Carbon accounting
Carbon accounting is a framework of methods to measure and track how much greenhouse gas an organization emits. It can also be used to track projects or actions to reduce emissions in sectors such as forestry or renewable energy. Corporations, cities and other groups use these techniques to help limit climate change. Organizations will often set an emissions baseline, create targets for reducing emissions, and track progress towards them. The accounting methods enable them to do this in a more consistent and transparent manner.
The main reasons for GHG accounting are to address social responsibility concerns or meet legal requirements. Public rankings of companies, financial due diligence and potential cost savings are other reasons. GHG accounting methods help investors better understand the climate risks of companies they invest in. They also help with net zero emission goals of corporations or communities. Many governments around the world require various forms of reporting. There is some evidence that programs that require GHG accounting help to lower emissions. Markets for buying and selling carbon credits depend on accurate measurement of emissions and emission reductions. These techniques can help to understand the impacts of specific products and services. They do this by quantifying their GHG emissions throughout their lifecycle.
These techniques can be used at different scales, from those of companies and cities, to the greenhouse gas inventories of entire nations. They require measurements, calculations and estimates. A variety of standards and guidelines can apply, including the Greenhouse Gas Protocol and ISO 14064. These usually group the emissions into three categories. The Scope 1 category includes the direct emissions from an organization's facilities. Scope 2 includes the emissions from energy purchased by the organization. Scope 3 includes other indirect emissions, such as those from suppliers and from the use of the organization's products.
There are a number of challenges in creating accurate accounts of greenhouse gas emissions. Scope 3 emissions, in particular, can be difficult to estimate. For example, problems with additionality and double counting issues can affect the credibility of carbon offset schemes. Accuracy checks on accounting reports from companies and projects are important. Organizations like Climate Trace are now able to check reports against actual emissions via the use of satellite imagery and AI techniques.
Origins
Initial efforts to create greenhouse gas accounting methods were largely at the national level. In 1995, the United Nations climate program required developed countries to report annually on their emissions from six types of industry. Two years later, the Kyoto protocol defined the greenhouse gases that are the focus of today's accounting methods. These are carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, nitrogen trifluoride, hydrofluorocarbons and perfluorocarbons. These actions raised awareness about the importance of accurate GHG emission estimates.
In 1998 the World Resources Institute and World Business Council for Sustainable Development began work to develop a protocol to support this goal. They published the first version of Greenhouse Gas Protocol in September 2001. It establishes a "comprehensive, global, standardized framework for measuring and managing emissions from private and public sector operations, value chains, products, cities, and policies". The corporate protocol divides an organization's emissions into three categories. Scope 1 covers direct emissions from an organization's facilities. Scope 2 covers emissions from generating electricity purchased by the organization. Scope 3 covers other indirect emissions.
Other initiatives since then have helped promote corporate and community participation in GHG accounting. The Carbon Disclosure Project began in the UK in 2002, and is now a multinational group, with thousands of companies disclosing their GHG emissions. The Science Based Targets Initiative formed in 2015 as a collaboration between CDP, WRI, the World Wide Fund for Nature, and the United Nations Global Compact. Its goal is to establish science-based environmental target setting as a standard corporate practice.
Since the 2015 Paris Agreement there has been an increased focus on standards for financial risk from GHG emissions. The Task Force on Climate Related Financial Disclosures formed as a follow-up to the Paris Agreement. It established a framework of recommendations on the types of information that companies should disclose to investors, lenders, and insurance underwriters. More recently, governments such as the EU and US have developed regulations that cover corporate financial disclosure requirements and the use of accounting protocols to meet them.
Participation in greenhouse gas accounting and reporting has grown significantly over time. In 2020, 81% of S&P 500 companies reported Scope 1 and Scope 2 emissions. Globally, over 22,000 companies disclosed data to CDP in 2022.
Drivers
Internal company drivers
A variety of business incentives drive corporate carbon accounting. These include rankings alongside other companies, managing climate change related risks, investment due diligence, shareholder and stakeholder outreach, staff engagement, and energy cost savings. Accounting for greenhouse gas emissions is often seen as a standard practice for business.Governmental requirements
Legal requirements provide another type of driver. These are usually created through specific laws on reporting, or within broader environmental programs. Emissions trading markets also depend on accounting and reporting protocols. In 2015 more than 40 countries had some type of reporting requirement in place.The EU's Corporate Sustainability Reporting Directive is part of the European Green Deal. It is intended to make EU countries carbon neutral by 2050. This directive will require many large companies and companies with securities listed on EU-regulated markets to disclose a broad array of ESG information, including GHG emissions. The UK's Environmental Reporting Guidelines update and clarify requirements in earlier laws that required companies to report information on GHG emissions. In the US the Greenhouse Gas Reporting Program requires facility based reporting of GHG emissions from large industrial facilities. The program covers a total of 41 industrial categories.
Recent regulations are also coming from agencies that traditionally have had a financial focus. The US Security Exchange Commission proposed a rule in 2022 to require all public companies, regardless of size, to report Scope 1 and Scope 2 emissions. Larger companies would be required to disclose Scope 3 emissions only if they are material to the company, or if the company has set an emissions target that includes Scope 3. Japan's Financial Services Agency's also issued rules in 2022 that require financial disclosure of climate related information. These may cover around 4,000 companies, including those listed on the Tokyo Stock Exchange.
Government procurement requirements have also begun to incorporate GHG reporting requirements. In 2022 both the US and the UK governments issued executive type orders that require this practice.
Emission trading schemes in various countries also play a role in promoting GHG accounting, as do international carbon offset programs. The European Union Emissions Trading System is a cap-and-trade system where a limit is placed on the right to emit specified pollutants over an area, and companies can trade emission rights within that area. EU ETS is the second largest trading system in the world after the Chinese national carbon trading scheme, covering over 40% of European GHG emissions. Greenhouse Gas Protocol is cited in its guidance documents. California's cap-and-trade program operates along similar principles. International offset programs also contain requirements for quantifying emission reductions from specific project. The CDM has a detailed set of monitoring, reporting, and verification procedures, as does the Reducing Emissions from Deforestation and Forest Degradation program. As of 2022, similar procedures to document project reductions under Article 6 of the Paris agreement are yet to be worked out.
Non-governmental organization programs
Many NGOs have developed programs that both promote GHG accounting and reporting, and help define its features. The Carbon Disclosure project allows a range of protocols for reporting to it. Most companies report GHG emissions to CDP using Greenhouse Gas Protocol or a protocol based on it. The Science Based Targets initiative cites Greenhouse Gas Protocol guidance as part of its criteria and recommendations. Similarly, the TCFD cites Greenhouse Gas Protocol in its recommended metrics and targets.Frameworks and standards
Many of today's carbon accounting standards have incorporated principles from the 2006 guidelines for greenhouse gas inventories that were created by the Intergovernmental Panel on Climate Change. Those most consistently applied include transparency, accuracy, consistency, and completeness. The IPCC principle of comparability, for example amongst organizations, is less widely applied, though techniques to support this goal are mentioned throughout Greenhouse Gas Protocol's corporate standard.These standards typically cover the greenhouse gases first regulated under the Kyoto Protocol. They operate in two distinct manners. Attributional accounting allocates emissions to specific organizations or products, and measures and tracks them over time. Consequential accounting methods measure the difference from a specific change, like a GHG reduction project.