What is carbon accounting?
Carbon accounting is a method that organizations use to track, calculate, report, and reduce their greenhouse gas emissions in order to operate in a more environmentally sustainable manner.
Overview: What is carbon accounting?
As the climate change warnings of scientists and international agencies grow increasingly more urgent, the question for business leaders is not whether they will do their part to help halt global warming , but how.
Businesses concerned with reversing the effects of climate change need a way to measure their environmental impact . They need a way to quantify the steps they’re taking to become more environmentally sustainable and the results those steps yield. And they need a way to share those results with customers, employees, investors, and regulators. Carbon accounting offers businesses a concrete process to calculate, monitor, and report these metrics.
Using carbon accounting, businesses can determine how much greenhouse gas—sometimes abbreviated as GHG—their operations, products, and services are responsible for releasing into the earth’s atmosphere. This data shows how significant an organization’s environmental impact is.
With an accurate inventory of their greenhouse gas emissions, business leaders can more easily spot operational inefficiencies and identify ways to reduce their organization’s emissions. Business leaders can also use this data to make more informed decisions when creating longer-term strategies for environmental sustainability and pursuing their organization’s sustainability goals.
Understanding greenhouse gas emissions
Before we discuss how your organization can conduct its own carbon accounting, let’s take a look at what greenhouse gases are and why they play such a prominent role in global warming. Understanding these details is crucial to accurately performing your own carbon accounting.
Greenhouse gases like carbon dioxide (CO2), water vapor (H2O), nitrous oxide (N2O), methane (CH4), and ozone (O3) trap the sun’s heat in the earth’s atmosphere. This naturally occurring phenomenon is known as the greenhouse effect. Without this effect, the earth would be far too cold for humans, animals, and plants to survive.
Human activities have exponentially increased the amount of greenhouse gases released into the atmosphere since the start of the industrial era in the 1700s. This has greatly accelerated global warming.
For example, fossil fuels like oil, coal, and natural gas—used to power factories, warehouses, offices, cars, trucks, planes, and other business facilities and modes of transportation—release CO2 into the atmosphere. Deforestation also releases CO2 into the atmosphere. In addition, the farming of livestock releases CH4 into the atmosphere, as do the landfills where we discard our garbage.
CO2 is by far the biggest contributor to global warming, accounting for nearly 75 percent of greenhouse gases. Unfortunately, the amount of CO2 humans are responsible for releasing into the earth’s atmosphere has increased by 50 percent in under two centuries.
The most significant way businesses can help curb global warming is to lower their greenhouse gas emissions—also referred to as reducing their carbon footprint. Carbon accounting—also known as greenhouse gas accounting, or GHG accounting—gives businesses a way to quantify their carbon emissions and track their progress as they work to reduce their carbon footprint.
GHG accounting has become increasingly prevalent in recent years as customers, investors, and employees seek out companies that prioritize environmental sustainability and companies look for measurable ways to prove their environmental responsibility.
A quick history of carbon accounting
Carbon accounting can be traced back to the 1990s. In 1994, the United Nations Framework Convention on Climate Change (UNFCCC) was created. Since its inception, the aim of this convention has been to slow the harmful effects of global warming by reducing carbon emissions.
Today most of the world’s nations participate in this convention. In addition to striving to ensure a sustainable future worldwide, members of the convention share these ideals:
- Industrialized countries—which are responsible for most of the world’s greenhouse gas emissions—must work the hardest to reduce their emissions.
- Industrialized countries must give developing countries financial and technological assistance to help them address climate change.
- Member countries must monitor and report on their policies and actions to reduce global warming. For developed countries, this includes submitting yearly inventories of their greenhouse gas emissions.
Each year, the countries of the UNFCCC attend a decision-making event called the Conference of the Parties (COP). Over the decades, global strides to thwart climate change have increased significantly. Several COP agreements in particular stand out:
- The Kyoto Protocol (1995). At the first Conference of the Parties event—known as COP1—members of the UNFCCC committed to specific, stringent goals to slow the effects of climate change. Called the Kyoto Protocol, these goals included setting global limits for greenhouse gas emissions.
- The Paris Agreement (2015). At COP21, members of the UNFCCC adopted the Paris Agreement to increase worldwide efforts to counteract climate change. This agreement calls for nations to prevent the earth from warming by more than 1.5 degrees Celsius beyond pre-industrial times.
- The push for net zero emissions (2021). At COP26, world leaders recognized that the next decade would be critical in the race against global warming and pledged to cut carbon emissions nearly in half by the year 2030. Leaders also pledged to reach what’s known as net zero before 2050 by eliminating the same amount of carbon emissions from the atmosphere as nations release into it.
But getting to net zero isn’t just the responsibility of nations and governments. Recognizing their own critical role in reducing the effects of climate change, many of the world’s leading public companies have also pledged to reach net zero by 2050.
The carbon accounting process
Carbon accounting has a lot in common with financial accounting. Like financial accounting, carbon accounting involves collecting and processing your organization’s data—only rather than working with cash flow and profits, you track and calculate your carbon footprint.
There are a number of different methods for conducting carbon accounting, designed by a variety of environmental organizations and agencies. Although there isn’t one preferred international standard, the Greenhouse Gas Protocol, or GHG Protocol, is most commonly used.
The GHG Protocol was developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD)—along with corporate partners and environmental groups—in the late 1990s. Businesses, industry associations, governments, and non-governmental organizations (NGOs) throughout the world use the GHG Protocols, which get updated regularly.
Using the GHG Protocol to conduct your carbon accounting involves several steps:
- Categorize your CO2 emissions by scope.
- Gather and organize the relevant data.
- Calculate your organization’s carbon impact.
- Report your metrics to the necessary regulatory bodies and business stakeholders.
The three emission scopes
The GHG Protocol uses three categories, or scopes, to classify carbon emissions. Each scope is defined by how the carbon in question is released into the atmosphere:
Scope 1 refers to emissions directly produced by an organization’s activities and assets. This includes the facilities, generators, vehicles, and other equipment a company uses to manufacture its goods, transport them, and otherwise conduct its business operations. Because the organization owns these assets, it presumably has the highest level of control over the emissions produced in this scope.
Scope 2 describes the emissions indirectly produced by the forms of energy an organization purchases to conduct its operations—including heating, cooling, electricity, and steam. This scope includes purchased utilities like natural gas and electricity that a company relies on to power its offices, warehouses, factories, and storefronts.
Scope 3 encompasses any other emissions indirectly produced by an organization’s business operations. Scope 3 is often the biggest emissions category for companies with a physical product and supply chain. Because this category of emissions is so broad, it can be the most complicated of the three to fully account for. Some of the most common items and activities that fall under in this category include:
- The products, services, and raw materials your company purchases.
- The waste your company creates in its daily operations.
- Employee commuting and business travel.
- Transportation and distribution of your products.
- The capital goods—including tools, computers, and machinery—your company uses to create its business offerings.
- How customers use your products and services, and how they dispose of them when done using them.
How to use emissions factors
Carbon accounting involves using formulas to calculate the emissions of your various business activities. Emissions factors are values used in these formulas to estimate the amount of greenhouse gas released into the atmosphere by a particular business process or activity—for example, the amount of pollution created by a particular manufacturing facility or trucking route in your supply chain.
At its most basic level, a carbon accounting formula that uses emissions factors looks like this:
Activity x emissions factor = greenhouse gas emissions
Emissions factors are determined by the activity causing the emission and the specific greenhouse gas that’s created. Emissions factors are established by government organizations like the U.S. Environmental Protection Agency (EPA). They’re often updated, so it’s important to be sure you’re using the latest factors.
Carbon accounting best practices
The carbon accounting process can be complicated and time intensive. Following are a few suggestions to help you conduct the process as efficiently and accurately as possible:
- Organize your data. The data you need to calculate your carbon emissions will likely be scattered across multiple sources like utility bills, waste collection invoices, receipts for fuel purchased, and employee travel records. Establish a uniform way to collect, store, and manage this data, and automate as much of the process as possible.
