How to choose the best carbon accounting method for your company?

Carbon accounting is increasingly becoming an industry-standard requirement for every company. In the race towards net zero, carbon accounting provides the tools to quantify and measure carbon emissions and help us make informed decisions regarding climate mitigation strategies. But which carbon accounting method should your company choose? This article explains the different carbon accounting methodologies, accompanied by an insightful infographic, to support businesses in selecting the best carbon accounting method.

What is carbon accounting?

Carbon accounting, or "greenhouse gas accounting," refers to the systematic methodologies, measurement, and monitoring used to evaluate and quantify the amount of carbon dioxide equivalents (CO₂e) an entity or activity emits. Carbon accounting measures all greenhouse gas (GHG) emissions, including CO₂, methane, nitrous oxide, and fluorinated gases. Gases other than carbon are expressed in terms of carbon equivalents and allocated across GHG emission scopes and categories.

What are the principal carbon accounting methods?

Carbon accounting covers a range of practices for calculating a company's carbon emissions. To understand a company's carbon footprint, the first step is to measure the emissions linked to the company's activities and within the supply chain. Companies may choose between five carbon accounting methods: the physical-unit method, spend-based method, supplier-specific method, average method, and hybrid method.

The GHG Protocol’s Corporate Standard and Corporate Value Chain Standard provide guidelines for accurate and consistent carbon reporting, encompassing the measurement of Scope 1, 2, and 3 emissions. These standards emphasise five central tenets: relevance, completeness, consistency, transparency, and accuracy. 

These standards describe various carbon accounting methods that allow companies to select the most suitable based on data availability, materiality, and accuracy. Below, you can read about these five essential methods.

‍

Physical-unit method

The physical-unit method, along with the spend-based method, describes the type of activity data used in carbon accounting. This method calculates greenhouse gas (GHG) emissions based on the number of physical units a company consumes or uses.

Examples include energy consumption measured in kilowatt-hours (kWh), gasoline consumption measured in litres, or other direct measures of physical resources used by the company.

Benefits of the physical-unit method include 

• Direct correlation: The physical-unit method directly links a company's activities and emissions, allowing for accurate calculations.
• Accurate data: This method ensures accurate reporting of a company's emissions, particularly for Scope 1 and 2 emissions, using precise measurements of physical resources consumed.
• Transparency: Using tangible units, such as kWh or litres, makes the data straightforward and transparent, allowing stakeholders to understand the correlation between company operations and emissions easily.

Challenges to consider before choosing the physical-based unit method

• Data collection: Gathering sufficient data on physical units across a company's operations can be time-consuming, particularly for larger companies with complex supply chains.
• Product complexity: Calculating the carbon footprint of specific products can become challenging due to varied factors, including the production process, transportation, and distribution.
• Limited Scope: The physical-unit method primarily focuses on direct emissions and may not fully capture the indirect emissions associated with a company's operations, particularly for Scope 3 emissions.

The physical-unit method is particularly suitable for companies focused on precise emissions tracking, especially in industries with significant energy or material usage. It offers detailed insights into direct emissions, making it valuable for entities seeking accuracy in sustainability reporting and regulatory compliance. However, businesses should be ready to invest in robust data collection systems.

This method provides a transparent and direct way to measure and reduce a company's carbon footprint, enhancing its sustainability efforts.

Spend-based method

The spend-based method calculates GHG emissions based on the financial transactions associated with a company's purchases. It involves multiplying the monetary value of purchased goods or services by an emissions factor that quantifies the average GHG emissions per currency unit.

For example, if a company spends a certain amount on IT services, the emissions factor would translate this expenditure into an equivalent amount of CO₂e, reflecting the service's environmental impact.

Benefits of the spend-based method

• Streamlined data acquisition: Since companies meticulously record their financial transactions, the necessary data for this method can be readily extracted from existing financial documents such as invoices, purchase orders, and expense reports.
• Administrative efficiency: The simplicity of the method makes it less technically demanding, enabling companies with limited access to detailed consumption data or without advanced carbon accounting systems to still assess their emissions.
• Coverage of indirect emissions: It is beneficial for capturing Scope 3 emissions, which can often be diffuse and challenging to measure directly, as it encompasses all indirect emissions associated with the company's operations, not just energy use.

