest impact
Straightforward presentation so any party can review for accuracy, compliance, and overall visibility

Reporters also need to consider their data's accessibility. Accurate information is the first piece of the puzzle. Once the data is gathered, organisations need to keep it organised and up to date for several potential reasons, like requests from investors, updates for director reports, and decision-making to keep up with decarbonisation targets.

What Are Common Issues Companies Run Into With Carbon Accounting?

Companies can have issues understanding regulations, gathering data, and managing all the information and requests needed to report on this data.

Greenhouse gas (GHG) accounting is an evolving field with vast amounts of data points. And the world is rapidly developing new standards, policies, and regulations to ensure organisations remain accountable.

However, the calculations needed are highly complex, demanding thousands of data points from a company's operations. Traditional calculation methods are time-consuming and resource-intensive.

In Boston Consulting Group’s recent Carbon Measurement Report, they found that 76% of respondents cannot measure the full carbon footprint of their products and services.

As a result of these complexities, much of today's carbon accounting is inaccurate and often months to years old and in various (even proprietary) frameworks, leaving a lot of room for "creative accounting." Thankfully, as regulation and investor demands increase, regulatory frameworks are beginning to unify and standardise this process.

Below are some common issues organisations run into when diving into carbon accounting:

organisations have confusion surrounding regulations since many standards exist for different geographical areas and industries. Many governments and private entities are still creating new standards and regulations to find ways to improve the carbon accounting process.
organisations can run into double-counting since some emissions may count for multiple categories. The GHGP alone isn't set up to compare two organisations to each other.
There may be differences in data quality among organisations since data and calculation methods can vary. Benchmarking and comparison can get difficult without completely standardised datasets.
It's likely to find poor data quality within some organisations since some information is difficult to collect accurately.
Reporters may have difficulty with complex data sources since some data requires cooperation with other organisations and consumers. Scope 3 emissions can be especially tough if organisations along your value chain don't accurately measure their emissions.
Some organisations may have incomplete data since some information collected may not accurately reflect the amount of generated emissions or emissions sources.
Reporters may be unclear next steps to reduce emissions since it's not always clear what does and doesn't create a negative impact.
There aren't many comprehensive data management tools to store and analyze the data.

On a broader scale, there is also a lack of accountability for accuracy. Since there are many standards and different regulatory bodies, inaccurate reporting has no standard consequences. This system can also contribute to a lack of high-quality data from reporting organisations.

How Can organisations Assess the Data They Collect for Carbon Accounting?

organisations can assess their data using a Climate Management and Accounting Platform (CMAP) and other reputable tools.

CMAPs are software that simplifies the carbon accounting process, so calculations are done in days rather than months.

These platforms use codified guidelines like the GHGP and PCAF to calculate carbon emissions. This software can then:

Deliver real-time solutions based on organisational data
Gauge emissions reduction progress over time
Accurately track progress toward net zero commitments using the latest data
Make reporting easy and accessible for stakeholders

Historically, carbon accounting information lived in complicated spreadsheets, contained outdated data, and was managed by expensive consultants.

The calculations are often so complex that it's unrealistic to expect all companies to have the time, resources, or expertise to account for their emissions accurately. Like financial accounting, effective tools must be developed to demystify the process and make it accessible to companies regardless of their size and resources.

In addition to CMAPs, organisations can look to official tools Built on GHG Protocol to know they're getting accurate information.

What Are the Different Types of Carbon Accounting?

Physical and financial carbon accounting are two broad ways to analyze your data. Both methods are necessary to measure your environmental and financial impact.

Physical carbon accounting measures physical quantities, like the volume of emissions generated in your value chain.
Financial carbon accounting measures financial values, like the cost of generating emissions in your value chain.

Why Do organisations Need To Invest in Carbon Accounting?

Stakeholder pressure, government regulations, and cost savings are all factors that compel organisations to decarbonise.

There has never been a more critical time for accurate carbon accounting. The reality of the financial implications of a global temperature rise over 2°C is setting in, and increasingly stringent governmental regulations have begun to hit home with businesses, investors, and stakeholders. One report found that 83% of consumers think it's important for brands to focus on operating sustainably.

Here are a few reasons why organisations should invest in carbon accounting now:

Reduce your organisation's environmental impact and contribute to the global effort to reach net zero emissions.
Set benchmarks and targets for reduction with your data.
Use data to inform carbon credit and carbon offset purchases.
Make informed decarbonisation decisions and track progress with real-time data.
Identify high areas of emissions in your organisation and value chain to see where reduction can make the biggest impact.
Get ahead of future regulations that may occur in your area or your industry.
Improve your organisation's operations and save on operational costs.
Justify the time, effort, and resources needed to reduce emissions by calculating the monetary cost of generating emissions.
Have information ready for climate risk reports requested from your board of directors, current investors, future investors, and other stakeholders.
Gather required information for business and government contract bids and grant applications.
Earn and establish trust with current and future customers and employees with transparent climate risk data.
Contribute your organisation's information to large research bodies to combat climate change.

Carbon accounting is no easy feat, given the amount of data needed and the regulations to learn. Persefoni's CMAP can help your company organise your data in preparation for upcoming regulations and requests.

Request a demo today to see how we can streamline data collection and simplify climate disclosure, carbon accounting, and carbon management.

Carbon Accounting Frequently Asked Questions (FAQs)

What is meant by carbon accounting?

Carbon accounting refers to the process of measuring an organisation's greenhouse gas emissions. It allows businesses to assess their climate impact, similar to how financial accounting tracks financial impact. Through carbon accounting, companies can better understand and manage their climate-related financial risks and environmental impact.

What is an example of carbon accounting?

An example of carbon accounting is using emissions factors to estimate the amount of greenhouse gas emissions released by a natural gas-fired power plant. By multiplying the emissions factor with the amount of gas burned, it's possible to calculate the emissions of carbon dioxide, methane, and other gases.

What is the use of carbon accounting?

Carbon accounting is essential for quantifying and measuring your company's carbon footprint. It provides valuable insights to help make informed decisions regarding carbon and mitigation strategies. Understanding the use of carbon accounting is crucial for effective sustainability management and understanding climate-related risks and opportunities.

What are the principles of carbon accounting?

The five main principles of carbon accounting are relevance, completeness, consistency, transparency, and accuracy. These principles ensure that carbon accounting and reporting are done effectively and accurately. By adhering to these principles, organisations can accurately measure and report their carbon emissions, helping them in their sustainability efforts.

What are key drivers of carbon accounting?

The key drivers of carbon accounting include regulatory compliance, investor expectations, stakeholder reporting, climate risk mitigation, building credible climate disclosures, net zero target setting, and decarbonisation.

What are the challenges of carbon accounting?

Carbon accounting poses several challenges that must be addressed to ensure accurate and reliable assessments. These challenges include calculation errors and data collection issues, defining emissions boundaries, the absence of standardised methodologies, variable data quality and availability, complexities in accounting for Scope 3 emissions, and evolving regulations. Overcoming these obstacles requires investing in robust data management systems, adopting standardised approaches, and staying up-to-date with changing reporting requirements and technologies to improve accuracy and transparency in carbon accounting practices.

Understanding Carbon Accounting: What You Need to Know