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Clean Energy 101: Carbon Accounting

What is carbon accounting and how can it help corporations reduce their emissions?

Accounting is back in vogue, and no, we don’t mean the boring financial kind. When organizations want to understand their climate impact, they turn to carbon accounting — the practice of quantifying and reporting an organization’s greenhouse gas emissions. They use this information to set targets for reducing emissions and to identify potential areas to implement solutions. But unlike financial accounting, carbon accounting is not yet required for all organizations — and there’s no risk of hefty fines for C-Suite executives for misrepresentation. In this article we’ll dive into how carbon accounting works and why it matters, but first we’ll look back to understand how it started.

A Brief History of Carbon Accounting

The year was 1974: the hair was big, the bell-bottoms were wide, and scientists had just published research suggesting that human-produced chemicals could cause damage to the ozone layer.  A flurry of international research and cooperation followed, culminating in the 1987 Montreal Protocol that regulates the production of ozone-depleting substances (ODS) and sets targets and timelines for phasing out their consumption. It was an unprecedented success story: faced with the evidence, governments around the world came together to take swift and decisive action, and the Antarctic ozone layer is slowly recovering as a result. The Montreal Protocol was the first — and remains the only — United Nations treaty to be ratified by all 198 Member States.

Where regulating ODS was a success, agreement and action on greenhouse gases (which trap heat in the lower atmosphere as opposed to ODS that deplete the ozone layer itself) has been a slower process. One year after the Montreal Protocol, the Intergovernmental Panel on Climate Change was formed to “provide governments at all levels with scientific information that they can use to develop climate policies,” and in 1992 the United Nations Framework Convention on Climate Change was formed “as a framework for international cooperation to combat climate change.” But unlike the Montreal Protocol, this treaty was nonbinding, and it was not until December 1997 that the Kyoto Protocol establishing binding emissions reduction targets for developed countries was adopted.

So, what does all this have to do with carbon accounting? It was in the wake of the Kyoto Protocol (and its requirement for periodic reporting) that a number of initiatives emerged in an attempt to standardize environmental reporting, forming the basis for carbon accounting that we still use today. These included the Global Reporting Initiative, the Carbon Disclosure Project (CDP), several technical committees of the International Organization for Standardization, and what would become the cornerstone of corporate carbon accounting: the Greenhouse Gas Protocol.

The Greenhouse Gas Protocol divides its guidance into three scopes of emissions. Scope 1 refers to direct emissions from owned or controlled sources, such as company vehicles. Scope 2 refers to indirect emissions from purchased or acquired electricity, steam, heat, and cooling. Scope 3, also known as supply chain emissions, refers to all other indirect emissions that occur in a company’s value chain. Scope 3 emissions have historically been the most difficult for an organization to measure and report, which matters because the CDP estimates that approximately 75 percent of all emissions are Scope 3 emissions.

From Understanding to Impact

Today, there is a vast patchwork of standards and frameworks that organizations can use to calculate and report their greenhouse gas emissions. Some are specialized for reporting by level (national, corporate, asset, or product), by industry (such as steel, agriculture, or transportation), or even by audience (such as corporations, consumers, or investors). Using the standard of their choice (or those preferred by their stakeholders), organizations calculate their greenhouse gas emissions using data from their own processes, data collected from suppliers, and data from emissions databases.

The majority of these standards rely on an attributional accounting method, which seeks to quantify the total greenhouse gas emissions within a defined scope of responsibility, such as an organizational boundary. But there is another method — consequential accounting — that merits discussion. The consequential accounting method seeks to measure the system-wide change in emissions that occurs as a result of a decision or action, such as switching from coal-powered electricity to solar-powered electricity. Where attributional accounting provides us with an understanding of where an organization’s emissions are occurring, data-driven consequential accounting can help an organization assess their impact. Attributional accounting defines the emissions iceberg, and consequential accounting asks whether or not the iceberg is drifting toward decarbonization.

Given the urgency of the climate crisis, there is no question that we will need new solutions to new (and worsening) problems. Accounting standards that are only updated every three to four years cannot evolve quickly enough to account for the impact of new climate solutions, and attributional accounting alone cannot fully account for the second-order effects of those actions. Organizations will need to shift focus from accounting exercises to accounting action. They’ll need to leverage existing business relationships to understand and influence their upstream and downstream emissions, and they’ll need to re-evaluate procurement processes to source green products and materials.

As we go, we’ll also need to redefine what it means to “buy green” and assess the global effects of changing markets. There won’t be time to evaluate the impacts of climate solutions over the course of several years — we’ll need near real-time assessments to guide future climate decision-making. And we will need to use both attributional and consequential accounting —in tandem — to assess the impacts of climate action and understand an organization’s progress toward climate goals.

Climate Policies and Commitments are Just the Beginning

Landmark legislation like the US Inflation Reduction Act is transformational in setting ambitious (and necessary) emissions reduction goals and echoes efforts we’re seeing in Europe and around the globe. We’ve also seen a slew of climate commitments from household names in the private sector, many of which have ambitious reduction targets for as soon as 2030. As these pledges come due, focus will increasingly shift from target setting toward implementation. For governments and private organizations alike, meeting these goals will require an understanding of where emissions are coming from and how to reduce them — and they’ll need an impact-based approach to carbon accounting to do so.

We can no longer be satisfied with static inventories of emissions. When it comes to carbon accounting, we must also ask the question of impact. If we can’t ask why — and answer soon — then we might as well break out the mothballs: carbon accounting will become outdated faster than a ‘70s mullet.