🌱 Demystifying carbon accounting for ESG professionals

Carbon accounting involves measuring greenhouse gas emissions and removals resulting from human activities, guided by international standards like the IPCC, GHG Protocol, and ISO. It categorizes emissions into three scopes: Scope 1 (direct emissions), Scope 2 (indirect emissions from energy use), and Scope 3 (indirect emissions from the value chain). Accurate reporting is crucial for compliance and stakeholder management, emphasizing principles of relevance, completeness, consistency, transparency, and accuracy. By setting reduction targets and adhering to established methodologies, businesses can effectively track their carbon footprint and contribute to climate change mitigation efforts.

Carbon accounting is the practice of measuring greenhouse gas emissions and removals caused by human activities. In order to develop a fair and consistent account of carbon emissions it is important to have internationally agreed and standardised accounting principles and calculation methodologies.

What are the leading international standards for carbon accounting?

Much like financial accounting, carbon accounting also relies on internationally accepted practices. Three key organisations that provide guidelines and standards are IPCC, GHG Protocol and ISO. These three are the most cited and followed. IPCC’s 2006 Guidelines provide internationally agreed and accepted methodologies intended for use by countries in estimating their greenhouse gas inventories to report to UNFCCC. GHG Protocol provides Corporate Accounting and Reporting Standard to provide an accounting system for companies to take stock of their carbon emissions. ISO 14000 series of standards also provide the details to perform carbon accounting and emission calculation. In case reporting is under a GHG programme, the methodologies of the programme overrule the above mentioned guidelines.

Which greenhouse gases must be reported in carbon accounting?

In carbon accounting, it is crucial to report on a specific set of greenhouse gases (GHGs) that significantly impact global warming. According to the GHG Protocol, the 7 gases that must be monitored include Carbon Dioxide (CO₂), Methane (CH₄), Nitrous Oxide (N₂O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur Hexafluoride (SF₆), and Nitrogen Trifluoride (NF₃). Each of these gases has a distinct Global Warming Potential (GWP), which quantifies their relative ability to trap heat in the atmosphere compared to CO₂, which serves as the baseline with a GWP of 1. While natural emissions may average out over time and are less critical for tracking, anthropogenic emissions are of particular concern due to their detrimental effects on climate change, as highlighted by the Intergovernmental Panel on Climate Change (IPCC).

What is Scope 1, 2 and 3?

Scope 1 emissions are reporting entity’s direct GHG emissions. The sources of these emissions may include combustion of fossil fuel, fugitive emissions, ghg emissions from industrial processes and product use (eg. during clinker creation in cement manufacturing), waste treatment, agriculture, forestry and land use change.

Scope 2 emissions are the reporting entity’s indirect emissions caused by purchase and use of electricity, steam, cooling and heating by the reporting entity. The actual emissions take place at a source outside the boundaries of the reporting entity. Scope 2 represents one of the largest sources of GHG emissions globally, with one third of global GHG emissions arising from generation of electricity and heat. ISO refers to these emissions as energy related indirect emissions.

Scope 3 emissions are all the other types of indirect emissions caused due to the value chain activities of the reporting company. GHG protocol lays down 15 categories under Scope 3. These emissions arise from various stages of a company’s supply chain. To manufacture products, a company must first acquire raw materials. Scope 3 emissions encompass the cradle-to-gate emissions associated with these purchased raw materials. Within the GHG Protocol, this category is referred to as "Purchased Goods and Services."

While a company has control over its direct emissions, it has influence over its indirect emissions. Put together Scope 1, 2 and 3 provide a full picture of GHG emissions due to the company's activities.

Why setting the right organisational boundary matters for emissions reporting?

Business operations are run under multiple legal and ownership structures. They include wholly and partially owned subsidiaries, joint ventures, wholly owned operations etc. Organisation boundaries define the method by which reporting companies can aggregate emissions from various related business entities. GHG protocol and ISO define two methods of consolidation - equity share approach and control approach.

In the equity share approach the reporting entity aggregates emissions of a related entity in proportion to its equity share. Whereas in a control approach a company reports 100% of the emissions if it exerts financial and/or operational control over related entities.

