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Carbon Accounting: The First Step On Your Way To NetZero

Carbon Accounting, The key to a NetZero Transition

StepChange Primer. Sidhant Pai, Chief Science Officer, StepChange Inc.

StepChange Primers provide brief overviews of important subjects in corporate sustainability.

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As an increasing number of businesses commit to green-house gas (GHG) emissions reductions and target ambitious Net Zero goals, there is a very real need for accessible methods to analyse, calculate and report an organisation’s carbon footprint. This process is commonly referred to as ‘Carbon Accounting’ (aka greenhouse gas accounting, carbon inventory management, carbon auditing). The broad goal of the carbon accounting process is to quantify GHG emissions that are produced due to a business’s operations. While there are a number of different methods to estimate corporate emissions, a robust carbon accounting and management tool is usually designed to provide bottom-up and granular insight at a process level, providing corporate decision-makers with a detailed and actionable breakdown of their emissions.

How can Carbon Accounting help companies?

A well-designed carbon accounting and management approach can be instrumental to an organisation's sustainability goals by:

  • Enabling a transparent and reproducible overview of an organisation’s GHG emissions

  • Facilitating third-party audits, reviews, assurances and certifications

  • Enabling realistic benchmarking and achievable goal-setting

  • Providing process-level insight and enabling a science-based emissions reduction strategy across different business operations

  • Validating the benefits of different interventions across both internal business operations and external product supply chains.

  • Tracking and benchmarking the progress of an organisation across multiple years

  • Allowing corporate decision-makers to conduct informed cost-benefit analyses before determining the most appropriate business processes to target. Generating the structured data needed to comply with (and stay ahead of) regulatory reporting and disclosure requirements (e.g., BRSR)

  • Unlocking efficiency co-benefits via energy savings and miscellaneous optimizations

  • Pricing the monetary externalities associated with business operations (and thus enabling the appropriate level of investment into sustainable transitions) Bolstering public-facing communications on an organisation’s environmental, social and governance strategy

  • Providing the requisite data for internal and external ESG rating exercises

  • Enabling science-based sustainability branding exercises

  • Unlocking access to impact capital and global ESG funds

  • Enabling the generation of validated carbon credits or prompting the purchase of validated carbon offsets

How do you ‘account’ for carbon in your business operations?

The underlying methods to estimate the carbon emissions of a business process are relatively simple, though the uncertainties associated with them can be quite high. The most common methods of accounting can be broadly classified into quantity-based methods and spend-based methods:

  • Quantity-based methods use physical indicators like mass or distance to determine the emissions resulting from a process (or embodied in a product). They usually leverage emissions factors from third-party carbon emission inventories and life-cycle databases that provide granular estimations regarding the embodied carbon of a given process or product. For more accurate results, quantity-based methods can also use carbon intensities that are directly measured by the company for the specific process they are evaluating. While quantity-based methods are quite granular and relatively more accurate, they are not comprehensive in their scope, with many processes lacking accurate representation in the life-cycle inventories mentioned above.

  • Spend-based methods help plug this data gap by using financial data to estimate the carbon emissions of a given business operation, leveraging secondary (industry-specific) emissions factors that map the economic value of business activity or product to associated carbon intensity. These secondary emissions factors are usually derived from sophisticated Environmentally-Extended Input-Output (EEIO) models. While spend-based approaches are often more comprehensive in their coverage relative to quantity-based ones, they are usually less accurate and prone to more uncertainties.

These methods are applied to estimate emissions (or emissions reductions) across a set of ‘scopes’ based on a well-established global carbon accounting practice set up by the GHG Protocol:

  • Scope 1 emissions relate to the direct GHG emissions occurring on-site (via the combustion of fuel, leakage of GHGs, etc.)

  • Scope 2 emissions relate to the emissions associated with the energy purchased to execute the business operations being evaluated (electricity, heat, etc.)

  • Scope 3 emissions cover a wide range of activities, including all the indirect upstream and downstream emissions associated with the business unit. They are thus very difficult to accurately estimate and mitigate. Read our upcoming primer on Carbon Scope Calculation for more details!

