Carbon Accounting 101 - What is Carbon Accounting, and Why Should Business Leaders Care?
A weekly Persefoni blog featuring all things climate, carbon, and ESG.
Published January 12, 2022
As corporate knowledge of the climate catastrophe has grown, so has the need for a means of calculating, analyzing, measuring, and reporting an organization's greenhouse gas (GHG) emissions in a way that is fully auditable. Carbon accounting does just that.
Carbon accounting quantifies the amount of GHGs produced by private and public organizations to better understand how much carbon they are emitting. Crucially, carbon accounting also measures which part of their operations are responsible for said emissions. This information is essential for organizations 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.
There has never been a more critical time for accurate carbon accounting. The reality of the financial implications of a global temperature rise over 2.0C is setting in, and increasingly stringent governmental regulations have begun to hit home with organizations and investors. However, the calculations needed are highly complex, demanding thousands of data points from a company's operations. Traditional calculation methods are thus time-consuming and resource intensive. As a result of these complexities, much of today's carbon accounting is inaccurate and regularly 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 standardize this process.
Carbon Accounting Standards
Climate accounting is an evolving field with vast amounts of data points. And the world is rapidly developing new standards, policies, and regulations to ensure organizations remain accountable.
The most recognized and utilized standard is the GHG Protocol (GHGP). Created in 1997 off the back of the Kyoto Protocol, the GHG Protocol (GHGP) is the first international treaty for GHG reductions. Namely, it provides guidelines for organizations to develop inventories for GHG emissions. It was designed to simplify, improve consistency, and provide businesses with the tools to report and manage their emissions.
Under the GHGP, all emissions are broken down into three scopes. Scope 1 and 2 are required to be measured by GHGP, whereas Scope 3 is optional.
Scope 1 refers to the direct emissions from an organization's operations, including company vehicles and buildings.
Scope 2 categorizes indirect emissions like purchasing electricity, heating, and cooling.
Scope 3 comprises all other indirect emissions that exist in a company's value chain, such as the usage of a sold product, employee commuting, and outsourcing activities.
Scopes 1 and 2 can be mitigated more easily by doing things like switching to an electric vehicle fleet or purchasing renewable energies. Scope 3, on the other hand, is notoriously difficult to calculate and therefore mitigate.
The 2015 Paris Climate Agreement was a significant catalyst in furthering carbon accounting regulations, policies, and reporting standards to align with financial regulations. And in 2017, the Task Force for Climate-Related Disclosures (TCFD) released a report, which set out a clear and consistent structure for climate-related disclosures. With proposals designed to apply to all organizations in all jurisdictions and give reliable, comparable, and forward-looking information for investors to base decisions.
In 2019, further developments were made when the Partnership for Carbon Accounting Financials (PCAF) became a global initiative. To support financial institutions with a standardized methodology for measuring and reporting GHG emissions tied to investing and lending—called financed emissions. This latest development will be one of many as the Climate Management & Accounting industry continues to grow.
New Tools for Carbon Accounting
Historically, carbon accounting has been performed on archaic complicated excel spreadsheets with outdated data, often completed by expensive consultants. The calculations are often so complex that it is unrealistic to expect that all companies would have the time, resources, or expertise to perform an accurate account of their emissions. Like financial accounting, effective tools must be developed to demystify the process and make it accessible to companies regardless of their size and resources.
Climate Management and Accounting Platforms (CMAP)
are software which simplify the carbon accounting process, so calculations are done in days rather than months. These platforms utilize codified guidelines like the GHGP & PCAF to calculate carbon emissions and thus deliver real-time solutions based on organizational data. CMAP’s allow companies to track their emissions in real-time. Furthermore, this means organizations can gauge their emissions reduction progress over time and accurately track their progress toward net zero commitments using the latest data available.
Stakeholder pressure, government regulations, and evident cost savings have compelled organizations to decarbonize. CMAP streamlines
this process, and makes reporting on progress easy, allowing companies to perform their enterprise resource planning for the climate with transparency and trust.
Warren Buffet once said, "Accounting is the language of business," —it could be said that carbon accounting is the language of climate change. Through CMAP, this language becomes fluent to businesses and investors, giving them a more coherent understanding of their emissions and how to reduce them.