Carbon Accounting – a first step towards Carbon Neutrality

The carbon dioxide levels are increasing! How  would it be if these emissions were tracked and accounted for? 

World is committed to limit global temperature rises to 1.5˚C above pre-industrial levels to counter the climate change 

GHG emissions need to be halved by 2030 and net zero emissions need to be hit by 2050. 

Businesses today are making carbon reductions and sustainability commitments and are finding routes to net-zero emissions. 

Many organizations have pledged to balance their emissions by mid century through combination of cutting emissions and removing carbon from the atmosphere. Tracking, reporting and calculating carbon emissions are a key part of companies progressing towards net zero goals. In order to achieve the net zero emissions movement, businesses seek third party assistance to help them manage their carbon and GHG emissions. 

But most of the companies, though motivated to fight the climate change are unaware where to start and how to go about measuring and reducing the carbon emissions 

Let us see how Carbon accounting or GHG accounting helps companies to reduce their carbon emissions and improve their sustainability efforts. 

What is Carbon Accounting? 

Carbon Accounting, also known as ‘Greenhouse Gas Accounting’, refers to the methods used to measure and analyze a business’s carbon emissions. It helps companies find where their emissions come from so that they can understand their carbon footprint and set the reduction plans. This is the first step in the company’s sustainability journey which is crucial to achieve net zero. 

Carbon Accounting is similar to financial accounting where it measures the climate impact rather than financial impact. Carbon accounting is used to measure carbon footprints for businesses, governments and even individuals. 

“You cannot manage what you cannot measure” 

This mandates the necessity of carbon accounting that helps organizations to understand their carbon emissions so that they can identify hotspots and begin the reduction efforts for strong climate actions. It will also help companies to calculate their residual emissions so that they can use climate investment to compensate their remaining emissions and complete their journey to net zero. 

Carbon Accounting is a way to quantify and understand how a business contributes to climate change. It provides the foundation for climate pledges like carbon neutrality and net zero. 

Why is Carbon Accounting important? 

According to the latest IPCC reports, there is a need to manage the carbon footprint to get the planet back on track. Consumers today demand greener and responsible products and investors attach a lot of importance to the sustainable ESG performance across the industry. Also as per the latest SEC proposed rules, all public companies need to disclose their emissions. 

It is time businesses stay ahead of the curve… 

Let us dive into why companies require carbon accounting 

• First step towards Corporate Sustainability 

Investors and customers are wanting to partner or purchase products or services from businesses that value not only financial success but also seek environmental and social justice as well. Company’s sustainability efforts becomes more tangible with carbon numbers. 

• Transparency 

Carbon accounting pulls the data together that unravels opportunities within the business. Steps towards carbon neutrality starts with carbon accounting. Greenhouse gas accounting helps to provide data which a company can be held accountable for regarding their  emissions. There is greater transparency between the investors, employees and customers. It can prevent allegations against greenwashing 

•  Attracts Opportunities 

Investors are interested in companies that are willing to adjust their business model to improve sustainability to combat climate change. Using reporting tools, businesses can effectively communicate their actions and commitments to address the climate crisis. It quantifies their efforts in their net zero journey. The verified process of carbon accounting attracts investors and customers whereby they can demonstrate compliance to environmental regulations. 

• Competitive Edge 

The laws on carbon reporting are gaining ground on a continual basis. The pressures to report emissions are increasing in countries like US and Europe. Companies that measure emissions and find ways to reduce them have a considerable advantage giving them the competitive edge. Governments are mandating on carbon emission reporting. 

• Compliance 

Regulators around the globe are requiring their businesses to disclose their carbon emissions. Companies in the UK have to disclose emissions per SECR. The US SEC has recently sought for requirement of public companies to disclose emissions. With the increase in climate impact reporting legislation, carbon accounting will ensure businesses to stay compliant tomorrow. 

How does Carbon Accounting work? 

Carbon Accounting measures an organization’s GHG emissions using two methodologies. The Spend based method and Activity based methods and a hybrid methodology combining both. 

The spend based method of calculating GHG emissions takes the financial value of a purchased good or service and multiplies it by an emission factor. The spend based method utilizes environmentally extended input and output models (EEIO) and is less mathematically complex and time consuming to calculate. Since spend based emission factors are built on the industry average GHG emission levels, they lack specificity. 

For example, buying a chair or table would factor in only that you bought a furniture and will not account for what the chair or table is made up of. 

