What Is Carbon Accounting? Standards, Frameworks, Developments and Challenges

What is carbon accounting?

Carbon accounting – also known as a carbon or greenhouse gas inventory – is the process of measuring the amount of carbon dioxide, or other greenhouse gas (GHG), an organization emits. The aim is to help the entity understand its climatic impact.

Carbon accounting is a must for any becoming business today. The process helps organizations highlight and target high GHG emitting operations with emission reduction strategies. Such businesses better meet the demands of the regulatory environment while coming into alignment with investor, consumer, and employee preferences.

As such, in 2022 81% of S&P 500 companies reported their own emissions (scope 1), and the emissions of the electricity they bought (scope 2). In addition, globally, over 22,000 companies disclosed environmental data – with a focus on business emissions – to the Carbon Disclosure Project (CDP) in the same year.

Your business too needs to understand where your emissions are coming from and the volume exuded, to then devise and implement an effective GHG reduction program. And to do that, this Green Business Bureau is your guide.

In this guide, we focus on the application of carbon accounting at the business level. We explain fundamental concepts and terminology with the recognition that this understanding is vital to accurately quantify business emissions. We then deliver an 8-step process to track, measure, and report the GHG emissions associated with your business and related operations. To conclude, we discuss the most recent developments in carbon accounting, as the discipline continues to evolve with ongoing research and a greater understanding of the concept.

Use the links provided to navigate through this article.

The birth of carbon accounting

Carbon accounting describes a process that measures, records, and reports greenhouse gas (GHG) emissions. It’s a relatively new discipline born from the collective awareness that carbon dioxide emissions impact our climate.

Yet it wasn’t until 1992, with the adoption of the United Nations Framework Convention on Change (UNFCCC) during the Rio de Janeiro Earth Summit, that a global movement to inventory GHG emissions, and with that, carbon accounting began.

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FROM RIO TO GLASGOW: THE POLITICAL RECOGNITION OF OUR CLIMATE CRISIS INCREASES

On the 9th of May, 1992, the United Nations Framework Convention on Change (UNFCCC) was adopted.

The objective of the convention was to:

“Stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climatic system.” – UNFCCC, What is the United Nations Framework on Climate Change?

Although this level was not defined by the convention, the aim was to allow ecosystems and society to adapt naturally to climate change, which means slowing global warming down. Since the convention’s establishment, the countries involved meet annually during the Conference of the Parties (COP). COP is a supreme decision-making body that aims to promote the effective application of the convention.

30 years later came COP 26 (2021) – held in Glasgow. COP26 brought together 120 world leaders and over 40,000 registered participants. Countries involved included the US, the UK, the European Union, and China. One of the main agreements made by COP26 was the commitment to end and reverse deforestation, along with securing global net zero targets by the mid-century and keeping 34.7°F (1.5°C) within reach.

The ongoing commitment towards UNFCCC – via COP – symbolizes how the political recognition of climate change has increased globally. There have been two significant events worth noting since the establishment of COP that are relevant to carbon accounting:

• The Kyoto Protocol: The first meeting of the Conference of the Parties (COP1) took place in 1995 in Berlin. COP1 launched strict and precise commitments to mitigate climate change in what was named the Kyoto Protocol. The protocol sets binding and measurable objectives for combating climate change for the first time, stipulating global ceilings for GHGs.
• The Paris Climate Agreement: COP21 took place in Paris 2015, and marked a new momentum for climate action. During COP21, leaders worldwide signed the Paris Agreement, which has the central aim of strengthening the global response to the threat of climate change. The Paris Agreement outlined the action necessary to limit global temperature rise this century below 35.6°F (2°C) (which is warmer than pre-industrial levels), and to cap further temperature increases to 34.7°F (1.5°C). The Paris Climate Agreement opened for signature on Earth Day (22nd of April 2016), at the UN headquarters in New York. 192 states and the EU – representing 98% of global GHG emissions – have ratified or acceded to the agreement. This includes China and the US (with president Biden’s remittance after Donald Trump’s previous withdrawal).

Today, the EU has set targets and measures for reducing carbon emissions. Among these is the Corporate Sustainability Reporting Directive (CSRD). The CSRD expects all large companies to report on their carbon emissions, and small and mid-sized businesses are likely to be included. The EU also expects claimed GHG emissions to be both audited and validated. In addition, in 2019 the UK introduced the Streamlined Energy and Carbon Reporting (SECR) standard, making it mandatory for large companies operating in the UK to annually report their energy and carbon emissions.

With these political shifts comes heightened regulatory demand for businesses to measure, track and report their GHG emissions.

In the United States, reporting on GHG emissions is mandatory for large GHG emitters. In addition, several states have their own more demanding legislation in place, such as California’s and Massachusetts’ Global Warming Solutions Act.

Plus we see these mounting regulations on a global level, far beyond the US and the EU. For instance, in 2007 Australia introduced the National Greenhouse and Energy Reporting Scheme (NGERS) to set mandatory emission reporting.

These changes in the political landscape create the first reason why carbon accounting is important: To stay ahead of the regulatory wave.

Why is carbon accounting important?

As well as helping organizations keep ahead of the regulatory environment, below we discuss additional reasons why carbon accounting is important.

CARBON ACCOUNTING ADDRESSES HUMAN-ATTRIBUTED CLIMATE CHANGE BY REDUCING A BUSINESS ENTITY’S ASSOCIATED EMISSIONS

The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 by the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) at the behest of the G7.