If two companies have joint ownership of an operation, there is a chance that emissions from this operation are double counted if the two companies use a different consolidation approach. For example Company A and Company B have joint ownership of Company C. Company A controls the operations of Company C. If Company A reports based on control approach they shall report 100% emissions of Company C and if Company B reports based on equity share approach they shall report Company C’s emission proportional to their share. This results in double counting of Company C emissions across these two companies. ISO and GHG protocol recommend that when a facility is controlled by several companies, these companies should adopt the same consolidation methodology to avoid double counting.

Calculating GHG emissions

GHG emissions typically have the following sources

  • Combustion emissions - Emissions caused by burning fossil fuel in stationary and mobile equipment. This includes emissions from boilers, furnaces, kilns, heaters, cars, trucks, boats, ships etc.
  • Process emissions - These are emissions from a physical or a chemical process that creates greenhouse gas. For example CO2 emission from cement manufacturing, catalytic cracking etc.
  • Direct product use - Some industries directly use greenhouse gases in their operations. For example use of anaesthetic medical gases in healthcare.
  • Fugitive emissions - These emissions include intentional or unintentional releases of greenhouse gases. For example leaks from joints, seals, gaskets, pipes, coal piles, etc.
  • Waste emissions - During waste treatment greenhouse gases like methane and nitrous oxide are released in the atmosphere as a result of biological degradation. Incineration of waste causes GHG emissions.
  • Agriculture, forest and other land use emissions - Emissions from livestock, manure application, liming, burning of biomass etc.

The most popular method of GHG emission calculation is based on emission factors. Emission factors are multipliers that are used with activity data to calculate emissions from a particular activity. For example, if a company burns 1 kg of coal, the company can use coal’s combustion emission factor which is expressed in Kg CO2e/Kg and multiply it with the consumed quantity of coal to estimate total GHG emissions of 1 Kg CO2e from that activity.

Other methods of GHG emission estimation are based on mass balance or stoichiometric calculation specific to a facility or direct measurement.

Tracking emissions and setting reduction targets

Companies track carbon emission with respect to an established base year. GHG protocol and ISO recommend reporting companies to select a base year based on the availability of good quality data for robust emission estimation. Companies may choose a historical year or use the first reporting year as their base year. Base year emission calculation may be revisited if relevant. GHG protocol and ISO require companies to establish recalculation policy. Usually companies ascertain a significance threshold beyond which recalculation is triggered. A lot of businesses undergo acquisitions and divestitures. This is another reason why companies may have to recalculate base year and recast calculations.

One of the most common goals of carbon accounting is GHG reduction. Companies embark on emission reduction journeys by setting targets. These targets can be absolute in nature or intensity based. Absolute reduction targets encourage businesses to implement strategies that delink carbon emissions with growth. Usually companies take up 5 to 10 year long targets with appropriate milestones in between. It is generally recommended that companies are ambitious and scientific about setting up their targets. Organisations like SBTi help companies validate their targets and align them to ambitions established in the Paris agreement of 2015.

Reporting

Companies report GHG emissions for multiple reasons. The report may facilitate emission verification, compliance in a GHG programme, voluntary disclosure, stakeholder management or for any other relevant reason. Both GHG protocol and ISO standard recommend companies to be relevant, complete, consistent, transparent and accurate in their reporting. If a public report is compliant with either GHG protocol or ISO standard it is required to comply with a bare minimum requirement set in each standard. Broadly speaking both standards require the companies to disclose company information, organisation boundary, emission data which includes both Scope 1 and Scope 2 emissions. Mention any source exclusions along with details on calculation methodology.

Conclusion

In conclusion, carbon accounting is an essential practice for businesses aiming to understand and mitigate their greenhouse gas emissions. By adhering to internationally recognized standards such as those set by the GHG Protocol, and ISO, organisations can ensure consistency and transparency in their reporting. The detailed categorization of emissions into Scope 1, 2, and 3 allows companies to capture a comprehensive view of their carbon footprint, while the emphasis on accurate measurement and reduction targets fosters accountability and encourages sustainable practices. As the urgency to address climate change intensifies, effective carbon accounting will play a pivotal role in guiding businesses toward a more sustainable future.