Climate change is one of the most pressing issues of our time, and businesses play a crucial role in addressing this global challenge. Carbon accounting is the first step in an effective climate strategy, enabling businesses to understand their carbon footprint and plan to reduce it.

This guide will explore the ins and outs of carbon accounting for businesses, including the importance of standardised emissions measurement, the key methodologies governing carbon accounting, the role of emissions factors and practical elements of carbon accounting, and the benefits of measuring an accurate carbon footprint.

By the end, you’ll have a pretty good understanding of how to implement effective carbon accounting practices in your own company.

What are Greenhouse Gas Emissions?

Let’s start with the basics. When sunlight (solar radiation) travels to earth, some of it is reflected back off the earth’s surface as infrared radiation. Greenhouse gases (GHGs) present in the atmosphere absorb this reflected infrared radiation, causing the atmosphere and earth’s surface to heat up. Termed the greenhouse effect, this is a naturally occurring process that enables life as we know it - without it the earth’s surface would drop to a cool -18°C. 

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Since the industrial revolution, human activities have accelerated the greenhouse effect by dramatically increasing the level of GHGs present in the atmosphere. Industrial processes have introduced novel, man-made GHGs, whilst activities such as combustion of fossil fuels and deforestation have increased the atmospheric abundance of naturally occurring greenhouse gases (e.g. CO2). This has caused an increase in global average temperatures (global warming), threatening significant long-term shifts in the earth’s climate (climate change).

What is a carbon footprint?

A company’s carbon footprint describes the total amount of greenhouse gasses it emits over a given period (typically measured over a year). Businesses generate greenhouse gas emissions (often simply referred to as carbon emissions due to the abundance of carbon relative to other GHGs) in 3 broad buckets:

• Direct emissions: Defined as emissions from sources that are owned or controlled by the company, direct emissions physically occur on site by assets that the company owns/controls. For instance, emissions from gas heating in an office or diesel-fuelled company-owned vehicles are described as direct emissions.
• Indirect emissions from purchased energy: These emissions occur as a result of the consumption of purchased electricity, heat, or steam. Whilst directly influenced by the company, the emissions occur off-site (e.g. at the power plant).
• Other indirect emissions: The broadest bucket, a company’s indirect emissions occur in their value chain. This includes both upstream (e.g. emissions from the manufacture and distribution of goods you purchase) and downstream emissions (e.g. GHG emissions from use of a product by an end-consumer).

What is Carbon Accounting?

Carbon accounting, also known as greenhouse gas (GHG) accounting, is the process of measuring and reporting greenhouse gas emissions. Quantifying carbon emissions is a crucial  first step in a business’ climate strategy. It will enable you and your team to understand the impact of your activity as a company and develop effective strategies to reduce carbon emissions in order to operate more sustainably.

If you’re reading a company’s emissions report, you’ll notice that carbon accounting uses a unit called 'carbon dioxide equivalent' (CO2e). Each greenhouse gas has a different global warming potential (GWP), which you can think of as potency. Instead of reporting each of the GHGs emitted by a company separately, carbon accounting often reports one number to simplify reporting - metric tonnes of CO2 equivalent or tCO2e. This is the amount of CO2 that would have the same warming impact as all of the different greenhouse gases that the company emits. 

Carbon Accounting Standards and Frameworks

There are 2 main standards that set guidelines for how to measure and report carbon emissions as a company:

The Greenhouse Gas (GHG) Protocol: The GHG protocol is the most widely used international accounting standard. The standard sets out the carbon accounting methodologies and reporting format that businesses should follow in order to enable consistent reporting. Consistency of carbon accounting methodologies between businesses is important because it enables investors, consumers, and other stakeholders to compare the sustainability credentials of businesses on a like-for-like basis.

ISO 14064 Standards: ISO 14064 is another guideline for quantifying and reporting greenhouse gas emissions. Developed by the International Standardisation Organisation (ISO), a global standard-setting body aimed at enabling global trade, ISO 14064 is mostly consistent with the GHG protocol but less prescriptive. It is also less widely used.

Types of GHG Emissions: Scopes 1, 2, and 3

The Greenhouse Gas Protocol requires businesses to measure and report carbon emissions under 3 different categories, called scopes:

Scope 1 Emissions

Scope 1 emissions are the direct greenhouse gas emissions described earlier that occur from sources owned or controlled by the company. Scope 1 is broken down into emissions from facilities (category 1.1) and vehicles (1.2).

