Carbon accounting is an accounting method to count, inventory, track, and report your organization's greenhouse gas (GHG) emissions. This is also known as your carbon footprint. For most companies, the established, global accounting unit for carbon is the greenhouse gas carbon dioxide (CO2), and "carbon equivalents" (CO2e) - the sum of carbon plus other emissions like methane converted into carbon.
If you're familiar with financial accounting, which adds up income and expenses into a budget, carbon accounting works in a similar way. An organization's emissions are its carbon inventory, which can be reduced or netted against carbon improvements, emissions reduction, or offsets.
Common practice in carbon accounting is categorizing CO2 as Scope 1, Scope 2, or Scope 3 GHG.
Emission "scopes" are used by Greenhouse Gas Protocol, one of the gold standard frameworks for carbon accounting, as well as by the U.S. Environmental Protection Agency (EPA).
Scope 3 emissions are all of a company's "indirect" or value chain emissions. For many companies - particularly companies with a physical product and supply chain - Scope 3 emission will represent most of the business' carbon footprint.
Scope 3 emissions include purchased raw materials ("upstream Scope 3"), as well as distribution, transportation, and shipping products, plus customer usage and end-of-life treatment ("downstream Scope 3"). Scope 3 is the most complex category to accurately and fully measure in carbon accounting.
There are 15 categories of Scope 3 emissions:
Certain Scope 3 categories, like business travel and employee commuting, are easier to quantify. Data for other Scope 3 categories like purchased goods and services or end-of-life treatment of sold products may require complex modeling, inputs, and assumptions - and can be challenging to calculate. Depending on your industry, not all 15 categories will be relevant to your company.
According to CDP, McKinsey, and our own internal data, a company’s Scope 3 value chain emissions are, on average, 5 to 25 times higher than its direct Scope 1 and 2 emissions, making Scope 3 GHG measurement a critical priority (and big challenge) for organizations taking action to decarbonize, reduce their environmental footprint, de-risk their brand, and improve ESG performance.
Despite the potential difficulty measuring Scope 3 emissions, if you don't, you're likely overlooking a major portion of your organization's total carbon footprint.
If your company ships products to customers via Amazon, Fedex, UPS, or the USPS, those count as Scope 3 emissions
Carbon accounting involves defining which Scopes to account for, collecting, organizing, and reviewing your emissions and environmental data, then performing carbon calculations to convert everything into CO2e.
With Scope 3 emissions specifically, we have five measurement recommendations:
Another common practice in carbon accounting is establishing a baseline year, then setting science-based targets (SBTs) to reduce emissions compared baseline. For example, let's say our company generated 1,000 tons of CO2e in 2021, we've accounted for all those emissions, and 50% are Scope 3. Our CEO, CFO, and Chief Sustainability Officer (CSO) set a goal to reduce our carbon footprint by 50% by 2025, using 2021 as the baseline year. Since we know our carbon inventory in 2021, we now need to reduce our emissions and decarbonize to 500 tons of CO2e in our goal year (50% times our 1,000 ton baseline) across Scope 1, 2, and 3.
In fact, we recommend setting separate emissions targets for Scope 1, 2, and 3, since the process and steps for measuring and reducing each one will be different.
Once your company's set its Scope 3 target, implement the projects, initiatives, data collection, investments, and integration work to reduce your Scope 3 emissions. Again, if your organization sells and/or manufactures a physical product, one of your biggest levers for Scope 3 emissions reduction is improving your supply chain sustainability, as well as adopting practices like quality controls, recycling, upcycling, and product re-use to limit end-of-life emissions.
If and when your company can't do enough directly to reduce its carbon footprint, then it's worth looking into purchasing high-quality carbon offsets - credits from verified projects like carbon capture or tree planting that are proven to sequester carbon elsewhere.
In a simple example, if we emit one ton of Scope 3 CO2 and then purchase carbon credits equal to the same amount of carbon, we've achieved "net zero." We still generated pollution (not ideal), but we've balanced the scales between the amount of greenhouse gas we produced and the amount we removed from the atmosphere.