Challenges to consider when choosing the spend-based method

• Generalisation risks: The technique relies on average emissions factors, which may need to accurately reflect the specific practices of individual suppliers or the operational efficiency of the goods and services purchased, leading to potential inaccuracies in emissions reporting.
• Contextual limitations: The approach needs to account for the nuanced environmental impacts of a company's purchasing decisions, such as choosing a green energy supplier versus a non-renewable one, as it treats all expenditures within a category the same.
• Market sensitivity: The method's reliance on financial data means that inflation, exchange rate fluctuations, or changes in purchasing behaviour could skew the emissions estimates over time, making it difficult to track progress in emissions reduction.
• Strategic implications: Although administratively convenient, a company needs more specificity to make informed strategic decisions about reducing its carbon footprint at the individual product, service, or operational practice level.

Companies can strategically use the spend-based method as a starting point for carbon accounting when other data is unavailable. It sets a baseline from which improvements in data collection and reporting can be developed.

Over time, companies can aim to refine this method with more specific data, transitioning towards more accurate methods like the physical-unit or supplier-specific approaches.

Supplier-specific method

The supplier-specific method collects granular, product-level cradle-to-gate GHG inventory data from suppliers. This involves obtaining detailed emission factors for every good or service the reporting company procures. As a result, this method is renowned for its precision, providing the most accurate emissions data directly relevant to the company’s supply chain operations. This method is highly beneficial for Scope 3 reporting. 

Benefits when using the supplier-specific method

• Unmatched accuracy: This method calculates the most precise carbon footprint by sourcing emissions data for each specific product or service, which is essential for targeted reduction strategies.
• Supplier engagement: Encourages direct engagement with suppliers, fostering collaboration and potentially influencing their sustainability practices.
• Customised data: Information gathered is customised to the company's specific purchases rather than relying on generalised industry averages.
• Improved reporting: Offers reliable and specific data for sustainability reports, often enhancing credibility with stakeholders.

Challenges of the supplier-specific method 

• Data availability: The most significant barrier is the need for detailed emissions data from suppliers, as many still need to measure or report this information.
• Complexity in data collection: Requires a robust mechanism for collecting and processing complex data sets, which can be resource-intensive.
• Supplier collaboration depends on suppliers' willingness to collaborate and share detailed emissions information, which can vary greatly.
• Time and resource investment: This method is the most time-consuming and resource-intensive, demanding significant efforts from the company’s sustainability and procurement teams.
• Data verification: Ensuring the accuracy of suppliers' data requires rigorous verification processes, which can add another layer of complexity.
• Scalability Issues: Scaling this method to cover all suppliers can be particularly challenging for companies with extensive supply chains.

A company that opts for the supplier-specific method must be prepared to engage deeply with its supply chain. This method is typically more feasible for companies with fewer large-scale suppliers where the investment in collecting and analysing data can be justified by the significant impact of the suppliers’ emissions on the company’s overall carbon footprint.

It suits organisations aiming for high-precision carbon management and those in industries where supply chain transparency is paramount for regulatory compliance or market differentiation.

Average-data method

The average-data method is a carbon accounting approach approximating emissions by leveraging aggregated data. It involves compiling information on the number of resources consumed or activities undertaken (such as the mass of materials processed, distance travelled, or energy consumed) and applying secondary emission factors, typically industry averages, to this data.

These factors are derived from a broader set of data representing a typical emission value for each unit of activity or resource used across an industry, providing a generalised estimate of the GHG emissions associated with a company's operations.

Benefits of choosing average-data method

• Data accessibility: Industry-average emission factors are often readily available, making this method convenient when specific data is lacking.
• Ease of implementation: It allows for a simplified calculation process that can be implemented with less specialised knowledge and fewer resources.
• Useful for baseline estimates: Provides a starting point for companies beginning to track their carbon footprint and can serve as a benchmark for improvement over time.

Challenges when selecting the average-data method 

• Generalisation risks: This approach relies on average values that may not accurately represent the specific practices or efficiencies of an individual company's operations.
• Lack of precision: The resulting data could be more precise, which may not be suitable for companies seeking to make specific operational changes to reduce emissions.
• Reduced incentive for data improvement: Companies might become complacent with average data, which can reduce the incentive to invest in more accurate measurement and reporting methods.