Scope 2 Emissions

Scope 2 emissions occur as a result of the generation of energy purchased and consumed by the company. The emissions occur offsite (at the power-plant) but are strongly influenced by how much energy you as a company consume, and the type of energy you purchase.

Scope 3 Emissions

Scope 3 emissions, also known as supply chain emissions, are all other indirect emissions that occur in a company’s value chain, both upstream and downstream. Scope 3 is therefore the biggest bucket, typically accounting for >80% of a company’s GHG emissions. Under the GHG Protocol, emissions from Scope 3 are broken down into a further 15 categories. Examples include emissions generated by the goods and services you purchase (category 3.1), from employee commuting (category 3.7), and business travel (category 3.6).

Scope 1 and 2 emissions are typically the easiest to address because they are more closely controlled by the company - businesses are often able to make improvements around the amount of energy they consume, and how it is generated.

For instance, a company can upgrade its vehicle fleet to more fuel-efficient or electric models, or install solar panels to generate renewable energy on-site to reduce reliance on fossil fuels. These actions can be taken relatively quickly and the results are easily monitored, allowing for more immediate and measurable reductions in emissions. However, these initiatives do often entail significant financial investment.

Scope 3 emissions are the hardest to address because they encompass all other indirect emissions that occur in a company’s value chain, both upstream and downstream. These emissions are beyond the direct control of the company and involve a very wide range of activities.

Managing Scope 3 emissions therefore requires extensive collaboration with suppliers, customers, and other stakeholders. This can be challenging for a number of reasons, including differing levels of commitment to sustainability, the absence of high quality emissions data across the supply chain, and varying ability to fund decarbonisation initiatives. 

How does carbon accounting work in practice?

Carbon accounting uses ‘emissions factors’ (sometimes called ‘conversion factors’) to convert business activity data (e.g. kWh of electricity consumed) into emissions data. Emissions factors describe the GHG output of a particular activity, and are integral to carbon accounting. 

Emissions factor databases are produced by governments, academics, non-profits, and businesses, and many are made publicly available. In the UK, DEFRA publishes emissions factors for businesses to use in reporting their GHG emissions each year. Depending on your industry, you may need to supplement this with more detailed emissions factors specific to your sector.

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Now you understand emissions factors, here’s the carbon accounting process broken down into some easy to digest steps:

Step 1: Define Objectives and Scope

The first step in measuring a company’s carbon emissions is to define the scope or ‘organisational boundary’, meaning the specific entity / entities that are being assessed. 

Under the GHG Protocol, a company can decide to account for emissions of any subsidiaries based on the equity share they hold, or based on whether or not they control the operations of that entity. The aim is to include in your scope emissions from any subsidiaries that the company has the power to influence.

Step 2: Collect Activity Data

Collecting accurate data is crucial for effective carbon accounting. You’ll need to map out your emissions generating activities in line with the GHG Protocol’s Scope system, and gather the right information to capture that activity and translate it into emissions. 

The data you need will likely come from lots of different sources, such as: energy bills, mileage information from your expenses system, spend-data from your accounting system, product lifecycle assessments for the goods you purchase (if available), and feedback from your employees on how they commute. 

There are two key things to remember: 

1) Comprehensiveness - be sure to capture all of your emissions generating activities. Where there are gaps because of data limitations, look to build systems or processes to fix this going forward. You’ll also need to highlight any exclusions / data gaps when you report.

2) Accuracy - gather the data points that are most reflective of your emissions generating activity. Let’s use train travel as an example. If you travel via train, say from Bristol to London, the price you pay for your ticket will vary hugely depending on a number of factors (the time of day you travel, how in advance you book your ticket etc.). The emissions from your journey won’t vary with the price of your ticket - what matters is the distance you travelled via train. £s spent on train travel (a spend-based metric) is therefore a less accurate indicator for measuring your emissions than distance travelled via train (an activity-based metric). 

If you can shift from collecting data on £s spent on train travel to miles travelled via train, you will improve the accuracy of your footprint. The more you can use activity-based metrics, and the less you rely on spend-based calculations, the more accurate your footprint will be.

Step 3: Calculate Emissions

Once you’ve collected your activity data under each Scope, the next step is to convert it into emissions using your conversion factors and following the guidance of the GHG Protocol (the most widely used corporate carbon accounting standard).  

