What is Carbon Accounting?
Carbon Accounting is the process of tracking, measuring, and documenting the amount of carbon emissions emitted by businesses either directly or indirectly, assessing their environmental impact, and developing & implementing sustainable strategies to mitigate the adverse climate effects.
Carbon Accounting (also known as GHG accounting) is gaining momentum in industries across the world due to growing awareness about climate change and the need to tackle it. Governments and businesses are increasingly adopting it for its sustainability benefits.
What are the 3 Scopes of Carbon Emissions?
The Carbon Accounting Emissions are categorized into three scopes namely Scope 1, Scope 2, and Scope 3.
1. Scope 1 Emissions
The company is directly responsible for contributing to the Scope 1 emissions. These emissions occur due to the direct activities performed by the company in the premises owned and operated by it. Examples include energy-intensive manufacturing processes, and fuel burning in vehicles owned or controlled by it.
2. Scope 2 Emissions
These emissions are not a direct result of the company’s operations. Various operations such as heating, cooling, and production of electricity contribute to the amount of greenhouse contributions. Scope 2 is mostly limited to the emissions that occur due to the energy usage of the company.
3. Scope 3 Emissions
The Scope 3 emissions are also called Indirect Emissions because the company doesn’t directly contribute to them. It includes all emissions that are not caused by the assets owned or operated by the company.
Steps Involved in the Process of Carbon Accounting
The Carbon Accounting process involves the following steps:
1. Data Mining
The Carbon Accounting process starts with collecting data from different sources about the energy consumption of the company at a specific time. Manually collecting the data can be a tiresome task. The company can benefit by integrating an ERP System that automates the data collection process with the help of IoT devices.
2. Data Conversion
The next step is to process the collected data about various carbon emissions using the emission factors or conversion coefficients. The processed data may appear in Kilograms of Carbon Dioxide Equivalents per Kilowatt-hour.
3. Data Standardization
The next step is to standardize the data into structured units and formats. This provides decision-makers with meaningful insights that enable them to analyze and compare the data for faster & better decision-making.
4. Data Reporting
Now that the data is transformed, the company needs to set realistic targets. This step may also involve finalizing any third-party verifications and reporting the data to the public and authorities.
5. Track Progress
After setting up the targets, it’s important to actively monitor the carbon accounting process for potential discrepancies. If any discrepancies are found, the Management should take swift decisions to address them and reduce the intensity of the adverse effects.
Popular Methodologies of Carbon Accounting
An organization can follow any one of the four methodologies to calculate greenhouse gas emissions.
1. Spend-based Method
In the spend-based method, it takes the financial value of the purchased goods or services to calculate the GHG emissions. The financial value is then multiplied by the emission factor. The emission factor is the total amount of emissions produced per financial unit which gives an estimate of the results.
2. Activity-based Method
This methodology focuses on collecting more detailed data from an organization’s value chain. It can be applied to account for emissions where raw data is recorded and then calculated into emissions data. This method gathers more granular information which gives a clear view of an organization’s emissions.
3. Hybrid-based Method
The Greenhouse gas(GHG) protocol suggested the hybrid methodology which is adopted by most businesses. It blends the abilities of both spend-based and activity-based methodology. This method gives you a more comprehensive view of the carbon footprint.
What are the Benefits of Carbon Accounting?
Carbon Accounting can benefit businesses in various ways from building a sustainable business model to staying compliant with regulatory aspects. Here’s how:
1. ESG Reporting
ESG can be expanded as environmental, social, and governance (ESG). It is a set of regulations to assess a company’s behavior. It also examines the company policies for safeguarding the environment. For example, these policies will attract socially conscious investors.
2. Achieve Carbon Efficiency
Carbon accounting is the only method that provides efficiency based on an environmental perspective. Goods and services with high carbon costs are made in inefficient ways, so eliminating them would reduce the carbon expenditure of the company.
3. Mitigate Compliance Risks
Businesses are under a lot of pressure to minimize carbon emissions. The Environmental regulatory body continuously delivers frequent changes to carbon adherence. By following the carbon accounting methodology, you will have all the data that is required to stay compliant with the regulatory bodies.
4. Improve Brand Identity
With Carbon Accounting, businesses can develop low-carbon strategies, build a sustainable business model, and demonstrate their success to partners, clients, and Govt. By following sustainable business practices, they can appeal to environment-conscious customers and build a positive brand image.