Now that we have a clearer understanding of Scope 3 emissions, let's walk through the ways you can design your carbon calculation. The right Scope 3 measurement approach for you and your company will primarily depend on your value chain, what data you have, as well as the carbon accounting and IT resources available to you.
The four methods to calculate Scope 3 emissions are:
The first Scope 3 measurement method available is a spend-based carbon accounting estimate. Spend-based Scope 3 carbon accounting takes the financial value of a purchased good or service and multiplies it by an emission factor – the amount of emissions produced per unit or monetary value of the goods – to calculate an estimate of your emissions.
There's no universal source of emissions factor (although we've been working hard to collect and build them into our software, and hope to open source a directory of emissons factors in the near future). The emissions factors you choose will need to come from government agencies, academic research, company reports, and third party standards organizations.
To perform a spend-based emissions calculation you need three data sources: your purchases, your suppliers, and the corresponding emission factors. This data will typically come from your accounting team, who can export it from your company's accounting system. Options also exist to integrate your financial system or ERP to have data feed directly into Brightest.
The spend-based method works best if the most accurate data you have is financial purchasing order or similar data. For example, say you don't have direct supplier data, but you do know your company spent $1 million dollars ordering goods and services from your Tier 1 suppliers in your reporting year. The spend-based method calculates the value or number of units you purchased, multiplied by an industry average emissions factor for that product.
Since spend-based emissions calculations use industry averages, a spend-based estimate will be less accurate. We might estimate the carbon footprint of a shirt, but we aren't accounting for environmental differences between a shirt made of cotton, silk, polyester, or recycled scrap fabrics.
Brightest helps hundreds of companies measure Scope 1, 2, and 3 emissions and report climate performance
A second calculation method is an activity-based (average data) carbon accounting estimate. This method is similar to the spend-based method, but instead of using financial data relies on material weight data. If our company's clothing is made of X tons of cotton, multiply the weight times the appropriate emissions factor for the material. Like the spend-based method, average data carbon accounting also suffers accuracy issues due to the use of averages.
The most accurate form of Scope 3 carbon accounting is the supplier-specific or primary source method. Supplier-specific carbon accounting collects product-level cradle-to-gate GHG data from each supplier using sustainability surveys and data collection workflows. Since supply chains typically represent most of a company's Scope 3 emissions (which in turn encompass the majority of the company's total emissions), direct data on purchased goods and services always provides the most accurate Scope 3 calculation.
Supplier-specific emissions data is a form of activity-based estimation. If we work with 10 suppliers, each one gets their electricity from a local power utility, and they share their monthly utility bills, we can convert that energy in kilowatt hours (kWh) or megawatt hours (MWh) to carbon. This same general process can be applied to water usage, transportation vehicles, shipping, and all the different activities and steps in your supply chain. Gather the activity data, identify the right emissions factor(s), and convert the activity to CO2e.
Gathering this data can be very time-consuming, and there may be gaps. Some suppliers may not know their emissions data in depth. A hybrid emissions calculation approach uses supplier-specific and activity-based data wherever possible, then fills in the gaps with industry averages. This hybrid approach can still be fairly precise, or at least much more so than a spend-based or average data-based emissions calculation.
In 2022, thousands of companies, including Amazon, Apple, Google, Levi's, Netflix, Unilever, Walmart, and many more are employing carbon accounting and sustainability measurement programs focused on Scope 3 emissions. Moreover, in addition to setting and achieve their own SBTs, leading companies are also working with their suppliers and vendors to help them understand and reduce their emissions.
Whether you and your company's new to carbon accounting or have been doing it for years, we recognize this is difficult, time-consuming work, particularly when it comes to gathering and fully understanding Scope 3 value chain emissions. Working with sustainability experts at hundreds of organizations, we've spent years developing flexible, comprehensive, and easy-to-use carbon accounting software, tools, and methods to help sustainability teams collect data easier, engage stakeholders, do more with less, and understand their full emissions picture across Scope 1-2-3.
Whatever methods you use to tackle Scope 3 emissions reporting and transparency, we wish you all the best as you continue your sustainability journey. If we can be helpful at all (at any step in your Scope 3 carbon accounting process), please get in touch. A central part of our mission and work here at Brightest is enabling better data-driven decision-making (and actions) that lead to a better future for us all.