  • Avoided Emissions (sometimes referred to as Scope 4) refer to emissions reductions that occur outside a business’s core value chain but can be linked to the use of the product (e.g., fuel-efficient tires).

At present, many governmental and industry reporting standards view Scope 1 and Scope 2 accounting as a requirement but classify Scope 3 accounting as voluntary.

Let’s consider an over-simplified example to illustrate this accounting process:

Consider a hypothetical business unit that relies exclusively on an industrial process that consumes 10 litres of diesel, 2 kWh of electricity, 1 kg of cement, 1 kg of cellulose fibre and 100 litres of water to produce one cement sheet unit.

The carbon footprint associated with one such sheet can be estimated using the quantity-based method from above, by multiplying the input quantities with the appropriate emissions factors, sourced from a credible life-cycle inventory. A total accounting of the GHG emissions involved would thus include (Scope 1) the direct emissions generated on-site (for example from the burning of diesel), (Scope 2) the emissions associated with the purchased energy (electricity) and (Scope 3) the indirect emissions associated with the upstream inputs (such as the emissions to produce and transport 1kg of cement) and downstream outputs (such as the weighted emissions associated with 1 cement sheet over its lifetime).

If the business unit being evaluated uses the above-mentioned process to produce 1000 units a year, we would simply multiply the unit carbon intensity calculated in the last step by 1000 to estimate the total annual emissions from this process.

This workflow is then repeated for every operation associated with the business unit that produces GHGs (including business investments, etc.). The resulting values are summed to generate an aggregate emissions estimate across the three Scope categories.

What are the challenges associated with Carbon Accounting methods?

When used independently, carbon accounting frameworks suffer from a few important limitations:

  • It can be challenging to interpret different reporting methods and gather, process and present the data in an appropriate manner

  • The calculations, while relatively simple in isolation, quickly become complex when viewed in aggregate, requiring thousands of data points. Maintaining a coherent structure without specialised carbon accounting tools can thus be challenging, overwhelming and resource-intensive.

  • Due to the complexity, it is relatively common for accounting analyses to be inaccurate or outdated, limiting their utility for decision-making.

  • ‘Double-counting’ emissions is a common problem

  • Most frameworks are not designed to benchmark and compare different companies.

  • The lack of standardised inventories and input data streams leads to compounding errors that are challenging to resolve. Scope 3 calculations are particularly challenging since they involve requesting large amounts of data from third-party sources without any provision for data validation.

  • While powerful diagnostic tools when applied correctly, carbon accounting tools that are not designed for decision-making often fail to provide any concrete insight into the next steps or potential avenues for improvement.

  • The lack of any regulatory accountability limits the pressure on organisations to invest in accurate carbon accounting practices, leading to inaccurate estimates.

So how does Carbon Accounting help fight climate change?

Well-designed carbon accounting and management tools are able to address a number of the limitations mentioned above and enable a clear apportionment of GHG emissions by source and ‘scope’.

This, in turn, helps businesses optimise for solutions that are cost-effective, impactful and realistic. For instance, once identified, there are a variety of options to reduce corporate Scope 1 and Scope 2 emissions in the Indian context (e.g., switching from internal combustion processes to electrified ones or installing micro-grid solar). Reducing Scope 3 emissions is a much more challenging exercise, and requires a deep understanding of a company’s upstream and downstream footprint.

Here too, however, there is a clear opportunity for targeted innovation in sophisticated but accessible climate decision-making tools that help companies make sustainable supply-chain and product development decisions. In order to achieve global net-zero, we must eventually get to the point where emissions abatement goals can be set, validated and tracked at both an individual and systemic scale. Robust carbon accounting tools are a fundamental necessity for achieving this goal via the setting of science-based targets.

There is a lot of exciting innovation that will happen in this space over the coming years, and we at StepChange are excited to play our part in it.

StepChange is a climate-tech startup that helps companies and brands accelerate their sustainability journey and transition to NetZero. Learn how we may be able to help your organisation through our website or simply follow us on LinkedIn to stay tuned!

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