When it comes to environmental impact, knowledge is power - and carbon accounting provides companies with essential insight. Accurate carbon accounting gives companies an overview of where they emit and where reduction efforts would have the most significant impact. With the rise of ESG reporting, regulatory and reporting frameworks, and carbon pricing, this important topic is sure to grow in prominence in years to come.
What does carbon accounting mean?
Carbon accounting, or "greenhouse gas accounting", refers to the systematic methodologies, measurement, and monitoring used to evaluate and quantify how much carbon dioxide equivalents (CO2e) an entity or activity emits. Carbon accounting measures emissions of all greenhouse gases and includes CO2, methane, nitrous oxide, and fluorinated gases. Gases other than carbon are expressed in terms of carbon equivalents.
Who uses carbon accounting?
Governments, businesses, and individuals can all use carbon accounting to calculate their greenhouse gas emissions. The total greenhouse gas emissions created by a person, country, or company is known as their carbon footprint. Carbon footprints most commonly show a yearly snapshot of an entity’s continuous emissions.
Why does carbon accounting matter to businesses?
Carbon accounting is an important factor when determining a business’s environmental impact. It is a crucial indicator for investors, consumers, and employees alike when accessing a company’s non-financial performance.
Carbon accounting is essential for businesses to:
- Understand their carbon footprint (scope 1, 2 and 3)
- Identify opportunities for decarbonisation
- Optimise ESG performance
- Future-proof their business against the rising cost of carbon and climate risk
- Align with rapidly changing rules, reporting requirements, and regulations
When did companies begin using carbon accounting?
Carbon accounting rose in prominence starting in the early 2000’s, together with the concept of a carbon footprint, which was popularised through an advertising campaign by British Petroleum in 2005. Carbon accounting soon became a standard way for businesses to measure their ecological impact. For instance, in 2012, the UK coalition government introduced mandatory carbon reporting, requiring around 1,100 of the UK’s largest listed companies to report their greenhouse gas emissions every year.
Carbon accounting has since risen in importance as more regulations make disclosures of emissions mandatory. To learn more about policies and regulations, visit our Regulations Centre and download our helpful fact sheets.
Thus, there is an upward trend in reporting requirements and regulations that demand companies understand where and how much carbon they emit.
The most well-known example of non-financial reporting is ESG reporting, which has become a standard for businesses across the globe. ESG frameworks measure a business's non-financial performance in environmental, social and governance categories. Carbon accounting is an essential component of the E, ‘Environment’, in ESG.
What is a carbon equivalent?
Carbon equivalent is a metric measure used to compare the emissions from various greenhouse gases based on their Global warming potential (GWP). GWP measures the relative potency of different greenhouse gases in trapping heat inside the earth’s atmosphere. For example, methane (CH4) is 28 times stronger than CO2 in trapping heat over a 100-year-period. A carbon equivalent is calculated by converting the GWP of other gases to the equivalent amount of carbon dioxide.
What is the future of carbon accounting?
As pressure rises to lower emissions and reach ambitious decarbonisation goals, the role of carbon accounting is increasingly crucial to a business’s success. In addition to climate pledges and regulatory constraints, the price of carbon is steadily rising and this further incentivises the private sector to measure, track and reduce carbon emissions.
Carbon accounting provides businesses with tools to quantify and measure carbon emissions and allows them to make informed decisions regarding decarbonisation strategies. Carbon accounting allows companies to pinpoint where they are releasing the most emissions. This enables them to prioritise decarbonisation strategies on where they will have the greatest impact.
In short: carbon accounting identifies the most powerful levers for decarbonisation. Carbon accounting is the first and critical step to emissions reduction, which is essential if we want to remain below 2 degrees of global warming. It is also important to business’s bottom line as the price of carbon and regulatory risk associated with carbon continues to rise.
In a great win for our planet, accounting for greenhouse gas emissions is increasingly an industry-standard requirement for businesses. The chart below shows how global interest in carbon management is increasing.
Credit: Plan A
What does carbon accounting have to do with the Paris Climate Agreement?
The Paris Climate Agreement is an international treaty adopted by 196 nations at COP21 in Paris in 2015 and came into force a year later in 2016. Most broadly, it aims to limit global warming to "well below 2°C, and preferably below 1.5°C.” The Paris Agreement has requested participating countries to formulate actions they plan to take to reduce greenhouse gas emissions. The commitments are known as Nationally Determined Contributions (NDCs). Within the agreement, countries developed an enhanced transparency framework (ETF) to report transparently and track progress on the actions taken.
Carbon accounting is an important tool countries use to measure their emissions reductions and compare them to the emission reduction targets set out in the Paris Agreement. Unfortunately, as of today, the world is not on track to meet the goals of the Paris Agreement.
What are the different carbon accounting methods?
The GHG Protocol’s Corporate Standard and Corporate Value Chain Standard ensure accurate and fair accounts of a company’s carbon footprint through agreed-upon methodologies and accounting principles. Carbon accounting and reporting should follow five main principles: relevance, completeness, consistency, transparency and accuracy. You can read more of these Principles on page 7 of the GHG Protocol’s Corporate Standard.
