Carbon accounting
Carbon accounting, also referred to as greenhouse gas accounting, measures the amount of greenhouse gases (GHGs) produced directly and indirectly by a company's or organization's operations within specific criteria. In essence, carbon accounting assesses the climate impact of an organization's business activities.
Greenhouse gases are significant contributors to climate change and primarily arise from human activities such as burning fossil fuels, electricity consumption, heat generation, and agricultural practices. The main GHGs include carbon dioxide (CO2), methane, and nitrous oxide. Emissions from these gases are often expressed in CO2e (carbon dioxide equivalent) to provide a standardized measure for carbon accounting.
Emissions Measurement
The Greenhouse Gas Protocol, developed by the World Resources Institute and the World Business Council for Sustainable Development, offers a framework for measuring GHG emissions. Under this protocol, emissions are categorized into three scopes:
- Scope 1: Direct emissions that come from sources owned or controlled by a company. For instance, emissions released during the extraction and processing of coal in a mining operation represent a clear connection between the activity and its emissions.
- Scope 2: Indirect emissions resulting from the generation of purchased electricity, steam, heating, and cooling. An example is the emissions associated with using electricity to heat a building or warm water for various purposes.
- Scope 3: All other indirect emissions related to a company's activities throughout its supply chain. For many service sector companies, Scope 3 emissions can exceed those from Scopes 1 and 2 combined, presenting a significant opportunity to reduce their overall GHG impact by decreasing reliance on third-party goods or investing in more sustainable alternatives.
The Importance of Carbon Accounting
* Changes in Environmental Legislation
In developed countries, such as the United States, publicly traded companies are now required to disclose their corporate emissions, climate risk impacts, and other material environmental, social, and governance (ESG) issues to the SEC. To comply with these new regulations and avoid charges of greenwashing, management teams must understand how to account for carbon emissions.
* ESG Reporting Disclosure and Benchmarking
Carbon accounting is essential for organizations that wish to track and disclose their performance against net-zero goals. It provides key information for the "E" in ESG reporting, which has gained popularity due to increasing awareness, potentially lowering risks and attracting investment. Moreover, carbon accounting allows for comparisons between past and current emissions, clearly indicating improvements or reductions. It also facilitates comparisons between companies, helping stakeholders understand relative performance.
* Capital Access
ESG factors are increasingly influencing investment and capital allocation decisions among large asset managers and global banks. By adhering to environmental regulations, demonstrating progress in reducing emissions, and contributing to a "net zero" economy, management teams can secure affordable capital market funding.
* Benefits of Carbon Accounting
There are numerous advantages to implementing carbon accounting and disclosing carbon emissions, such as:
- Companies can identify risks and understand their current state and performance. This insight enables them to make strategic decisions that promote sustainability and enhance company value.
- Disclosing carbon emissions has significant implications for legitimizing companies and building confidence among stakeholders, regulators, and investors.
- Transparency in carbon accounting can encourage diverse investments, enhancing companies’ credibility and trustworthiness.
References
1. Hazaea, Saddam & Al-Matari, Ebrahim & Alosaimi, Mushari & Farhan, Najib & Abubakar, Ahmed & Zhu, Jinyu. (2023). Past, present, and future of carbon accounting: Insights from scholarly research. DOI:10.3389/fenrg.2022.958362
2. Supply Chain Solutions Center. (2019, February 27). Carbon accounting 101. Supply Chain Solutions Center. https://supplychain.edf.org/resources/carbon-accounting/
3. World Resources Institute. (2019, August 19). Greenhouse gas protocol. World Resources Institute. https://www.wri.org/initiatives/greenhouse-gas-protocol
4. IBM. (2024, December 16). What is Carbon Accounting? IBM. https://www.ibm.com/think/topics/carbon-accounting
MA. Tran Ai Tien