The role of the IPCC is to:

“Assess the scientific, technical, and socio-economic information relevant for understanding the risk of human-induced climate change – Cooperation with the IPCC

IPCC is a body that assesses and coordinates research into climate change occurring across the world.

In 1990, the IPCC published its first assessment report (FAR), which confirmed climate change is a threat to human life and stability. The IPCC estimates that the concentration of CO₂ in our atmosphere has increased from 280 parts per million (ppm) – during the pre-industrial era – to 412.5 ppm in 2020. Such a rise has not been seen in the last 650,000 years, and never before has atmospheric CO₂ increased as rapidly.

This increase in atmospheric carbon dioxide is associated – as predicted – with an average temperature rise. Yes, the Earth’s average temperature naturally oscillates. What’s different this time is humans are interfering with this natural rhythm and pushing it out of sync. For instance, our planet is currently heating up, when over the past 7,000 years, the average temperature has been decreasing at a baseline rate of 0.01°C per century.

The most recent IPCC report, published on Monday 28th February 2022, paints the bleakest picture yet regarding the impacts of climate change risk on ecosystems, wildlife, human health, society, and our economy. The report confirms that the widespread impact of global warming is being felt around the world. Once more, further impacts are in the pipeline even if emissions are cut to meet the most ambitious scenario targets.

“We also conclude that many future climate-related risks are more severe than previous IPCC assessments, increasing the urgency of cutting greenhouse gas emissions to limit future warming to as low as possible.” – Professor Richard Betts MBE, Met Office, and the University of Exeter and report lead author” – Prof Richard Betss MBE, Met Office, the University of Exeter and report lead author

Hence, to ensure resilient and stable planetary systems, our global economy must meet a 45-50% reduction in emissions by 2030, with the aim of achieving global net zero by early 2050.

With these targets in mind, 2015 marks a significant point in our history. As we mentioned, it was in this year that 192 countries (plus the European Union) signed the Paris Climate Agreement, to limit global temperature rise to 2°C (35.6°F) above pre-industrial levels by 2040.

As global leaders work to deliver a zero-carbon future, pressure mounts on business leaders to do the same. As such, during the fiscal years 2018 and 2019, half of the fortune 500 companies (F500) fully or partially reported GHG emission data. Plus, 60% of America’s largest companies have set at least one target to reduce GHG emissions.

In addition, a 2018-2019 Fortune 500 Greenhouse Gas Emissions Report calculated that the F500 was responsible for 13.34 billion tons of CO_2e in 2018, and 13.15 billion tons of CO_2e in 2019. Once more, a 2017 Carbon Major Report stated 50% of global industrial emissions can be traced to just 25 organizations (since human-induced climate change was officially recognized). Hence, businesses withhold the power to dent global GHG emissions and mitigate the effects of climate change. Keeping track of organizational emissions via carbon accounting is key to realizing this power.

CARBON ACCOUNTING PROVIDES LONG-TERM BUSINESS VIABILITY

A 2021 survey reported 83% of consumers declared that it’s very important for them to buy from a company that operates sustainably. In the United States alone, 56% of consumers will stop buying from companies they believe operated unethically – although this percentage has been obtained from research conducted in 2015, so may be outdated.

And it’s not just consumers that are demanding responsible businesses. For Gen Z (67%) and Millennials (64%) sustainability is a significant factor in an employee’s decision-making process when deciding where to work.

Investors, also, are demanding sustainability in business as practices design lower-risk investment options. For instance, one report by Bloomberg showed investors doubled sustainability-led capital in 2021. The same report also indicated investments are growing rapidly, and now represent almost one-third of all professionally managed assets globally.

Measuring, tracking, and reporting business emissions via carbon accounting represents a vital element for any business wanting to operate sustainably. Hence, carbon accounting helps businesses secure funding.

CARBON ACCOUNTING ALLOWS COMPARISON AND BENCHMARKING

Carbon accounting is not simply a case of tracking emissions. The purpose of carbon accounting is to help stakeholders derive meaningful insight, which means comparing an entity’s current emissions to historical datasets to illustrate improvements (or declines). Benchmarks should also be set to help companies track progress.

Plus, stakeholders can use a given entity’s emission reports to compare one firm to another and understand an organization’s relative performance.

Carbon accounting glossary: Understanding important terminology and concepts

The complexity involved in measuring, tracking, and reporting business emissions makes carbon accounting a daunting topic to tackle. Plus, as a fairly new discipline, the concepts, terminology, frameworks, standards, and practices continue to evolve. As such, it’s important you grasp the foundations of carbon accounting before measuring and tracking your organization’s emissions. And that understanding starts with defining the jargon.

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SCOPE 1 EMISSIONS

Head to: Scope 1 2 and 3 Emissions Diagram (Understanding Corporate Emission Sources) to learn more about the above diagram and the different emission scopes.

Scope 1 emissions, as defined by the GHG Protocol, are GHGs released directly by the business in question by the burning of fossil fuels onsite. For simplicity, when defining scope 1 emissions, think burnt. To learn more about scope 1 emissions, head to our article GHG Protocol: Scope 1 Emissions Explained.

SCOPE 2 EMISSIONS

Scope 2 emissions, as defined by the GHG Protocol, are indirect GHGs released due to the energy purchased by the business in question. By energy purchased, we’re referring to electrical energy. For simplicity, when defining scope 2 emissions, think bought. To learn more about scope 2 emissions, head to our article GHG Protocol: Scope 2 Emissions Explained.