The activity-based method uses data to specify how many units of a particular product that a company has purchased, like the units could be kilograms or litres of a product. The activity-based method also uses emission factors to determine an activity’s emissions output. These emission factors are taken from scientific studies 

Activity based data generates more accurate emission estimates than spend based data. The only issue is activity-based data collection is time consuming. The GHG protocol recommends use of activity-based data followed by spend based method to estimate the rest. 

How does carbon accounting classify company’s emissions? 

Carbon dioxide (CO2) is the most common greenhouse gas emitted by human activities. The emissions are represented as carbon dioxide equivalent or CO2e. A quantity of GHG can be expressed as CO2e by multiplying the amount of GHG by its Global Warming Potential (GWP). The GWP for each GHG is tracked in a series of factor tables produced by a variety of organizations. 

What is CO2e? 

Climate change always talks about carbon emissions but carbon dioxide is not the only driver for GHG emissions. The other GHGs that add to global warming are methane, nitrous oxide, hydrochlorofluorocarbons, hydrofluorocarbons and ozone. 

CO2e is a measure that was created by the United Nation’s IPCC in order to make the effects of different greenhouse gases comparable because every gas has a different global warming potential. The impact of different greenhouse gases is expressed in terms of the amount of CO2 that would result in the same  amount of warming. The GWP of CO2 is 1 because CO2 is considered as base value. 

To facilitate accurate GHG accounting, WRI and WBCSD have  developed a number of accounting standards under the Greenhouse gas protocol to help organizations track and measure their progress towards decarbonization. Businesses use GHG Corporate Standard when accounting for emissions. Under this Corporate standard, emissions are classified into Scopes for measurement and reporting. 

According to the Greenhouse gas protocol, Scopes are divided into Scope1, Scope 2 and Scope 3 emissions. 

Scope 1 emissions are the direct emissions from the sources controlled by the organization, particularly those related to the manufacture of the product. 

Scope 2 emissions are the indirect emissions linked to energy consumption ie. emissions associated with production of heat, electricity, steam imported for the organization’s activities. 

Scope 3 emissions are the other indirect emissions not accounted for in scope1 and scope2 but linked to the entire value chain also called as supply chain emissions. 

Supply chain emissions account for 5.5 times more emissions on average than a company’s direct emissions 

What does Carbon accounting entail? 

Where do you start? 

Start with Scope 1 and Scope 2 emissions which reflect the emissions from the energy your business consumes and after going around energy emissions, it’s time to look into the corporate value chain emissions ie. Scope 3 emissions. These emissions need to cover the supply chain, service providers, customers and employees.  

Scope 3 emissions can make over 90 % of your emission impact. 

Once the emissions are accounted for, it is continuous measurement as you work towards carbon reduction targets. In addition to mitigation and abatement methods companies utilize carbon offsets to reach their carbon neutral goals. 

Challenges in Carbon accounting 

• Carbon accounting is complex requiring accurate and real-time data and factor sets that can be traced back to the source. 
• The data needs to be auditable to adhere to compliance 
• Data collection and emission calculations need to be standardized 
• Maintaining records in spreadsheets result in enhanced risk and productivity loss. 
• Data quality is inconsistent and unreliable. 
• Capturing sustainability metrics for reporting is time consuming and costly 

Carbon Accounting Standards 

Organizations like World Resources Institute (WRI), World Business Council for Sustainable Development (WBSCD), Intergovernmental Panel on Climate Change (IPCC), GHG Protocol and the International Organization for Standardization (ISO) provide guidelines for national GHG inventories. 

The general guidelines provided for greenhouse gas emissions by ISO are 

• Organizational GHG emissions (ISO 14064-1) 
• Project level GHG emissions (ISO 14064-2) 
• Validation and Verification of pertinent accounting ( ISO 14064-3) 

How do Carbon Accounting Systems help? 

Carbon accounting systems address the challenges associated with data capture, storage and  analysis. The automated data capture, reporting, consolidation and generating insights help to build a robust carbon management platform

Choosing the right accounting solution helps companies to accurately measure, capture and track emissions data and accordingly strategize to regulate their output of emissions. Companies that adopt carbon accounting solutions are in a better position to collect and manage their data, disclose their carbon footprints to the stakeholders and apply analytics for decarbonization and establish science based targets(SBTi) and manage compliance and value chains 

TraceX’s blockchain traceability solutions enables carbon management on a shared platform building climate resilient food supply chains. The solutions empower the company to achieve quick and accurate measurements to report in real-time. A one stop carbon management solution to calculate, analyse, reduce, report and certify emissions. 

Carbon Accounting – a first step towards Carbon Neutrality