What method should you use for carbon accounting?
Just as organisations use financial accounting to establish the facts about their business activities, they’re increasingly using carbon accounting to quantify their environmental impact. There may soon be legal requirements for organisations to report their carbon emissions in standardised ways. Here, we examine carbon accounting reports and discuss the advantages and disadvantages of some of the most widely used methodologies at present.
What is carbon accounting?
Carbon accounting is the process of quantifying the amount of greenhouse gases (GHGs) produced by an organisation’s activities. It’s also sometimes known as greenhouse gas accounting.
Calculating an organisation’s emissions (or carbon footprint) involves reporting on the Scope 1, 2 and 3 emissions. These are defined by the GHG Protocol (GHGP).
What principles apply to carbon accounting?
Just as your organisation’s financial accounts provide a ‘faithful, true and fair’ account of your business performance, your carbon accounts should do the same for your carbon or GHG emissions.
To ensure this, the Greenhouse Gas Protocol requires that carbon or GHG accounting follows these five key principles:
- Relevance: Your carbon accounts must contain the information other stakeholders – inside and outside the organisation – need to make decisions.
- Completeness: You should always strive to give the most complete and accurate account of your organisation’s emissions possible. You should explain any exclusions.
- Consistency: Your accounting should enable comparison of the amount of carbon emissions produced over time.
- Transparency: Disclose emissions in a neutral and factual way. You should explain what methodology you are using. Many organisations call on third parties to verify their carbon accounting.
- Accuracy: The data your organisation shares should always be accurate and credible.
What are the three main methods of carbon accounting?
Most organisations use one of three methodologies to produce their carbon accounts:
1. Spend-based methodology
This takes the value of the individual goods or services that your organisation has purchased during the accounting period. It then multiplies it by an agreed ‘emission factor’ to quantify your carbon emissions.
Industry-wide averages of the levels of emissions associated with a particular activity derive these "emission factors". One advantage of the spend-based method is that it provides organisations with a clear estimation of emissions associated with each financial unit. However, that estimation is based on averages. It may suffer from inaccuracies when used to calculate your organisation’s precise emissions.
| Advantage | Limitations |
|---|---|
| Relatively easy to implement | Based on averages so may not be completely accurate |
2. Activity-based methodology
Activity-based carbon accounting quantifies your organisation’s emissions based on the activities it carries out. It depends on collecting emissions data from the entire length of your value chain.
Because it’s based on granular data rather than averages, it makes it possible to provide a more accurate representation of your organisation’s carbon emissions. However, it may be difficult to find all the data you need to cover Scope 3 emissions using this approach.
| Advantages | Limitations |
|---|---|
| Accurate because it’s based on granular data | Gathering all the required data may be difficult. This is especially true for Scope 3, the largest part of your emissions. |
3. Hybrid methodology
The Hybrid approach allows your organisation to enjoy the advantages of both the spend-based and activity-based methodologies. You need to gather all the granular data that can be harvested from the length of your value chain. Then, use spend-based methodology to ‘fill in’ any gaps that may be left. For instance, for some of your Scope 3 emissions. It allows your organisation to accurately account for its carbon emissions.
| Advantages | Limitations |
|---|---|
| Allows you to play to the strengths of both spend-based and activity-based methodologies | Still relies to a degree on averages |
| Recommended by GHGP |
How to choose the right carbon accounting method for your organisation
Every organisation faces different challenges. Choosing the right methodology to account for your carbon emissions depends on your organisation’s particular needs and goals. It also depends on what field your organisation works in, and the length of your value chain.
Consider all three methodologies in the context of your organisation and the reality in which you work. You also need to consider any particular compliance and reporting standards that affect your organisation.
Importantly, you’ll also need to adopt a method that suits both the data and the resources you have available. If you lack granular data for some of your emissions, then it’s far better to choose the spend-based or hybrid approach to carbon accounting than no approach at all.
Finally, whichever methodology you choose to adopt, you’ll need to communicate the reasons for your choice with all your stakeholders. That way, you’ll have a better chance of achieving the buy-in you need.
Need more help with carbon accounting?
At Drax, we’ve got the expertise to help you with your organisation’s carbon accounting. And in collaboration with our partner, Notch, we’re able to offer comprehensive carbon accounting for your organisation, plus free net zero training worth £2,500.
Learn more