SCOPE 3 EMISSIONS

Scope 3 emissions as defined by the GHG Protocol are indirect GHGs released across an organization’s value chain. For simplicity, when defining scope 3 emissions, think beyond. To learn more about scope 3 emissions, head to our article GHG protocol: Scope 3 Emissions Explained.

The GHG Protocol outlines 15 categories that fall under scope 3 emissions. These categories are grouped as either upstream or downstream activities, and are as follows:

• Upstream activities:some text
  • Business travel;
  • Employee commuting;
  • Waste generation;
  • Purchased goods and services;
  • Transportation and distribution;
  • Fuel and energy-related activities;
  • Capital goods;
  • Upstream leased assets.
• Downstream activities:some text
  • Investments;
  • Downstream distribution and transportation;
  • Processing of sold products;
  • Franchises;
  • Downstream leased assets;
  • Use of sold products;
  • End-of-life retirement.

CARBON DIOXIDE EQUIVALENT (CO_2E)

When dealing with emission data, you’ll emissions represented as carbon dioxide equivalents – CO_2e. What does this measure mean?

A carbon dioxide equivalent is a standard unit for counting greenhouse gas (GHG) emissions regardless of whether they’re from carbon dioxide or another gas, such as methane.

As we know, GHG emissions are mainly carbon dioxide (CO₂). But there are other GHGs that contribute significantly to human-induced global warming such as methane (CH₄), nitrous oxide (N₂0), refrigerant gasses (HFCs, PFCs, and CFCs), sulfur hexafluoride (SF₆), water vapor (H₂0), and ozone (O₃).

These different GHGs have distinct fundamental structures and properties, meaning they have differing IR absorbing capacities and greenhouse gas effects. A gas’s IR absorption ability is captured in Global Warming Potential (GWP) measures.

Because CO₂ is the main culprit when it comes to human-induced climate change, every GHG is translated into a CO₂ equivalent. This translation is based on the global warming potential (GWP) of a given GHG – the higher the GWP, the higher the greenhouse gas effect.

The GWP of CO₂ is 1, as CO₂ is compared to itself. The GWP of CH₄ is 21 according to the latest estimates. This means that 1 ton of CH₄ has the global warming potential of 21 tons of CO₂ – and so we would say 21 tons of CO_2e.

EMISSION FACTOR

An emission factor (EF) is a multiplier that describes the volume of GHGs emitted during a given activity. High EF values define an activity that releases a large volume of GHGs into the atmosphere.

EFs are used because calculating exact measures for GHG emissions would exhaust both time and money. Hence companies calculate emission estimations based on activity data and the EF associated with that activity.

What do we mean by activity data?

Activity data represents production to reflect fossil fuel energy demand. For instance, the activity data could be the number of liters of diesel consumed, or the tons of iron ore used in an industrial process.

Activity data is then multiplied by the EF, which is calibrated to measure an activity’s CO₂ equivalent. Hence EFs are represented by kg CO_2e/accounting unit of activity. You can look up the emission factors associated with a given activity from IPCC’s emission factor database.

LOCATION-BASED APPROACH

The location-based approach is a carbon accounting method designed to help companies report their scope 2 emissions. Scope 2 emissions are calculated using a standard emission factor that’s set by the grid. The issue with this approach is that an organization’s specific emission reduction efforts aren’t captured, such as the purchasing of green power. To address this issue, the market-based approach was adopted, which we discuss later.

Using the location-based approach, an organization’s scope 2 emissions are calculated using the following measures:

• Direct line emission factor;
• Regional emission factor;
• National emission factor.

These measures are defined below.

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DIRECT LINE EMISSION FACTOR

A direct line emission factor is applied when an organization purchases electricity through a direct line connection with a known supplier – a direct line links an isolated generation site with an isolated customer. The organization should allocate a direct line emission factor to the portion of the electricity purchased from the specific known source.

REGIONAL EMISSION FACTOR

If an organization purchases electricity that’s delivered through a grid, the organization should use published emission factors based on the geographical location of each of its facilities. The regional emission factor is the average emission factor for the electricity generation facilities in a given region. Regional factors are available for several countries through national governments or other sources. For operations in the U.S., the recommended regional factors are the total output subregion grid factors published by the EPA’s Emission & Generation Resource Integrated Database (eGRID).

The EPA publishes an Emission Factors Hub that contains the most recent eGRID subregion emission factors. It must be noted that there’s often a delay between the release of the new version of eGRID and updates to the Emission Factors Hub. You can find the most recent version of eGRID, along with supporting documentation and resources here. If you don’t know what eGRID subregion your organization is located in, use the Power Profiler Tool to find out.

NATIONAL EMISSION FACTOR

If regional emission factors are not available, use the national emission factor, such as those published by national governments or the International Energy Agency.

MARKET-BASED APPROACH

The market-based approach instructs organizations to use more specific emission factors that account for the electricity mix sourced. With this method, if a business decides to derive a portion of electricity from a renewable energy supplier, then this will be reflected in an organization’s GHG inventory. Emission factors applied in the market-based approach include:

• Energy Attribute Certificates – such as Renewable energy certificates (RECs);
• Contracts;
• Supplier-specific emission factor;
• Residual mix factor;
• Regional emission factor;
• National emission factor.

The above terms are defined below.

RENEWABLE ENERGY CERTIFICATES (RECS)

Renewable energy certificates (RECs), otherwise known as a Guarantee of Origin, represent 1 megawatt-hour (MWh) of electricity generated from a renewable energy source, such as wind, solar, or biomass.

