What is Carbon Accounting? A Definition
Carbon accounting is a method to count, inventory, calculate, and report an organization's greenhouse gas (GHG) emissions. 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 or offsets. This is also commonly referred to as an organization's carbon footprint.
Common practice in carbon accounting is categorizing CO2 as Scope 1, Scope 2, or Scope 3 GHG.
Scope 1 + Scope 2 + Scope 3 = Total CO2e Emissions
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).
The Two Different Types of Carbon Accounting
Carbon accounting can be measured in emissions or financial value, and some organizations use both:
- Emissions-based or 'physical' carbon accounting is measured in CO2e and used by companies in non-financial sustainability and ESG reporting
- Financial or 'market-based' carbon accounting is measured in currency value per unit, such as $ per kg of carbon or € per metric tonne of CO2. Financial carbon accounting is used in carbon markets, carbon trading, and financial assessments like marginal abatement cost (MAC) analysis, which measures and compares the financial cost and abatement benefit of individual emissions reduction actions
While most companies practice and report emissions-based carbon accounting, financial carbon accounting is used by many financial exchanges, as well as governments. For example, in the United States, President Joe Biden used an executive order to set a U.S. federal government carbon accounting cost of $51 per ton of carbon dioxide emissions. By comparison, the Trump administration set the price of carbon pollution at around $7 per ton.
Other Key Carbon Accounting Terms and Definitions
- Emissions factors are used in carbon accounting to convert activity or spend information into carbon. For example, one gigajoule (GJ) of burned natural gas generates 63.1 kg of carbon emissions. 63.1 is the specific emissions factor to convert used natural gas energy to carbon emissions.
- Activity-based carbon accounting data is the term used to describe actual units of activity or usage. For example, a GJ of natural gas or a kWh of electricity is carbon accounting activity. We multiply or divide units of energy (activity) with an emissions factor to calculate carbon
- Spend-based carbon accounting data describes financial information that needs to be converted into carbon. For example, the value of carbon is $51 per ton, and we have $102 worth of carbon credits, assuming an efficient market with no other premiums, spreads, or transaction costs, we could convert 102 / 51 = 2 tons of CO2
- Direct emissions are GHG emissions a company generates performing its business activities from owned offices, vehicles, facilities, and other assets. For example, driving trucks the company owns which burn diesel fuel are direct emissions. Direct emissions are also called scope 1 emissions
- Indirect emissions are GHG emissions from purchased energy (Scope 2) and a company's upstream and downstream value chain (Scope 3)
- Base or baseline period defines a benchmark for carbon accounting and reduction targets. The first year or time period you perform carbon accounting is your baseline, which you can then use to compare to future periods to see how your organization's carbon emissions have changed over time
How Carbon Accounting Works
For a typical organization, a carbon accounting process involves defining which emission categories to account for, collecting, organizing, and reviewing activity and spend data, then performing carbon calculations using emissions factors to convert everything into CO2e.
For example, let's say our company generated 1,000 tons of CO2e in 2021, and we've accounted for all those emissions for the first time. 2021 is now our baseline year. 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).
Source: Unilever
Once a company sets a carbon accounting or emissions reduction target, we need to carry out projects and investments to reduce our carbon footprint. We can transition from fossil fuel vehicles to electric vehicles (EVs), install solar panels, and make our offices and facilities more energy efficient - all actions that reduce Scope 1 and Scope 2 emissions. We can also work to improve our supply chain sustainability, and adopt practices like recycling, upcycling, and product re-use to limit Scope 3 emissions. From a carbon accounting perspective, we need to track all that activity and calculate its impact.
For example, here's a carbon accounting calculation for a bottle of wine, step-by-step in its value chain:
Source: Benoit Cushman-Roisin, Bruna Tanaka Cremonini, 2021
Carbon Accounting vs. Carbon Offsets
When a company can't do enough directly to reduce its carbon footprint, many choose to purchase 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 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. We're carbon neutral.
Carbon Accounting Across the Industry
Thousands of companies, including Amazon, Apple, Google, Levi's, Netflix, Unilever, Walmart, and many more all practice carbon accounting. In recent years, carbon accounting has become more widespread. There's also been more convergence between ESG and sustainability teams who often do carbon accounting work, and finance departments who perform financial accounting.
Whether you and your company's new to carbon accounting or have been doing it for years, carbon accounting can difficult, time-consuming work, particularly when it comes to Scope 3 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.
We wish you all the best as you continue your carbon accounting journey. If we can be helpful at all (at any step in your 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 help fight and mitigate climate change.
