What is Carbon Accounting?
Carbon accounting, or greenhouse gas accounting, involves calculating the climate impact of a company to form a so-called greenhouse gas (GHG) emission inventory – an image of the GHG emissions caused by your company, commonly known as the “carbon footprint” of your company. Like financial accounting, carbon accounting quantifies the impact of your organization’s business activities; only instead of the impact on revenues, profit, and cash, it measures the climate impact or carbon footprint.
Why Carbon Accounting?
There are many reasons to calculate your organization’s carbon footprint. One is regulation: You may be (or become) required to do so by law and be facing fines if you do not comply. Our article on EU regulation deep-dives on this area of carbon accounting requirements. Even without legal requirements, measuring Greenhouse gas emissions and reductions is becoming more and more important for company stakeholders, including, for example:
- Customers: Your customers, from end users (consumers) to big corporations in B2B, are increasingly concerned and alerted about climate change. They have a major interest in carbon labels based on accurately measured greenhouse gas emissions, which can support them in making educated decisions to purchase climate-friendly products
- Suppliers: Suppliers may also ask for accurately measured greenhouse gas emissions, e.g. for their own Scope 3 emission calculation
- Employees (current and future): For both employee engagement and the acquisition of top talent, your ESG position are increasingly important
- Investors: Sustainable investing is one of the fastest-growing trends in financing and investment of the last year. Investors are seriously looking into this
For many companies, the green revolution has also created material business opportunities that can be estimated with carbon accounting. Furthermore, there are cost-improvement opportunities associated with carbon accounting as well. Last, but not least, climate change also poses major risks for businesses, leading to financial risks that companies need to understand. Climate change implications pose diverse risks to environmental, economic, social, and technological aspects across industries.
Last, but not least, to borrow from Yoda once again: “Only what measured is, done .” Only if you and your organization understand your carbon emissions well, you can identify hotspots, and begin your reduction efforts effectively with high-impact actions. Furthermore, even when an organization has reduced its carbon emissions as much as possible, measuring its carbon footprints will still help them calculate its residual emissions. They can then use climate investment to compensate for these remaining emissions, completing their journey to net zero.
How does carbon accounting work?
Different Methodologies
There are several ways to calculate emissions, with spend-based and activity-based methods being the main approaches:
- Spend-based data uses the financial value of a purchased good or service and multiplies it by an emission factor. Emission factors are typically derived from environmentally extended input-output (EEIO) models that depict the flow of resources between different sectors of the economy. This provides a great estimate of emissions per financial unit; however, it is not always very accurate, because it is based on broad industry averages.
- Activity-based data focuses on collecting the data across your supply chain at a more granular level. This is based on activities done by your organization and recording raw data that is quantified into emissions data. The more data collected, the more accurate the accounting. They often use supplier-specific emissions factors, e.g. as reported by your utility as an emissions factor, or industry benchmarks.
- In practice, a hybrid approach is often used for carbon measurement. This method includes recording as much activity-based data as one can collect from the supply chain, then using the spend-based approach to estimate the rest
What steps to take
For our customers, a five-step approach has proven to be extremely helpful to calculate emissions:
Build a process map
The first step is to identify all business processes of your organization’s value chain that are carbon sources (or carbon sinks). This requires a good understanding of the entire production and utilization processes, including suppliers and clients – holistically cradle-to-grave for consumer products; cradle-to-gate for capital goods. Checking the whole value chain for potential GHG emissions is very important, because it varies by sector and by company. At first glance, an e-commerce player may appear to have far more GHG emissions than a SAAS player – but as soon as you look down the value chain, you may be surprised how much GHG emissions are produced by people flying out to meet your SAAS customers.
You need to know what your biggest emission sources are, for example, what kinds of energy you use and how much, so you can start calculating your carbon footprint.
Define Scope
The second step is the definition of the reporting scope and the boundaries of the reporting entity. It is crucial to determine which parts of the business need to be included (and in what scope), typically using the “control” concept. For small businesses, this will be straightforward, as they are likely to own or control all business operations. In this case, the boundary will be the entire business as well as the entire value chain (cradle-to-grave for consumer products, cradle-to-gate for capital goods).
However, if the structure of the business is more complicated and includes partnerships; franchises, joint ventures, or other, similar constructions, the boundary will be more complicated to set and can have a material impact on total emissions and allocation between emission scopes 1-3.
Collect Data
To calculate the amount of GHG for the activities releasing GHG emissions, organizations need to collect data for each relevant emission-releasing activity. Most of our clients already have the information they need to collect this data in one of their data warehouses – either in their finance, ERP, or other IT systems. This could be electricity use in total kilowatt-hours (from ERP, accounting data, or electricity bills).
Calculate and verify footprint
To calculate the carbon footprint of your organization, we recommend a 2-pronged approach with initial screening for “hot spots” and subsequent deep-dives into the most important areas.
- The initial screening for “hot spots” we try to automate to the max; the less time you spend data hunting, the earlier you can begin developing and implementing reduction strategies. This is especially valuable in the value chain (Scope 3), where a large part (>90%) of most businesses’ carbon footprint can be located, but data may be scarce and difficult to measure. Also, tools to automate the process will reduce the error rate in your emissions measurements, a common trap for “involuntary greenwashing”.
- The subsequent deep dives into the most important areas should be done with experts, in-house or externally. The last step of any GHG calculation is always the verification and plausibility check of all emissions as well as the benchmarking with other players from the industry.
The resulting output is broken down into “scopes,” based on where the emissions originated from. There are three scopes defined by the Greenhouse Gas Protocol, which we have described here in detail.
What to do with your carbon accounting information
Once GHG emissions have been calculated, this information should be used to reduce emissions, and to monitor progress over time. We recommend monitoring and reporting performance on a monthly basis and providing this information inside your organization. We also encourage our clients to report this information externally, even if they are not (yet) required to legally publish this information. Organizations should share their progress with stakeholders like clients, investors, and employees – and some may become required to report their emissions by law. We have detailed our approach to the reporting of emissions here.
Where to go from here
Once GHG emissions have been calculated, this information should be used to reduce emissions, and to monitor progress over time. We recommend monitoring and reporting performance on a monthly basis and providing this information inside your organization. We also encourage our clients to report this information externally, even if they are not (yet) required to legally publish this information. Organizations should share their progress with stakeholders like clients, investors, and employees – and some may become required to report their emissions by law. We have detailed our approach to the reporting of emissions here.
Climate change is the biggest challenge of our time. To limit the impact of global warming below catastrophic effects, “net zero” should be the benchmark. Whatever your strategic climate goals may be, you have read this far for a reason. Maybe, because you wish to reduce your GHG footprint and are looking for the “how”.
We recommend using tools like our calculator to automate the process of transforming data into carbon emissions measurements will save your business significant time compared to trying to achieve the same in-house. The less time you spend data hunting, the earlier you can begin developing and implementing reduction strategies. This is especially valuable in the value chain (Scope 3), where a large part (>90%) of most businesses’ carbon footprint can be located, but data may be scarce and difficult to measure. Also, tools to automate the process will reduce the error rate in your emissions measurements, a common trap for “involuntary greenwashing”.
We would also encourage you to make “net zero” your short- to mid-term ambition. On the “how” side, we have further detailed our approach in our publications section here. And if you wish to discuss this with our experts, feel free to contact us here:
