Carbon Accounting: Do you need it for your business?
The sustainability jargon can be overwhelming for businesses to make an eco-friendly transit. One of the most tricky parts of implementing sustainable practices and standards is finances. As business works towards being sustainable and carbon neutral, keeping track of standards, apart from finances can be too intimidating. To help you understand the carbon account tools in simple language, I have created this practical guide to help you understand the concept and applicability of carbon accounting.
What is carbon accounting?
As the name suggests, it is the technique of calculating the carbon footprint by using better environmental standards in the Environmental Management System. Carbon Accounting is also necessary to acquire certificates like ISO 14001.
It covers all the methods and procedures to keep track of inventory and report greenhouse emissions.
Carbon accounting has become crucial as climate change has worsened. Stakeholders are now looking for companies that have improved sustainability.
Table of contents
- What is carbon accounting?
- Why is it important?
- How does the company classify identify and measure the emissions?
- What is the basic process of accounting?
- Guidelines for carbon-based accounting
- How to establish a good accounting system in the company?
- What are carbon accounting standards?
- Methodologies used
- Top accounting challenges
- Who are carbon accountants?
- When do you need carbon accountants?
- How is carbon accounting different from GHG accounting?
- Top resources by official agencies
Why is carbon accounting important?
Carbon accounting helps the company to get accurate and reliable data on GHG emissions – which is essential for any organization focusing on minimizing efforts, reporting, and tracking their impact on the environment.
It is important to have real, established data on the emissions – as it helps to create accurate and effective strategies. Also, any GHG emissions-reducing project would require a qualified feedback loop
It also stimulates better financial growth for the company as stakeholders are always inclined to invest in products and services that are sustainable.
How does the company classify identify and measure the emissions?
Just like any other accounting principles and standards, every transaction is segregated into a separate category. According to the Greenhouse Gas Protocol, the emissions are segregated into three broad categories (Scopes). The categories are also recognized by US Environmental Protection Agency (EPA)
Scope 1 entails carbon emissions that are generated from industrial tools and activities of the company. These emissions are direct as it is created from the assets that are owned or controlled by the company.
These emissions include emissions that are purchased either from a third-party power utility – provided to the building or the facility.
All the indirect emissions that are not covered in Scope 2 are included in Scope 3. Ir represents the emissions from the supply chain, distribution, shipping, consumer usage, and transport.
What is the basic process of carbon accounting?
Typically, the process depends on the complexity and magnitude of the operations. It is also based on the number of products and services the company offers, including the structure of value chains. The process involves –
- Identifying all the sources of emissions – activities content with the business directly or indirectly.
- Segregating the emission sources based on their usage, period, and other essential metrics
- Using mathematical tools to quantify the emissions generated that correspond with the standards mentioned in different environmental management systems.
Guidelines for carbon-based accounting
- It is essential to document and give importance to the information on the process and verify its sources.
- The proper record needs to be maintained on a monthly, quarterly, and yearly basis.
- Record keeping of all the significant activities relating to the carbon assessment and management systems needs to be maintained.
- All the processes and activities should also be periodically maintained and audited.
The essential purpose of carbon-based accounting is to record, summarise and report the companies’ GHG emissions performance. This helps the company to provide a realistic perspective of the sustainability performance of the company.
How to establish a good carbon accounting system in the company?
Having standardized processes can help to capture and reflect relevant data relating to carbon emissions financially. Here’s how to create a good system to deliver better GHG emissions data.
Automate the verification of data review
The data needed for a particular GHG emission calculation is usually spread over different activities of the company. By automating the data review systems, it becomes easier to track the flow of activities that amount to a specific source of carbon emissions.
Work with specialists and experts
Energy consumption data accounting is not the same as usual accounting. It also considers and creates an approach to numerous decarbonization strategies, so sourcing accounting to experts is beneficial. It streamlines different processes and makes them easy to manage.
Create a robust and standard accounting system
Accounting standard needs to be maintained in a way that correlates to other financial data of the company as well. ESG reporting software helps to organize data to provide conclusive and self-explanatory data that translates down to the operations of the company.
It is also equally important to have a flexible system for multi-national companies, which allows them to set standards that are globally relevant. It is also essential to set relevant KPIs for a better data management process.
You can also use cloud-based storage and systems to ensure that the accounting is done immediately and the track record is updated for different relative segments. This helps to check change tracking, time stamping and navigate the activities on a particular GHG emission data.
Data is crucial for implementing an effective decarbonization strategy. This helps the company to implement different tactics to create a verifiable reporting process. A robust accounting system helps to give quality insights on sustainability performance and drives the company towards its low-carbon future.
What are carbon accounting standards?
Carbon accounting standards are established guidelines or frameworks that provide consistent and transparent methods for measuring, reporting, and verifying greenhouse gas (GHG) emissions. These standards help ensure that accounting practices are credible, comparable, and reliable across different organizations and industries. Some of the well-known accounting standards include:
The Greenhouse Gas Protocol (GHGP)
Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), GHGP provides widely accepted guidelines for measuring and reporting GHG emissions from various sources.
This standard developed by the International Organization for Standardization (ISO) provides guidance on GHG accounting and verification, including organizational and project-level accounting.
The Carbon Disclosure Project (CDP)
CDP is a global platform that offers a standardized framework for companies to disclose their climate-related information, including GHG emissions data.
The Science-Based Targets Initiative (SBTi)
SBTi provides guidelines for setting science-based targets to reduce GHG emissions in line with the goals of the Paris Agreement.
The Global Reporting Initiative (GRI)
GRI offers sustainability reporting standards that include requirements for reporting on GHG emissions and climate-related topics.
Methodologies used in carbon accounting?
The two main methodologies used in carbon accounting are:
1. Activity-based approach
Known as the “bottom-up” approach, it involves measuring and calculating emissions from specific activities or processes within an organization. This can include direct emissions from sources such as fuel combustion, as well as indirect emissions associated with electricity consumption, transportation, and other activities. Activity-based carbon accounting typically involves collecting and analyzing data on energy use, fuel consumption, production processes, and other relevant parameters to calculate emissions.
2. Emission factor-based approach
Also known as the “top-down” approach, this methodology involves using standardized emission factors or coefficients to estimate emissions based on aggregated data, such as national or regional energy consumption data. Emission factors are predetermined values that represent the average emissions associated with a particular type of fuel or activity. This approach is often used when detailed activity data is not available or when estimating emissions for large-scale or complex systems.
Both methodologies have their strengths and limitations. The activity-based approach provides more accurate and detailed emissions data but may require more data collection efforts and can be resource-intensive. The emission factor-based approach, on the other hand, can provide estimates quickly and with fewer data but may be less precise and subject to uncertainties. Organizations may use a combination of both methodologies, depending on their specific needs, data availability, and reporting requirements.
Carbon accounting challenges
Carbon accounting faces several challenges, including:
- Data availability and quality: Accurate accounting requires reliable and comprehensive data on energy consumption, fuel use, and other relevant parameters. However, such data may not always be readily available or may be of poor quality, particularly for smaller or less developed organizations.
- Complex accounting methodologies: Carbon accounting can be complex, particularly for larger organizations with multiple emissions sources and complex production processes. Implementing and maintaining an accurate accounting system can require significant resources, expertise, and time.
- Lack of standardization: Despite the existence of various accounting standards, there is still a lack of universal agreement on methodologies, reporting requirements, and data disclosure standards. This can create challenges for comparing emissions data across different organizations and industries.
- Verification and assurance: Carbon accounting requires independent verification and assurance to ensure the accuracy and reliability of emissions data. However, verification and assurance can be costly and time-consuming, particularly for smaller organizations.
- Regulatory uncertainty: Accounting can be subject to evolving regulations and policies, particularly as countries and jurisdictions adopt different carbon pricing mechanisms or emissions reduction targets. This can create uncertainty and compliance challenges for organizations.
Who are carbon accountants?
Professionals with expertise in calculating greenhouse gas (GHG) emissions and other environmental effects linked to an organization’s operations are known as carbon accountants. They could serve as consultants for outside businesses or operate internally for a company or organisation. They may be responsible for creating and implementing accounting systems, gathering and analysing information on energy use and emissions, computing and disclosing GHG emissions, and offering guidance and suggestions on methods for reducing emissions.
Accounting, environmental science, engineering, or other related professions may be the background of a carbon accountant. They may also possess qualifications like the Certified Carbon Reduction Manager (CCRM) or the Certified GHG Inventory Quantifier (CGQP).