Step 4: Decarbonise

Carbon footprint complete, developing a strategy to decarbonise is the next step. A good approach is to analyse your business’ footprint data starting at the category level to identify where your carbon emissions are concentrated. Prioritising ‘emissions hotspots’ will enable your businesses to focus on areas of greatest potential reduction impact. 

Alongside the size of the reduction opportunity, key factors to assess include the difficulty of implementing decarbonisation initiatives (e.g. level of financial investment required) and the associated timelines. You should also identify potential benefits of emissions reduction beyond climate impact, whether that’s commercial (e.g. meeting requirements of a tender), employee wellbeing (e.g. cycle to work scheme), or something else. 

Building a realistic roadmap that identifies the business challenges of reduction initiatives alongside the benefits is key to getting the buy-in necessary to make emissions reduction a reality.

Step 5: Offset

Investing in verified offsetting projects is a great way to have immediate additional impact as you work toward your emissions reduction goals. The United Nations Clean Development Mechanism and Gold Standard are examples of verification schemes that ensure the investments you fund meet the highest quality standards, including that the emissions impact is measured and would not have happened in the absence of your investment.

Step 6: Report

Finally, it’s best practice to share your carbon footprint data, decarbonisation strategy, and offsetting investments publicly and with key stakeholders. It’s vital to be accurate and transparent in any climate-related communications you share to avoid the risk of greenwashing - making misleading claims that proliferate confusion, undermine trust, and prevent collective action around climate change.

The Importance of Carbon Accounting

Accurate carbon accounting is essential for an effective climate strategy and for us to collectively tackle climate change - to manage greenhouse gas emissions, a company must first understand its carbon footprint. 

A thorough emissions management strategy can help businesses achieve a broad and growing range of objectives: benefits beyond  As expectations around emissions reporting grow, carbon acc  meet commercial objectives such as identifying and managing climate-related risks, meeting sustainability reporting requirements, and aligning with the expectations of clients, consumers, and employees. Lets dive into each of these areas:

Sustainability Reporting and Regulatory Compliance

Governments worldwide are implementing stricter regulations on greenhouse gas emissions. In the UK, larger businesses (meeting 2 of the following criteria: turnover £36 million or more; balance sheet assets £18 million or more; >249 employees) are legally required to report some of their emissions data under SECR. 

Supply chain reporting

Pressure on larger firms to improve the accuracy of Scope 3 reporting and reduce supply chain emissions is trickling down to their smaller suppliers. Small and medium sized businesses (SMEs) are now having to respond to requests from large clients for accurate emissions data and a plan to decarbonise.

Investors

Investors are increasingly concerned about the environmental impact of the companies they fund, making emissions management a key investment criteria and focus of due diligence. 

Asset managers themselves face reporting requirements; the FCA implemented TCFD in January 2022. Portfolio reporting or disclosure of ‘financed emissions’ is a key component of investor reporting, meaning investors increasingly require emissions data from the companies they choose to back.

Consumer Demand

According to a YouGov poll, 72% [can’t find this poll anymore, need to replace stat] of consumers consider sustainability when making purchasing decisions. Transparent emissions reporting and action to decarbonise can be a strong competitive advantage with corporate accountability for climate change front-of-mind for so many consumers.

Recruitment and retention

Company values and approach to climate change are increasingly a deciding factor in recruitment and employee retention. IBM’s Global Consumer Study found that 68% of candidates are more likely to accept a role at an environmentally sustainable company. Voluntary standards such as B Corp have become key to enable companies to differentiate as values-driven employers, a key aspect of which is action on climate change including emissions management.

Cost Savings

By identifying and reducing inefficiencies, carbon accounting can lead to significant cost savings. Energy-efficient practices are a great example of initiatives that not only reduce emissions, but prevent unnecessary costs too. Emissions reduction and cost savings often go hand-in-hand.

Summary

Carbon accounting is a critical tool for businesses of all sizes to understand their carbon footprint and build an effective plan to reduce emissions. Its core to tackling climate change, and also helps businesses meet growing pressure to manage emissions and climate-related risks. 

This guide has hopefully been a helpful starting point in understanding:

• The GHG Protocol - the gold standard of carbon accounting;
• Conversion factors, and the mechanics of measuring emissions; 
• A helpful framework to assess and prioritise decarbonisation initiatives;
• The material benefits of taking climate action!

Additional Resources

For further reading and resources on carbon accounting, consider the following links:

• GHG Protocol
• The IPCC
• Carbon Disclosure Project (CDP)
• Task Force on Climate-related Financial Disclosures (TCFD)