The average-data method applies to small and medium-sized enterprises (SMEs) or companies developing their carbon accounting practices early. It is also helpful for preliminary assessments where specific data is unavailable or for indirect emissions categories where detailed measurement is challenging.

For companies looking to move beyond compliance and towards more active carbon management, this method can be a temporary measure while developing more refined carbon accounting practices.

Hybrid method

The hybrid method is a versatile approach that integrates multiple data sources to create a comprehensive emissions profile. This method combines the granularity of supplier-specific data, where available, with secondary data sources, like industry averages, to compensate for any information gaps. It represents a middle ground, combining the detail-oriented nature of the supplier-specific method with the broader applicability of spend-based and physical-unit methods. 

The hybrid method may also blend these two latter methods by using financial data and physical measurements of resource use to calculate emissions.

Benefits of the hybrid method

• Enhanced accuracy: By using supplier-specific data when possible, the method achieves greater accuracy than secondary data.
• Practicality: It balances the detailed and resource-intensive supplier-specific approach and the more accessible but less precise spend-based or average-data methods.
• Flexibility: This method can adapt to the varying levels of data quality and availability across different emission sources within a company.
• Comprehensive coverage: This option offers a more complete emissions profile by incorporating direct and indirect emission sources, improving the overall quality of carbon reporting.

Challenges when selecting the hybrid method

• Data integration complexity: Merging different data types can be complex, requiring careful consideration to ensure consistency and comparability in the emissions calculations.
• Upstream emissions data: Accurate upstream emissions data, critical for Scope 3 accounting, may take time.
• Resource allocation: While less resource-intensive than the supplier-specific method alone, the hybrid approach still requires significant time and expertise to manage effectively.
• Methodological consistency: Ensuring a consistent approach to emissions calculation when combining different methods can be challenging, mainly when dealing with varied and complex supply chains.

The hybrid method applies to organisations of various sizes and complexities. It is particularly beneficial for companies with some supplier-specific data that must rely on broader data sets to complete their emissions picture. This method is suitable for organisations aiming to refine their carbon accounting over time, starting with broader estimates and gradually increasing the specificity and accuracy of their data as they enhance their data collection and supplier engagement practices.

The most accurate carbon accounting method 

The most accurate carbon accounting method is the hybrid method, which effectively combines the strengths of various approaches to provide a comprehensive and precise assessment of emissions. By integrating supplier-specific data—where available—with other reliable data sources, the hybrid method allows for detailed emissions tracking where primary data is most accurate and fills gaps with validated secondary data. This approach not only leverages the accuracy of supplier-specific emissions factors but also ensures broader coverage and consistency across all operational scopes by incorporating methodologies like the physical unit and spend-based methods. 

Such a multidimensional strategy is aligned with the recommendations of the GHG Protocol, which emphasises accuracy, completeness, and consistency in emissions reporting. This makes the hybrid method particularly suitable for organisations striving to achieve a precise and holistic understanding of their carbon footprint, thereby enhancing their ability to implement effective and targeted emission reduction strategies.

Easiest carbon accounting method 

The spend-based method is widely considered the easiest carbon accounting method to implement, mainly due to its reliance on readily available financial data. This approach calculates greenhouse gas (GHG) emissions by multiplying the monetary value of purchased goods and services by an appropriate emissions factor. The emissions factor represents the average amount of GHGs emitted per currency unit spent, often derived from industry averages or secondary data sources.

Using financial records such as invoices and purchase orders, the spend-based method allows companies to quickly gather expenditure data and generate emissions estimates without requiring extensive new data collection systems. This simplicity makes the method especially suitable for companies in the early stages of developing their carbon accounting practices or with limited resources for tracking emissions in more detail. However, the method's reliance on average emissions factors can lead to generalised or less accurate estimates, highlighting the need for companies to balance convenience with the accuracy of more direct accounting methods over time. Nonetheless, the spend-based method remains a valuable and straightforward tool for initial carbon accounting and reporting.

‍Carbon accounting helps corporations know precisely how much carbon emissions they emit to set reduction targets. Our carbon management and decarbonisation platform makes carbon accounting more manageable for your company and supply chain. ‍Book a demo now.