RECs are traded between the renewable energy supplier and the organization seeking to reduce its climatic impact.

BUNDLED AND UNBUNDLED RECS

Bundled RECs are sold alongside the electrical energy produced.

Unbundled RECs are sold separately from the electrical energy produced, which is instead, fed to the grid.

The purpose of unbundled RECs is to give organizations a cost-effective and flexible means of supporting renewable energy developments, and meet sustainability goals even if clean energy products are not available locally. By purchasing unbundled RECs, a business does not need to alter its existing power contracts. An entity can “cancel out” emissions from operations by financially supporting the renewable energy market. This hinges on the concept that greenhouse gas emissions (GHGs) mix globally in the atmosphere and that it doesn’t matter where GHGs are emitted, what matters is the overall impact an organization has on global GHG levels.

Bundled RECs, on the other hand, will have a direct impact on the buyer’s energy mix by providing renewable energy.

ENERGY ATTRIBUTE CERTIFICATES

An Energy Attribute Certificate (EAC) guarantees the energy’s origin is from renewables. A EAC electronically tracks the production, trade/distribution and consumption of renewable energy. The most common type of EAC is a REC – as previously explained. The emission factor associated with an EAC is based on the specific energy source that the certificate represents. As RECs use a renewable energy source, that emission factor is often set at zero. But they may also have a non-zero emission factor (e.g. if there is a fossil-fuel or biomass generation component).

CONTRACTS

An organization may have a contract, such as a power purchase agreement (PPA) as defined below, to purchase electricity from a specific generating facility. If there are no certificates (EACs) available indicating the amount of energy and emissions associated with this contract, then the contract itself will carry an emissions factor associated with the generation facility.

1. If certificates are issued to the generating facility then the emission factor is conveyed by the certificates rather than the contract.
2. If the certificates are bundled with the contract, then the purchasers can claim the emission factor.
3. If the certificates are sold to another entity, then the purchaser cannot make that claim, and the energy should be assigned the residual mix factor.

SUPPLIER-SPECIFIC EMISSION FACTOR

The supplier-specific emission factor is one that is reported by the utility provider. This emission factor must include all the electricity delivered by the supplier, including the electricity it generates and the electricity purchased from others.

RESIDUAL MIX FACTOR

Think of the residual mix factor as what’s left over. That is, the residual emission factor represents the emissions and energy generation that remain after certificates, contracts, and supplier-specific factors have been claimed and removed from the calculation.

POWER-PURCHASE AGREEMENT

A power purchase agreement, otherwise known as an electricity power agreement, is a contract – usually 5-20 years in length – during which time, the purchasers buy energy at a pre-negotiated rate. PPAs are fundamental in supporting independently owned electricity generators, especially producers of renewable energy such as wind or solar.

MARGINAL EMISSION FACTOR

A marginal emissions factor refers to the rate at which emissions would change dependent on the energy load.

For instance, say a town runs on 75% hydroelectric power and 25% on coal power. For inhabitants in this town, the electricity they receive is mostly clean. This could entice businesses wanting to operate via clean energy to move into the area. However, such a move will increase electricity demand on the grid. If that demand cannot be matched by an increase in hydroelectric power, then in effect, the business is operating on 100% coal-generated electricity. This is captured in a marginal emission factor. Hence, thinking in marginal rather than average carbon emissions can dramatically affect a company’s choices to reduce their climatic impact.

CARBON OFFSET

A carbon offset describes the reduction, or removal, of carbon dioxide or other greenhouse gas using a process that measures, tracks, and captures GHG emissions to compensate for an entity’s emissions exuded elsewhere. GHGs are captured using projects such as tree planting schemes, renewable energy infrastructure, carbon capture programs, or community-based sustainable developments.

Carbon offsetting works on the following principle: It doesn’t matter where GHG emissions are reduced or absorbed because GHGs mix globally in the atmosphere. Therefore, companies can partner with/pay other companies to help minimize their impact on the environment.

CARBON CREDIT

When a business invests in a carbon offsetting project, that business will receive carbon credits. A carbon credit is a transferable instrument, certified by governments or independent bodies, and represents a reduction in GHG emissions of one metric ton of CO_2e. As such, a carbon credit is a generic term for any tradable certificate or permit. These represent the right to emit a set amount of carbon dioxide, or the equivalent amount of a different greenhouse gas.

An easy way to think about this is to imagine carbon credits as the tokens, or accounting language used to convey net climatic benefits from one entity to another.

To learn more about carbon offsets and carbon credits, read: Carbon Offsets vs Carbon Credits: What’s the Difference?

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ADDITIONALITY

Additionality is the defining concept of carbon offset projects. To qualify as a carbon offset, the emission reductions made as a result of the project must be additional to what would have happened if the project had not been carried out.

Grid additionally means production is accompanied by an additional source of renewable energy capacity.

EMISSIONALITY

Emissionality builds on the idea behind additionally. Emissionality quantifies a real-world drop in fossil fuel emissions, and is used by buyers of RECs to show their purchasing decisions are really driving a global impact.

ATTRIBUTIONAL CARBON ACCOUNTING

Attributional carbon accounting uses inventories of an organization’s emissions – scopes 1, 2, and 3 – with the aim of allocating “carbon budgets” to entities. With attributional carbon accounting, emission inventories are static and are allocated to a defined scope of responsibility. The aim is to establish emission quotas and to track emissions over time. The output of information is the quantity of GHGs released and/or removed from the atmosphere under the boundaries of the given entity.

CONSEQUENTIAL CARBON ACCOUNTING

Consequential carbon accounting (otherwise known as intervention accounting) quantifies the change in emissions caused by decisions, interventions, and projects. Consequential carbon accounting methods estimate the change in GHG emissions and/or removals from the atmosphere caused by a specified decision or intervention relative to a counterfactual baseline.

To illustrate the difference between attributional and consequential accounting, let’s consider an example. Say we have a brewery business that’s decided to use grain residues from the distilling process as fuel, substituting fossil fuels. With this change, the GHG emissions reported via the attributional carbon accounting method indicate a reduction in business emissions. However, livestock farmers previously relied on these grain residues as animal feed. Farmers now have to buy more soy meal, placing a higher demand on agricultural output in international markets, expanding deforestation. Under the consequential carbon accounting method, GHG emissions have increased.

SUPPLIER-SPECIFIC METHOD

The Supplier-Specific Method collects product-level cradle-to-grave GHG inventory data from the suppliers of goods and services. Using this method, an organization’s GHG emissions are calculated using the following formula:

Supplier activity x secondary emission factor

For instance, let’s say your business bought 200 iPads and wants to calculate the associated emissions. Using the supplier-specific method you’d use the secondary emission factor associated with an iPad which is estimated to be 78 kg CO_2e per iPad, and then the number of iPads your business has purchased.

The supplier-specific method is used to estimate scope 3 emissions under the following categories:

• Purchased goods and services;
• Capital goods;
• Fuel and energy-related activities;
• Waste generated in operations.

PHYSICAL-UNIT METHOD

The physical-unit method calculates the GHG emissions based on the number of physical units purchased, plus measures for the energy consumed by those units. For instance, let’s say a company purchases 100 vehicles, and each vehicle consumes 10,000 liters of gasoline. Using the physical-unit method we can calculate the associated emissions using the following formula:

100 cars x 10,000 litres x 88.05 CO_2e per litre = 88, 050,000 CO_2e

The physical unit method can be used to estimate scope 3 emissions under the following categories:

• Capital goods;
• Purchased goods and services.

SPEND-BASED METHOD

The spend-based method calculates the financial value of a purchased good or service, then multiplies this by the associated emission factor to give the amount of GHG emissions produced per monetary unit. The following calculation is used in the spend-based method:

Cost (purchased goods or service) x emission factor

The spend-based method is recommended to calculate scope 3 emissions under the following categories:

• Purchased goods and services;
• Capital goods;
• Upstream transportation and distribution;
• Business travel;
• Downstream transportation and distribution.

HYBRID METHOD

The hybrid method is recommended by the GHG Protocol to calculate scope 3 emissions. This method includes recording as much activity-based data as one can collect from the supply chain and then using the spend-based approach to estimate what’s left over.

Carbon accounting standards and frameworks

At present, there are no internationally recognized standards for measuring, recording, and reporting an organization’s GHG emissions. This can make it difficult for businesses to know how to account for their emissions. Many separate entities have developed programs that both promote GHG accounting/reporting while helping to define the ways in which it’s carried out. With this many standards and frameworks to choose from, it can be difficult to select ones that are right for your business. To help, we’ve detailed the most widely recognized standards and frameworks used in carbon accounting below. We recommend you choose more than one framework or standard to inventory your organization’s GHG emissions.

IPCC

The Intergovernmental Panel on Climate Change (IPCC) has provided several key principles that have been adopted by today’s carbon accounting standards. In this sense, the IPCC set a foundational framework to base carbon accounting standards on. Elements of this framework that are most consistently applied include transparency, accuracy, consistency, and completeness.

TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURE (TCFD)

The Task Force on Climate-Related Financial Disclosures was created as a follow-up to the 2015 Paris agreement. The TCFD has established a framework of recommendations on the types of information companies should disclose to investors, lenders, and insurance underwriters.

SUSTAINABILITY ACCOUNTING STANDARDS BOARD

The IFRS Foundation’s International Sustainability Standards Board (ISS) encourages companies to keep using the SASB Standards. These standards enable organizations to provide industry-based sustainability disclosures about the risks and opportunities that affect enterprise value. Included in this is the tracking and reporting of an entity’s GHG emissions.

GLOBAL REPORTING INITIATIVE

The Global Reporting Initiative (GRI) is an international independent set of standards that help businesses, governments, and other organizations understand and communicate their impact on issues such as climate change, human rights, and corruption. These standards are used by over 10,000 organizations across 200 countries and are advancing the practice of sustainability reporting – which includes the reporting of business GHG emissions.

CLIMATE REGISTRY

The Climate Registry offers a variety of tools and guidance to help businesses track their emissions and become more efficient, sustainable, and accountable. Resources provided include access to the Carbon Footprint Registry, Net Zero Portal, and Protocols that outline best practices in carbon accounting.

CDP

The Carbon Disclosure Project asks for voluntary disclosures of non-financial data, which includes GHG emissions (along with a company’s broader financial performance such as water security, forest health, and preservation). CDP is a non-profit charity that runs global disclosure systems to be used by investors, companies, cities, states, and regions. Today, the CDP holds the largest database in the world of primary information regarding a company’s carbon footprint and carbon-reduction strategies. Eg. in 2020, more than 9,600 companies with (more than) 50% of the global market capitalization disclosed carbon footprint data through CDP. Information on climate risk alongside low carbon opportunities is requested. Industry peers are used as a benchmark as companies are scored and ranked publicly.

THE GREENHOUSE GAS PROTOCOL

The Greenhouse Gas Protocol was developed by the World Resource Institute and the World Business Council for Sustainable Development. The aim of the GHG Protocol is to help organizations track and measure their progress toward decarbonization. The GHG Protocol represents the most used standards for GHG accounting. Business emissions are measured, tracked, and recorded across 3 scopes – which have been defined above.

ISO 14064

ISO, WRI, and WBCSD worked together to ensure consistency amongst the ISO and GHG Protocol standards. As such, ISO 14064 is largely based on the GHG Protocol. The standards include minimum requirements for GHG inventories which provide the basic structure against which credible and consistent independent auditing can be performed. The ISO 14064 standard offers policymakers a ready foundation of best practices upon which to build a GHG reduction program. The aim of ISO 14064 is to improve consistency, increase flexibility, and decrease the effort associated with voluntary GHG inventories.

GHG REPORTING PROTOCOL BY USEPA

The United States Environment Protection Agency (USEPA) Greenhouse Gas Reporting Protocol (GHGRP) requires the reporting of greenhouse gas (GHG) data and other relevant information from large GHG emission sources, such as fuel and industrial gas suppliers, and CO₂ injection sites in the United States. ~8,000 facilities are required to report their emission data under the GHGRP standards, and this information is made public in October of each year.

The GHGRP requires facilities to report two types of GHG emissions:

1. Combustion emissions that result from the burning of fossil fuels onsite;
2. Other emissions from industrial processes such as chemical reactions. Emissions from leaks or irregular emissions are also process emissions.

ESG REPORTING AND CARBON REPORTING

The demand for environmental, social, and governance (ESG) reporting continues to rise. Carbon accounting is incorporated within the E of ESG. In this sense, frameworks and standards for ESG reporting also apply to carbon accounting. Take a read of our article: ESG Reporting Frameworks, Standards, and Requirements to find out more.

Getting started with carbon accounting

Access to accurate and granular GHG emission data is essential for organizations looking to identify where to focus emission reduction efforts, develop a clear strategy, and track the impact of emission reduction activities. In the next section of this guide, we will outline 7 key steps to help you get started with carbon accounting.

CAPTURE BUSINESS EMISSION DATA

You want solid sustainability data to underpin your GHG accounting and decarbonization disclosures.

The main challenge to overcome in this step is the removal of organizational data silos. It’s common for companies to have GHG emission data scattered across various internal systems, with these systems running in isolation and not communicating with one another. For instance, your utility providers might not have systems and processes in place to share data. Below we’ve detailed best practices to help your business overcome this barrier.

Step #1: Consider outsourcing data

Consider outsourcing data capture to a specialist and aim to get close to the original data source if you can – for instance, take a meter reading rather than looking at invoice data. Aim to automate this process – you want to minimize the amount of human intervention involved.

Step #2: Work with your utility providers

Contact your utility providers and explore what data-sharing options are available. You can automate data provision via an online portal or an application programming interface (APR) that allows data exchange. If assessing utility meter data is impossible, explore sub-meter options.

Step #3: Create a robust and flexible data structure

You want to organize your data in a structured way, to support your decarbonization target. Consider the types of data your business needs to capture, and how that data can be tagged and aggregated. You can aggregate data at the account or meter level, which can then be further aggregated to location and then, reporting groups.

1. Meters and accounts: Account data is monthly or quarterly. Meter data is consumption data that’s delivered daily – using 15-30 min intervals and can be tracked at the same location.
2. Location: Where meter data is tracked and reported
3. Organization: Data reported at the whole-of-organization level is an aggregate of all locations and underlying data.
4. Reporting groups: Use groups to aggregate data from multiple locations. This can help you set boundaries for sustainability reporting.

It should be easy for you to reconfigure data and change reporting groups, locations, accounts, and meters that underlie it. Baseline emissions must be recalculated when your organization goes through structural change.

Step #4: Embed business processes for data management and ownership

Create an accountability matrix for data management and assign responsibilities to staff. This matrix needs to set out a regular schedule to review data completeness and to catch errors and address them. Note that the process of capturing data demands buy-in from a diverse range of stakeholders who’ll share data from their respective business units. Be mindful of the challenges this may present.

Your data storage process needs to be both auditable and traceable. Make sure your data management system can store reference documents and meet core audit requirements such as change tracking, time stamping, and data origin. Your aim is to have a trusted and secure single source where you can access this data, and share it with relevant stakeholders.

Keep a close eye on the data flowing in. You’ll want to set up an inactivity alert against each data source to identify data gaps early on. Follow up promptly with parties that have not fulfilled data provision commitments.

Step #5: Establish consistency and reliability in reporting processes

Keep track of decisions made and the reasons for them, with up-to-the-minute records of calculations and their inputs, plus relevant documentation and paperwork. Make sure to maintain data quality through clear lines of responsibility, regular attention, and by staying up-to-date with the changes made in reporting frameworks – noting that decarbonization guidelines are evolving and subject to change.

You can share data with the relevant stakeholders using bespoke reports and sustainability software that inform and engage. Use these reports as part of your engagement plan, and alongside the communication of your emission reduction mission.

CALCULATE YOUR BUSINESS’S GHG EMISSIONS

With a solid foundation of emission data, it’s now easier for you to calculate your GHG emissions for reporting and disclosure while also obtaining significant GHG reductions. You can use this data alongside selected emission reporting standards and frameworks mentioned previously, such as the GHG Protocol and the Carbon Disclosure Project.

To add to these standards, below we detail key focus areas when preparing your data for GHG accounting, reporting, and disclosure.

Step #6: Detail your baseline

You need a means of measuring progress. Your baseline is a clear line in the sand which will enable you to measure this progress. When setting your baseline, you need to consider:

• How you will define the boundaries of your activities.
• How you will structure your data so it can easily be captured for future activity.
• What data is the most appropriate, making sure your historical work on carbon reduction isn’t discounted.

Make sure you’re clear about your objectives and understand the technical criteria to meet these goals.

Step #7: Use the correct emission factors for calculating GHG emissions

Selecting the right emission factor is essential but can present a challenge. When selecting the right EF to use, pay close attention to the following criteria:

• Carbon accounting approach: Decide on whether you’re using a location-based approach to calculate emissions or a market-based approach. This will decipher what emission factors you need to use.
• Region: Important when considering location-based emission factors, with the aim of selecting factors that are as granular as possible.
• Reporting period vs factor period: Emission factor updates probably won’t align with your reporting timeline. With this in mind, set regular schedules for when to source and update factors. This will prevent confusion and maintain consistency between reporting periods and versions.
• Emission sources: Make sure you know your emission source accurately. E.g. is your vehicle fleet running on diesel or gasoline? Selecting the wrong emission factors will cause errors in your GHG reporting processes.

Step #8: Use consequential carbon accounting methods

You want to use consequential carbon accounting methods over attributional carbon accounting to measure the effectiveness of implemented carbon reduction initiatives for reducing business emissions. Attributional carbon accounting is most effective for establishing your business baseline and tracking business-related emissions at set time intervals. However, to establish the effectiveness of sustainable change, and to reduce global GHG emissions – which is your overarching aim – means a consequential carbon accounting approach must be applied.

Carbon accounting developments and challenges

The nuances of carbon accounting continue to evolve, with the most recent changes relating to the way organizations account for renewable energy purchases, capture business scope 3 emissions, and report on a 4th emission scope. In the next section of this article, we explain these developments.

UTILIZE THE MARKET-BASED APPROACH TO MEASURE SCOPE 2 EMISSIONS

Before 2015, organizations were required to report their scope 2 emissions based on standard grid-average emission factors. However, this approach – known as location-based carbon accounting – meant innovative companies working to reduce business scope 2 emissions were not receiving the credit they deserved for their efforts. That is, companies obtaining electricity from the same grid supplier are lumped together under one emission factor.

Issues with this approach led to the development of the market-based approach. Scope 2 emissions under this approach are determined by the mix of EACs, contracts, utility emission rates, and residual mix emission factors – which a company has a significant degree of control over. With this approach, organizations pursuing clean and renewable energy gain the credit they deserve.

It’s therefore important your organization favors the market-based approach to capture scope 2 emissions over the location-based approach.

ACCOUNTING FOR AND REDUCING SCOPE 2 EMISSIONS

Renewable energy certificates (RECs) play an essential role in energy systems today, and help organizations reduce business-related scope 2 emissions. Most energy purchased comes in the form of electricity from the grid. Traditionally, RECs give organizations the opportunity to reduce scope 2 emissions through the concept of additionality or carbon-offsetting, as we explain.

In additionality, a business matches electricity demand with the MWh of electricity provided via purchased RECs. In this sense, emissions are canceled out. The aim is to have 24/7 carbon-free energy. For every hour of operation, attributes are found. This means the business injects the same amount of energy as it takes from the grid using the renewable energy provided by RECs.

Another approach is to seek attributes at locations where marginal emissions are high. RECs are purchased to displace emissions caused by the marginal emission factor. This second method is more of a carbon offsetting approach.

However, the effectiveness of RECs to reduce an organization’s scope 2 emissions via these two approaches is limited because temporal and geographical information is not supplied. To improve the system, a more granular method has been developed by the company Energy Tag.

Energy Tag has developed a system in which REC certificates give a time stamp stating where the energy came from at the specific hour of the day, and from what renewable energy source and plant. This means granular RECs represent the energy your business is using for every hour of the day. To explain further, let’s work through an example.

Say your business is operational in Indiana. You seek RECs from Texas to cancel out the fossil-fuel-generated electricity from the grid in Indiana. You buy Texan RECs because they’re in plentiful supply and cheaper in this region. This is because RECs come from a large Texan wind farm. However, this wind farm is only operational at night, meaning you cannot state that during the time period within which your business runs, the electricity supplied is renewable or completely accounted for by the RECs you purchased.

Now, consider the fact that the marginal emission factor in Indiana is a lot higher than in Texas, meaning your business places more pressure on the grid than is fully accounted for by the RECs you purchase.

A granular REC, on the other hand, records the amount of energy produced in a certain period and gives the location and source. E.g. 1 MWh of solar energy is produced in Indiana. Not only do these certificates bestow a more accurate representation of your business’s impact on global emissions, but they also give a time-based signal to markets conveying the real value of RECs. E.g. RECs from solar energy are more valuable at night than during the day.

Large tech companies such as Google and Microsoft have set targets to power operations on 100% clean energy, every hour, by 2030. In addition, the US Federal government is set to buy half of its energy on an hourly time frame using time-based RECs. Hence, granular REC certificates are entering the market, and the demand for this system is increasing. It’s important your business seeks granular RECs when they’re available to truly account for, and reduce scope 2 emissions.