The standards describe various carbon accounting methods that can be selected based on data availability, materiality and accuracy. Below you can read about five important methods: the physical-unit method, spend-based method, supplier-specific method, average method, and hybrid method.
Physical-unit method: Together with “spend-based”, physical-unit describes the type of activity data used. It calculates GHG emissions based on the number of physical units a company consumes or uses (e.g. electricity in kWh, gasoline consumed in litres).
Spend-based method: Together with “physical-based”, spend-based describes the type of activity data used. It calculates GHG emissions based on the financial value of a purchased good or service (e.g. total value in euros paid for IT hardware), then multiplies it by a relevant emissions factor (the amount of GHG emissions produced per monetary unit).
Supplier-specific method: Collects product-level cradle-to-gate GHG inventory data (i.e. emission factors) from goods or services Suppliers of the reporting company. This is the most accurate but also the most time and resource-intensive method.
Average-data method: Estimates emissions by collecting data on the mass or other relevant units for the emissions category, and multiplies this by the relevant secondary (e.g. industry average) emission factors (e.g. average emissions per unit of good or service).
Hybrid-method: A combination of supplier-specific activity (if available) and using secondary data to fill the gaps. It can also mean the mixed use of physical- and spend-based methods.
France has developed specific carbon accounting methods and frameworks, learn more about the Bilan Carbone.
What are scopes 1, 2 and 3?
According to the leading GHG Protocol Corporate Standard, a company's greenhouse gas emissions are classified into three scopes. While some standards and regulatory requirements, such as TCFD, EU NFRD and UK SECR, already require the disclosure of a company's scope 1 and 2 emissions, the reporting of scope 3 emissions is mostly voluntary. However, upcoming regulations, such as the EU CSRD or the already partly implemented EU SFDR, will also require the disclosure of scope 3 emissions.
Scope 1 emissions are direct emissions from company-owned and controlled resources. In other words, emissions are released into the atmosphere as a direct result of a set of activities at a company level. Scope 1 has four categories: stationary combustion, mobile combustion, fugitive emissions, and process emissions.
Scope 2 emissions are indirect emissions from the generation of purchased energy, from a utility provider. In other words, all GHG emissions released in the atmosphere, from the consumption of purchased electricity, steam, heat and cooling.
Scope 3 emissions are all indirect emissions - not included in scope 2 - that occur in the value chain of the reporting company, both upstream and downstream.
Scope 3 describes activities and emissions in the value chain that are outside the company’s direct control and, therefore, the hardest to measure and reduce. However, companies succeeding in reporting all three scopes will gain a competitive advantage through early alignment with compliance, decarbonisation, and reduced climate risk, among other benefits.
Why is scope 3 so important?
For most industries, 92% of a company's emissions come from scope 3 (indirect emissions) - meaning that only 8% of GHG emissions come from scopes 1 and 2 of emissions. For companies to reduce their emissions, they must also set their efforts on scope 3. Therefore, allocating resources for scope 3 carbon accounting and decarbonisation is a tremendous opportunity for companies to create a real impact and drastically reduce their carbon footprint.
What is a carbon accounting software?
Carbon accounting software allows companies to streamline and automate their carbon accounting. For instance, Plan A’s platform has a series of scope 1, 2 and 3 calculators to streamline businesses’ carbon accounting and lay the groundwork for setting SBTi targets.
It is essential that carbon accounting tracks emissions across the full supply chain of a business, as often the vast majority of greenhouse gas emissions are found in scope 3.
To address this need, Plan A's Suppliers Module allows companies to track, report and reduce emissions beyond scopes 1 and 2 by providing a complete overview of scope 3 supplier emissions.
Carbon accounting softwares can also automate and streamline compliance with non-financial regulatory and reporting frameworks. The Plan A platform's customisable reports allow for streamlined compliance with NFRD, SFRD and other ESG reporting requirements.
How can my business use carbon accounting?
Carbon accounting is essential to a company’s current and future success. Establishing a credible decarbonisation strategy is key to:
- Lowering financial risk
- Protecting your business against rising cost of carbon
- Avoiding greenwashing allegations
- Complying with a rapidly changing regulatory landscape
How can my business measure and reduce emissions with Plan A?
Science-driven analysis and decision-making are at the heart of any decarbonisation strategy, which is why Plan A has a highly specialised carbon accounting team, a Scientific Board, and is TÜV Rheinland Certified.
Plan A’s decarbonisation and ESG management platform follows the methodology of the internationally recognised Greenhouse Gas Protocol Corporate Standard. The software collects the necessary company data across all relevant emissions scopes (scopes 1, 2, and 3) to the industry and merges them with the appropriate emission factors. The application then derives emissions estimates and monitors them over time to visualise progress.
Plan A believes that it is not enough to create visibility for a company’s current carbon footprint. Instead, our software actively helps companies set Paris Agreement-compliant net-zero targets and achieve them through decarbonisation solutions and activities, as well as a network of service providers and sustainability professionals. These are based on the company’s emissions profile and directly address the indicators with the most significant reduction potential.
If your business is ready to become a leader in sustainability and begin your path to net-zero, sign up for a free demo with Plan A today. Plan A’s end-to-end platform will empower your business to unlock the full potential of carbon accounting and decarbonise across all three scopes.