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.

As climate change worsens and more investors, regulators, customers, and partners encourage and pressure companies to improve their sustainability, the number of businesses practicing carbon accounting has grown significantly over the past decade - a trend we expect (and hope) will continue.

How Carbon Accounting Works

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.

Common practice in carbon accounting is categorizing CO2 as Scope 1, Scope 2, or Scope 3 GHG.

Scope 1  +  Scope 2  +  Scope 3  =  Total GHG 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).

Carbon Accounting GHG Protocol Methodology

Scope 1

Scope 1 emissions are defined as "direct" emissions - emissions which result from direct activities of your company, as well as assets like buildings and vehicles your company directly owns. Scope 1 emissions include:

  1. Energy generation within owned facilities and energy assets
  2. Energy generation from any owned, non-renewable sources like generators
  3. Fuel usage and other mobile combustion emissions from vehicles used in a company's primary operations
  4. Other emissions from owned equipment not already accounted for in sites and facilities

Scope 2

Scope 2 emissions are generally defined as purchased emissions. Examples of Scope 2 emissions include electricity or natural gas that's purchased from a local power utility to power a building or facility, as well as:

  1. Energy consumption and usage for offices and sites that's purchased from a utility
  2. Energy generation from any leased, non-renewable sources
  3. Other purchased emissions from rented or leased equipment not already accounted for in sites and facilities

Scope 3

Scope 3 emissions are all other "indirect" emissions. For many companies - particularly companies with a physical product and supply chain - Scope 3 emission will represent most of the company's carbon footprint. Scope 3 emissions include purchased raw materials ("upstream Scope 3"), as well as distribution, transportation, and shipping of product, and customer usage and end-of-life treatment ("downstream Scope 3"). Scope 3 is usually the most difficult category to accurately and fully measure in carbon accounting.

The full list of potential Scope 3 GHG sources for your company includes:

  1. Purchased goods and services
  2. Capital goods
  3. Fuel- and energy-related activities
  4. Transportation and distribution
  5. Waste generated in operations
  6. Business travel
  7. Employee commuting
  8. Leased assets
  9. Processing of sold products
  10. Use of sold products
  11. End of life treatment of sold products
  12. Franchises
  13. Investments

For a typical organization, a carbon accounting process involves defining which scopes to account for, collecting, organizing, and reviewing emissions and other input data, then performing carbon calculations to convert all of an organization's greenhouse gas (GHG) emissions into CO2e.

Carbon Accounting Principles and Best Practices

Many of the same financial accounting best practices also apply to carbon accounting. That includes:

  • Keep a digital record of all the assets, events, and transactions that contribute to your carbon inventory or budget
  • Maintain a dashboard of your key carbon accounting and sustainability KPIs like total emissions, Scope 1, 2 & 3 emissions, and their change over time
  • Track your carbon on an ongoing monthly, quarterly, and annual basis
  • Document key assumptions, processes, and information sources
  • Follow established carbon accounting guidelines and frameworks like GHG Protocal and the IFRS (ISSB)'s sustainability reporting standards

The main goal of your carbon accounting efforts should be to accurately collect, record, summarize, and report your company’s GHG emissions performance over time. This type of standardized carbon reporting lets all your internal and external stakeholders assess the sustainability performance of your business from an emissions perspective. Carbon accounting disclosures need to be transparent, reliable, consistent, and accurate.

Emissions, GHG & Carbon Accounting Methodology

How to Use Carbon Accounting in Corporate Sustainability

Common practice in carbon accounting is to establish a baseline year, then set one or more science-based targets (SBTs) to reduce emissions compared baseline. For example, let's say our company generated 1,000 tons of CO2e in 2021, and we've accounted for all those emissions. 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).

Unilever Carbon Accounting Chart Example

Source: Unilever

Once a company sets one or more carbon accounting targets or SBTs, we need to carry out projects, initiatives, and investments to reduce our operating 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 decrease Scope 3 emissions. From a carbon accounting perspective, we need to track all that activity and calculate its impact.

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" emissions. 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.

Carbon Accounting at Your Organization

In 2022, thousands of companies, including Amazon, Apple, Google, Levi's, Netflix, Unilever, Walmart, and many more employ carbon accounting or sustainability measurement teams. Companies are increasingly working to set and achieve SBTs, understand their full emissions footprint, and transparently offset what they can't.

Recently, the IFRS (International Financial Reporting Standards Foundation) has also proposed requirements for sustainability disclosure by financial reporting entities. While still in draft form, we're monitoring IFRS sustainability accounting standards closely, as we expect them to add additional levels of structure and standardization within the carbon accounting field in the coming years. For more, please see our IFRS (ISSB) Sustainability Disclosure Overview.

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 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 sustainability 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 lead to a better future for us all.