5. Financial Profitability
Reducing greenhouse gas emissions can also benefit businesses financially. For example, one of the significant steps toward reducing greenhouse gas emissions is optimizing energy consumption. This can result in lower energy bills and higher profit margins.
Common Challenges in Carbon Accounting
Companies can encounter different challenges during the Carbon Accounting process.
1. Manual Work
Many companies, especially small and medium ones, use spreadsheets and similar methods to manually track and document carbon emissions. This can be a time-consuming process, which can hamper their productivity and add up to business costs.
2. Inaccurate Data
Manually tracking carbon emissions is not easy. The complexity of the business operations makes the data collection process difficult. The complex nature of the process can lead to human errors and inaccuracies in the data.
3. Management Approach
Sometimes, the Management may not be willing for a company-wide implementation. They may hesitate to change and perceive it as a waste of time, money, and organizational resources. As such, persuading the Management may become a difficult task.
4. Diverse Nature of Processes
A lack of standardization across different processes and business practices can pose a significant challenge to carbon accounting. Businesses may find it difficult to track greenhouse emissions and achieve their intended targets.
5. Process Complexity
Greenhouse gas GHG accounting can become difficult while identifying the Scope 3 emissions. Scope 3 emissions are those which occur outside the organization’s purview. For example: Greenhouse emissions by partners, suppliers, and customers.
Future Trends in Carbon Accounting
The Carbon Accounting is gaining momentum across businesses of all scales and types. Here are the future trends in it:
1. Technological Advancements
Modern technology such as the use of Internet of Things (IoT) devices, Machine Learning, and remote sensing automates and speeds up the process of collecting and aggregating data from different sources. This brings efficiency and reduces manual work in carbon accounting.
2. Stringent Regulatory Framework
Governments across the world are providing incentives to embrace Carbon Accounting. Businesses have to operate under stringent regulatory frameworks to adopt sustainable business practices and reduce carbon emissions.
3. Integration with Business Processes
Modern-day businesses integrate carbon accounting into their core processes to effectively track and document emissions. According to Economic Times, India is intensifying its endeavors to diminish its carbon footprint by progressively transitioning away from fossil fuels like coal, oil, and natural gas. The country is embracing cleaner energy sources such as renewables and green hydrogen.
4. Data Aggregation Strategies
Businesses are adopting new ways to measure Scope 3 emissions, which were traditionally considered difficult to manage due to their indirect nature. Such strategies help enhance the quality and accuracy of the data.
5. Sector-specific Approach
The needs and functional processes in each industry may differ. As such, companies are adopting a sector-specific approach to implement Carbon Accounting. They are finding new innovative ways for mainstreaming Carbon Accounting throughout its processes.
FAQs
1. What is the Definition of Carbon Accounting?
Carbon Accounting meaning is that it is the methodology used by business management teams and environmentalists to understand the extent of the environmental impact of the carbon emissions produced by a company to develop strategies and corrective measures.
2. Is Carbon Accounting Applicable to Individuals too?
Yes, Carbon Accounting applies to both individuals and businesses. Individuals can also engage in carbon accounting by calculating their carbon footprint focusing on energy use, transportation, and consumption habits, and taking steps to reduce and offset their emissions.
3. How Can Companies Reduce Carbon Footprint?
Companies can reduce their carbon footprint through energy efficiency measures, shifting to renewable energy sources, implementing carbon capture and storage technologies, and engaging in afforestation or reforestation projects.
4. Who Needs to Perform Carbon Accounting?
Both businesses and Government entities can benefit from performing Carbon Accounting. Tracking and documenting the carbon emissions is the first step towards their reduction. Such sustainable environmental practices can help companies improve brand loyalty, attract customers & investors, and stay compliant with regulatory aspects.
5. What are Common Carbon Accounting Frameworks?
There is no one-size-fits-all framework that fits businesses of all scales. Here are the most common frameworks:
- Global Reporting Initiative (GRI): It is a widely used carbon accounting standard that supports almost all sectors.
- Carbon Disclosure Project (CDP): It contains a large database of voluntarily reported data by business entities across the world.
- Global Real Estate Sustainability (GRES): It contains self-reported data which is scored by percentile method.
- Sustainability Accounting Standards Board (SASB): Released by a non-profit named SASB, it is compatible with numerous industries.
- Greenhouse Gas Reporting Protocol (GHGRP): It primarily focuses on industrial gas suppliers and companies classified in the fuel business.