When do you need carbon accountants?
Determining when to hire a carbon accountant depends on several factors, including the size and complexity of an organization’s operations, its sustainability goals, and regulatory requirements. Here are some scenarios where it may be beneficial to hire a carbon accountant:
- Regulatory compliance: If an organization is subject to mandatory carbon reporting or emissions reduction requirements, such as those under a cap-and-trade system or carbon tax, it may be necessary to hire a carbon accountant to ensure compliance with reporting and accounting standards.
- Sustainability goals: If an organization has set ambitious sustainability goals, such as achieving net-zero emissions or a carbon-neutral status, a carbon accountant can help develop and implement a carbon accounting system to track progress towards these goals and identify emissions reduction opportunities.
- Supply chain emissions: If an organization’s supply chain has significant emissions impacts, such as those associated with transportation, manufacturing, or raw material production, a carbon accountant can help measure and manage these emissions, and work with suppliers to identify opportunities for emissions reduction.
- Investor and stakeholder demands: If an organization’s investors, customers, or other stakeholders demand greater transparency and accountability on environmental performance, a carbon accountant can help ensure accurate and credible reporting of emissions and sustainability metrics.
How is carbon accounting different from GHG accounting?
Carbon accounting and GHG accounting are closely related concepts but have different scopes.
Carbon accounting refers specifically to the measurement and management of carbon dioxide (CO2) emissions associated with an organization’s activities or operations. It focuses on the quantification of emissions from sources such as fuel combustion, transportation, and industrial processes.
GHG accounting, on the other hand, encompasses a broader range of greenhouse gases beyond just carbon dioxide, such as methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), and others. GHG accounting also includes emissions from a wider range of sources beyond just an organization’s direct emissions, such as emissions from purchased electricity, waste disposal, and transportation of goods and services.
In summary, carbon accounting is a subset of GHG accounting, focusing specifically on CO2 emissions, while GHG accounting has a broader scope, encompassing emissions of a range of greenhouse gases from various sources beyond an organization’s direct emissions.
Top carbon accounting resources
Here are some top resources:
- IPCC: Leading body for assessing climate change. https://www.ipcc.ch/
- GHGP: Widely used accounting tool for GHG emissions. https://ghgprotocol.org/
- TCR: Provides standardized approach to GHG reporting and emissions reduction. https://www.theclimateregistry.org/
- CDP: Works with organizations to measure and manage environmental impacts. https://www.cdp.net/en
- UNFCCC: Sets out framework for addressing climate change. https://unfccc.int/
What is carbon accounting?
Carbon accounting is the process of measuring and tracking greenhouse gas emissions to understand and manage their environmental impact.
What is an example of carbon accounting?
An example of carbon accounting is a company measuring the emissions generated by its operations and supply chain to identify opportunities for reduction.
What are the different methods of carbon accounting?
The different methods of carbon accounting include activity data, emission factors, and mass balance.
What are the principles of carbon accounting?
The principles of carbon accounting include accuracy, completeness, consistency, relevance, and transparency.
Why do we need carbon accounting?
We need carbon accounting to understand our impact on the environment, identify opportunities for emissions reductions, and contribute to global efforts to mitigate climate change.
What are 3 examples of carbon sources?
Three examples of carbon sources are transportation, electricity generation, and agriculture.
What is the difference between GHG and carbon accounting?
GHG accounting includes all greenhouse gases, while carbon accounting specifically focuses on carbon dioxide emissions.
How do I start carbon accounting?
To start carbon accounting, identify the scope and boundaries of your inventory, collect data on your emissions sources, calculate emissions using an appropriate methodology, and report your findings.
What is scope 1 2 3 in carbon accounting?
Scope 1, 2, and 3 refer to the different categories of emissions sources in a carbon accounting inventory, including direct emissions, indirect emissions from energy consumption, and emissions from the supply chain, respectively.
What is the ISO for carbon emissions?
The ISO standard for carbon emissions is ISO 14064.
What is the ISO for carbon footprint?
The ISO standard for carbon footprint is ISO 14067.
Is ISO 14064 mandatory?
ISO 14064 is not mandatory, but it provides a globally recognised framework for carbon accounting and can help organisations demonstrate their commitment to sustainability.