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carbon accounting

What is carbon accounting?

Carbon accounting is the process of calculating and tracking the amount of carbon dioxide (CO2) and other greenhouse gas (GHG) emissions both produced and removed from the biosphere by an organization.

It is an essential part of measuring and managing an organization's carbon footprint -- the total GHG emissions released into the atmosphere because of human activities.

Carbon accounting allows individuals and organizations to measure the environmental impact of carbon emissions from their various activities, processes and steps taken to counterbalance the emissions. It helps these entities understand their impact on the climate and provides a basis for making informed decisions to reduce their carbon footprint.

Carbon accounting is an essential tool for businesses, governments and individuals striving to understand and reduce their impact on climate change. It plays a crucial role in advancing sustainability goals, promoting environmentally responsible practices and, therefore, meeting environmental, social and governance objectives.

Why does carbon accounting matter?

Carbon accounting is a fundamental tool in the fight against climate change. The following are a few reasons why:

  • Climate change mitigation. Carbon accounting helps organizations or entities identify their production of greenhouse gas emissions, enabling them to take steps to reduce their carbon footprint. Tracking emissions and setting reduction goals are the initial steps in limiting climate change and reducing global carbon emissions.
  • Environmental responsibility. Decades ago, it was agreed that factories belching black smoke into the atmosphere was no longer acceptable. Today, it's been decided that current carbon emissions are unacceptable, and something needs to be done. Carbon accounting provides a means for individuals, businesses and governments to take responsibility for their contributions to climate change.
  • Regulatory compliance. Environmental responsibility might appear altruistic in most business applications, but a growing number of countries and regions are mandating regulations and policies to reduce GHG emissions. Carbon accounting helps organizations comply with these regulations and report their emissions accurately, avoiding potential penalties and fostering a culture of transparency.
  • Investor and stakeholder expectations. Investors and stakeholders in publicly traded companies increasingly demand transparency and accountability regarding an organization's environmental impact. Proper carbon accounting in financial statements such as annual reports allows businesses to demonstrate their commitment to sustainability, which attracts socially responsible investors and can increase customer loyalty.
  • Innovation and efficiency. After gaining a clear picture of their carbon footprint, forward-thinking organizations seek out innovative ways to reduce carbon output and replace less energy-efficient technologies. In the process, they often improve operational costs and other efficiencies thanks to the modernization of their infrastructure.
  • International agreements and collaborations. Each nation has its own approach to reducing climate emissions, and they can vary considerably. Through proper carbon accounting, nations can more easily align their efforts.
  • Carbon offset and market mechanisms. By engaging in proper carbon accounting, companies and organizations can better plan their carbon offset initiatives and invest in projects that remove or reduce CO2 from the atmosphere.

How does carbon accounting work?

Carbon accounting is a multistep process that typically involves the following:

  • Identifying emissions sources. The first step in the process is to identify and categorize all sources of greenhouse gas emissions as related to a particular entity or activity. These sources can include both direct emissions -- for example, operating a polluting factory -- and indirect emissions, which come from a third party such as a business partner.
  • Data collection. Thorough and accurate data collection is crucial for carbon accounting because a company does not want to invest too much or too little in addressing emissions. Data collection points include energy consumption, fuel use, transportation, waste generation and other relevant activities that produce carbon emissions.
  • Emissions calculation. Once data is collected, carbon accountants calculate the net amount of CO2 and other GHG emissions after subtracting the gases absorbed for each identified source.
  • Conversion to carbon dioxide equivalent (CO2e). Greenhouse gases trap varying amounts of heat in the atmosphere. To come to a fair comparison, they are converted to CO2e, a standardized unit used to express the global warming potential of various GHGs.
  • Reporting and verification. The data is then compiled into a carbon inventory report, used for internal management or reporting to external stakeholders. In some instances, the data is shared with independent auditors to verify its accuracy and credibility.
  • Reduction and offsetting strategies. Once they have the compiled data, organizations can go about developing strategies to reduce their carbon footprint using a variety of options, including upgrading equipment, purchasing renewable energy and buying carbon offsets.