IMPLEMENT BEST PRACTICES AND SEEK MORE ACCURATE MEASURES FOR SCOPE 3 EMISSIONS

The CDP Supply Chain Report cites supply chain emissions are 5.5x greater than scope 1 and 3 emissions. Hence, capturing scope 3 emissions is vital to gain a more thorough understanding of how your business impacts the environment. Unfortunately, capturing scope 3 emissions is the most difficult. But luckily developments in this area are helping organizations better understand such emissions.

To help you effectively track your business scope 3 emissions, adopt the below best practices:

1. Use sustainability software to automate what would otherwise be a painstaking manual data collection process. You want to utilize sustainability software that uses electronic data interchange (EDI) and artificial intelligence (AI) technology.
2. Be prepared to rely on manual surveys and conversations with individuals that represent key emission hotspots along your supply chain.
3. Note that the data you obtain from various suppliers will come in different formats. Steps #4 and #5 specified in this guide give the flexible data structure you need here.
4. Make sure to account for business scope 3 emissions across every category as detailed by the GHG Protocol (categories detailed in our carbon accounting glossary). Use the supplier-specific, physical unit, spend-based, and hybrid-based methods to account for emissions in each category.
5. Understand the shortcomings of scope 3 emission reporting and how these can be overcome using alternative methods, such as the E-Liability method discussed below.

UNDERSTANDING THE NEED FOR AN E-LIABILITY ACCOUNTING SYSTEM

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The issue with accounting for and addressing business scope 3 emissions is that most companies only know a few of their non-tier-1 suppliers. Plus, companies often don’t know their customers well enough to gauge meaningful data from them – to understand how their product will be disposed of, or how their service will be utilized, which will have a significant impact on a product’s or service’s downstream emissions. Yet, the GHG Protocol expects companies to diversify product lines to gather emission data from all of their multi-tier customers and suppliers – a complex task.

Hence, accounting for business scope 3 emissions has meant the GHG Protocol allows companies to use industry and regional averages, rather than pursuing actual measures from suppliers, distributors, and consumers.

This secondary data – to only be used when primary data isn’t available – is obtained from published databases, government statistics, literature studies, industry associations, financial data, proxy data, and other generic data.

However, using secondary data in certain circumstances seriously undermines the integrity of emission reporting. Imagine producing financial reports using industry cost averages rather than actual invoice information.

In addition, now let’s say a company makes a fundamental and innovative change to reduce business emissions. The organization’s downstream customers are then able to report lower emissions as a result – as they should. However, these changes will also reduce emission averages for the industry, meaning through the use of secondary data, all of that brand’s competitors and all of their downstream customers can also claim the emission-reduction benefits. This would be an inaccurate representation of competitor emissions meaning companies that aren’t even trying to lower their emissions will gain from another organization’s proactive GHG reduction efforts.

To address this issue, Pro. Robert S. Kaplan from the Harvard Business School and Pro. Karthik Ramanna from the University of Oxford have developed an alternative approach for accounting for scope 3 emissions, termed the E-liability approach.

The E-liability approach explained

E-liability is an accounting algorithm that allows organizations to produce real-time, accurate, and auditable data on their scope 3 emissions. The method combines well-established best practices from the financial sector and cost accounting with recent advancements in climate science and blockchain technology.

Blockchain technology is a shared, immutable ledger used to facilitate the process of recording transactions and tracking assets within a business network. Blockchain technology is important as it provides immediate, shared, and completely transparent information that’s stored on an immutable ledger, to be accessed by permission network members. The blockchain network can track orders, payments, accounts, production, and much more.

With E-liability, each supplier along the supply chain records direct carbon emissions. This data is then transferred to the next supplier along the chain.

To explain, supplier one in a value chain will measure and record direct emissions from operations – the extraction of raw materials. These emissions are then transferred to supplier two. Supplier two will record emissions from operations – the manufacturing of products from raw materials. Supplier two will assign transferred emissions and emissions used onsite to the various products. This is similar to the standard accounting practice that assigns the cost of materials and overheads to the finished products. The total emissions used to make and distribute products are then transferred to the next supplier in the value chain. In a method similar to how value-added taxes work, the E-liability approach also solves a counting problem in carbon accounting protocols.

The carbon footprint of a product or service is therefore tracked from the raw materials right until its arrival at the customer’s gate. Just as an organization tracks costs occurred from the sourcing, manufacturing, and distribution of products, the carbon footprint of these processes is also tracked via E-liability.

Once more, the E-liability approach does not demand expensive and complicated software systems to run. Information technology, such as blockchain, combined with existing inventory and cost accounting systems can provide an audit trail for E-liability transactions. Emission data for each service/product will automatically aggregate into company-level accounts, just as in financial reporting. The data can be presented in a format similar to a financial balance sheet, making it easy for independent analysts to verify.

Through the E-liability method, every player in the value chain is encouraged to make changes to reduce GHG emissions. Plus, the end user will see not only their purchase price but also the volume of greenhouse gas emissions emitted during every production stage.

THE NEW SCOPE: ACCOUNTING FOR SCOPE 4 EMISSIONS

There’s growing interest in the adoption of a fourth scope, to calculate and report emissions avoided by using a brand’s products or services. The impacts of which can have either positive or negative climatic effects.

Scope 4 emissions have not yet been standardized in reporting, but it’s expected that guidance on scope 4 reporting will be released in the future. Methodologies have yet to be agreed upon, but the GHG protocol is recommending a consequential approach over an attributional approach to estimate the comparative impacts.