- Establish a tracking schedule. Record your emissions each month, quarter, and year at a minimum. Make sure the data you use to calculate your carbon emissions reflects your energy usage throughout the year. Your summer heating bills will likely be far lower than your winter ones, for example.
- Create a digital dashboard of your metrics. This will make it easier to track and revisit critical data points, including your overall emissions and your emissions categorized by scope. It will also make it easier to monitor your organization’s carbon footprint going forward.
- Document everything. That way, you won’t have to re-create the process of collecting all your emissions data, assigning the correct scope to each emission source, finding the correct emission factor for each data point, and performing the needed calculations every time.
- Conduct audits. Periodically review your carbon accounting procedures and metrics to see if any part of the process needs updating.
Benefits of carbon accounting
Implementing a carbon accounting program doesn’t just benefit the planet. It also benefits your business in multiple ways:
Ensure regulatory compliance. The nature, size, and location of your business operations will likely dictate which regulatory bodies require your organization to report on its carbon emissions, as well as how and when you must comply with these regulations. For example, the EPA requires thousands of U.S. facilities known to be large sources of carbon emissions to report on their emissions each year through the agency’s Greenhouse Gas Reporting Program (GHGRP).
Create meaningful benchmarks. Simply taking inventory of your company’s carbon emissions one time won’t indicate how well your organization is doing at reducing its carbon footprint. But maintaining an ongoing carbon accounting process gives you benchmarks that your organization, stakeholders, and regulators can use to see whether your carbon emissions are decreasing over time or whether you need to increase your sustainability efforts.
Inform your sustainability strategies. The concrete benchmarks and ongoing reporting that your carbon accounting yields will give you a more accurate picture of your organization’s carbon footprint. This will help you make more informed decisions on how to improve your sustainability strategies over time. Your carbon data and reporting will also give you a concrete way to measure your sustainability efforts against those of your competitors—a detail that’s become increasingly important to today’s customers, investors, and employees.
Increase operational efficiency. Taking stock of your carbon footprint can help to reveal any inefficiencies in your business operations—particularly the development, production, marketing, distribution, and support of the products and services that your company sells. For example, moving some of your in-person business meetings to online gatherings can save your organization travel time and expenses in addition to reducing carbon emissions. Likewise, your company may find that investing in assets that run on renewable energy, like electric vehicles and solar-powered heaters, saves money in the long run.
Boost your brand. Environmentally conscious consumers don’t have much tolerance for “greenwashing”—which is when companies promote themselves as being environmentally sustainable but don’t actually do anything of significance to back up their claims. Show customers, employees, investors, and business partners concerned about global warming that you take reducing your company’s carbon footprint seriously and don’t just regard sustainability as a marketing tactic. By sharing the results of your carbon accounting—and your progress in reducing your carbon emissions—with your staff, stakeholders, and the public, you’ll earn their trust as an organization that values environmental sustainability.
Attract business capital. Many investment firms, international banks, asset management firms, and other financial stakeholders now factor companies’ ESG (Environmental, Social, and Governance ) policies—in other words, how businesses approach environmental sustainability and social responsibility—into their investment decisions. The more sustainable and socially responsible your company is, the more attractive it will be to sustainability-minded investors. If you’re looking for additional business capital, having the carbon metrics and reporting to back up your ESG claims will help.
Challenges of carbon accounting
Carbon accounting can be a complex, time-consuming undertaking for a number of reasons:
No standardized accounting method exists. Despite the existence of protocols like the GHG Protocol, the practice of carbon accounting leaves a lot open to interpretation. There isn’t one international standard for performing the necessary calculations. Nor is there a standard method for collecting emissions data. Even for organizations that use the GHG Protocol, there isn’t a clear standard for identifying the boundaries between the three emission scopes.
All this leads to discrepancies in the carbon accounting itself—such as using data estimates rather than concrete numbers—and results that aren’t comparable among companies, industries, and geographic regions. On a bigger scale, these potential inaccuracies in emissions reporting can hurt global efforts to track the reduction of greenhouse gases worldwide.
Data collection can be cumbersome. The data needed to conduct a carbon accounting of your business operations is often vast. It may be siloed throughout your organization in different departments, files, folders, spreadsheets, and reporting tools, as well as receipts, invoices, and bills from your suppliers. Some of this data may not be in a consistent format. Ensuring that you’ve collected all the necessary information to perform a carbon accounting—and input all relevant data into one uniform reporting tool—can be an arduous step in the process.
Inventorying emissions can be difficult. Most organizations have no trouble adding up their scope 1 emissions—that is, the emissions they directly generate. But accurately accounting for scope 2 and 3 emissions—the emissions that organizations purchase or otherwise indirectly generate through their product production and distribution—isn’t as simple. This is because a company’s scope 2 and 3 data will come from its suppliers and other companies associated with its supply chain. Because some scope 3 data can be especially hard to access, many organizations wind up using industry averages in its place. Although many carbon accounting standards allow organizations to make this substitution, doing so leads to less reliable results.
The entire process is resource intensive. Carbon accounting is an ongoing endeavor, with regulatory bodies setting deadlines for routine reporting (often annually). These reports aren’t something you can throw together in a couple of hours. To ensure your reports are accurate and comprehensive, you’ll need to dedicate adequate resources to this aspect of your sustainability efforts.
Compliance rules often change. Organizations must keep up with constantly evolving carbon accounting requirements . Different companies must abide by the rules of different regulatory agencies depending on the nature, size, and location of their business. For example, the U.S. Securities and Exchange Commission (SEC) may soon require public companies to include carbon reporting in their financial statements.
Mistakes are easy to make. The more manual steps in your process—and the more varied the data sources that your carbon accounting draws from—the more vulnerable your carbon reporting will be to mistakes. Many software providers offer carbon accounting solutions to help automate the tracking, calculating, and reporting of your carbon emissions. Besides reducing errors in your carbon reporting, this technology can help you reduce the amount of time spent on this labor-intensive process.
Additional resources
Calculate your cloud footprint
Estimate your carbon emissions—and emissions you’ve already saved—related to using Microsoft Azure and Microsoft 365 cloud services. Make targeted decisions to help create new efficiencies around cloud usage.
Microsoft 2022 Environmental Sustainability Report
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Microsoft Carbon Removal white paper
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Frequently asked questions about carbon accounting
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Carbon accounting is a process that companies use to calculate the amount of greenhouse gas that their operations and offerings release into the earth’s atmosphere. Carbon accounting gives businesses a widely accepted method to measure their environmental impact over time.
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Although a number of different ways to perform carbon accounting exist, the Greenhouse Gas Protocol, or GHG Protocol, is the most common method. The GHG Protocol entails categorizing your emissions by scope in order to calculate your overall environmental impact:
- Scope 1 emissions are directly produced by your business activities and assets.
- Scope 2 emissions are indirectly produced by the energy your organization purchases.
- Scope 3—which is often the biggest emissions category—consists of any other emissions indirectly produced by your supply chain.
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Carbon accounting is a complex process that involves gathering large quantities of emissions data from various sources, organizing that data, and using regulatory standards and formulas to calculate and report it. Carbon accounting is an ongoing, time-consuming process that requires a lot of resources to perform. The process is made more difficult by the fact that there isn’t one universally agreed-upon standard or regulatory body that oversees the world’s carbon accounting.
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Carbon accounting enables businesses to quantify and report on their greenhouse gas emissions and show their progress toward reducing their environmental impact over time. It also gives businesses a widely accepted method to share hard data from their sustainability initiatives with their customers, employees, investors, and government regulators.
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Carbon accounting and greenhouse gas accounting—sometimes abbreviated as GHG accounting—mean the same thing: methodically tracking, calculating, and reporting on your organization’s greenhouse gas emissions in order to reduce your business’s carbon footprint.
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