Carbon accounting methods, from easy to accurate

Determining carbon emissions is a complex process with many variables. They include the following:

  • Activity data and emission factors. With this basic, widely used method, organizations collect activity data and multiply it by appropriate emission factors to calculate carbon emissions.
  • Direct measurement. Sensors gather data from equipment operation. While this is the easiest and most straightforward measurement to gather, it does not provide a complete picture.
  • Indirect measurement. Instead of measuring emissions at the source, this method relies on estimates through indirect means, such as past performance, prior measurements and other models.
  • Lifecycle assessment (LCA). LCA is the process of determining environmental impact through the entire lifecycle of equipment, processes or other carbon producers. It considers both direct and indirect emissions.
  • Remote sensing and satellite data. This is used for large-scale emissions monitoring, such as in specific geographic areas.
  • Standardized reporting protocols. There are several standardized reporting protocols, such as the Greenhouse Gas Protocol developed by the World Resources Institute and the World Business Council for Sustainable Development.

What is carbon accounting software?

Carbon accounting software, also known as greenhouse gas accounting software, is a vertical software package specifically written and designed to help organizations and businesses measure, track, manage and report their GHG emissions and carbon footprint. This software automates the carbon accounting process, making it more efficient, accurate and accessible for users.

There are numerous choices available -- some with general-purpose use and others for specific industries. Carbon accounting software features and functions typically include the following:

  • Data collection. The first and most obvious feature is the collection of a variety of emissions data from all sources.
  • Emission conversion and calculation. This feature handles all conversions required for accurate accounting, such as determining CO2e values. It also automates the calculations for determining carbon emissions.
  • Real-time monitoring. Some software packages integrate with internet of things devices and other systems to provide real-time data tracking.
  • Inventory management. This software organizes emissions data, allowing for analytical review and performance comparison.
  • Compliance reporting. Many packages support the generation of standardized reports to indicate compliance with regulatory requirements.
  • Certifications and standards. The software might incorporate predefined calculation methodologies based on internationally recognized standards and protocols.
  • Data visualization. Many software packages provide graphical visualization tools to help clarify emissions tracking.

Carbon accounting challenges

Carbon accounting, as an emerging and immature discipline, faces issues that affect its accuracy and effectiveness -- and therefore, its credibility. Some of the main challenges include the following:

  • Changing standards. Because the process is relatively new, standards are emerging and evolving. This sometimes leads to inaccurate calculations and assessments, especially in carbon accounting's early stages. Also, due to industry differences and varying regional concerns, choosing appropriate emission factors and accounting methodologies is complicated.
  • Complete data capture. For data gathering to be truly accurate, the entire infrastructure and ecosystem of an organization must be monitored. However, such technology is rarely rolled out at once, and a complete picture remains elusive until carbon accounting processes are fully in place.
  • Emissions omissions. Deciding which emissions sources to include or exclude obviously changes carbon footprint calculations. This is a process of trial and error. In addition, the processes of validation and auditing become more difficult as emissions exclusions increase.
  • Old technology. Carbon emissions are a relatively recent concern among manufacturing and supply chains. Older equipment, such as factory equipment, is unable to measure greenhouse gases. However, retrofitting equipment to ensure accurate measurements can be difficult logistically and financially for some organizations.
  • Privacy. Expect a battle between compliance with yet-to-be-written regulations and the handling of sensitive data and its privacy. In this fight, the accuracy of carbon emissions measurements suffers if the information is withheld.
  • Third-party concerns. In addition to determining carbon emissions, farsighted stakeholders look closely at their partners' emissions, especially if those partners lack a comprehensive carbon accounting program. Scope 3 emissions, for example, refer to indirect emissions throughout an organization's value chain, including its third-party suppliers and other customers.

Why should businesses use carbon accounting?

Some business leaders have expressed that they feel coerced into compliance with climate change initiatives in general and carbon accounting in particular. Still, real payoffs remain for businesses that embrace carbon accounting, from financial savings to improved brand reputation. Reasons businesses should use carbon accounting include the following:

  • Environmental responsibility. It's not just about being green. It can be argued that companies don't have a right to pollute. They share the same biosphere, so responsible stewardship is a prerequisite for their continued existence.
  • Regulatory compliance. Emissions regulations vary between countries and regions, and proper carbon accounting ensures a business does not run afoul of local authorities for noncompliance.
  • Investor and stakeholder expectations. Investors and stakeholders increasingly consider the environmental initiatives of a company before they invest in it.
  • Cost savings. By analyzing and monitoring their emissions and energy usage, businesses can upgrade with green equipment that is energy-efficient and saves on bottom-line operational costs.
  • Competitive advantage. Upgrades to equipment and infrastructure not only bring businesses closer to carbon neutrality, but also often improve operations and production.

Learn more about IT sustainability approaches to help the environment.

This was last updated in August 2023

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