Carbon accounting: demystifying climate and tax systems.

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Sustainability 101

Carbon accounting is an incredibly important piece of the climate crisis puzzle. It's a corner and edge and the centre allIt’s also crucial for the successful implementation of carbon tax systems. With extreme weather events becoming more common, time is of the essence, and corporations worldwide need to be more responsible with their carbon emissions.

Part of the issue is that despite actions to reduce emissions, many companies fail to identify and consider Scope 3 emissions. But just how high is the average company's greenhouse gas (GHG) supply chain emissions? According to a Rocky Mountain Institute report, it is 5.5 times higher than its own emissions!  

Thankfully, there’s a solution. Accurate carbon accounting and better taxation systems can improve climate efforts and help companies achieve their emissions goals in line with the Paris Agreement. 

In this article, we’ll explore the practice of carbon accounting and the role tax systems can play in improving it. 

What is carbon accounting? 

Carbon accounting or GHG accounting refers to measuring the GHG emissions of a business and its activities. It includes direct (Scope 1 and 2) and indirect (Scope 3) emissions. Put simply, carbon accounting aims to assess and report a business's carbon footprint. They can use carbon accounting to create targets and comply with applicable regulations in their jurisdiction. 

The GHG Protocol provides a comprehensive framework for accounting and reporting seven greenhouse gases, including carbon dioxide and methane. Many companies use the GHG Protocol guideline, the Corporate Standard, for carbon accounting.

The process of carbon accounting may vary by business and industry. Calculating the emissions accurately can be challenging, especially due to a lack of data or poor transparency. Carbon accounting is also required for tax purposes, such as the carbon tax in Denmark as part of its green tax reforms

How carbon accounting works 

Carbon accounting relies on data, which covers the spending and activities of a business. The spending data helps calculate emissions generated from purchasing goods and services. Similarly, activity data helps calculate emissions generated by a company’s operations or services. Accurate carbon accounting must include both a company's upstream and downstream emissions.

The spending and activity data is multiplied with relevant emissions factors, representing the GHG emitted. For instance, the carbon emission factor for crude oil is 20 tC/TJ (what do you mean 'What's tC/TJ when it's at home?' Don't worry – we asked the same thing. It simply means the amount of carbon (in tonnes) per terajoule of energy).

Historically, companies have struggled to attain accurate carbon accounting, particularly for Scope 3 emissions. However, thanks to technology, the methods used for calculating GHG emissions have considerably improved. 

In addition to emission factors, key performance indicators (KPI) are also used to measure the impact of efforts to reduce emissions. Some KPIs used in carbon accounting are energy consumption, emissions per unit of production, and amount of waste. KPIs can be automatically tracked and monitored with the help of software solutions designed for calculating and analysing emissions. The benchmarks for these KPIs may differ by country, city, and industry. However, they are an integral part of the carbon accounting process. 

Carbon taxation explained 

A carbon tax is a tax paid on carbon emissions. Many countries in the West have adopted carbon taxation systems to tax emitters, particularly those with a large carbon footprint, such as oil and gas companies*. Carbon taxation aims to deter businesses and consumers from using planet-warming fossil fuels and adopting greener practices. Countries typically set a price per tonne of GHG that emitters must pay at the end of the tax year. 

So, where does carbon accounting fit in all of this? 

Carbon accounting provides data that companies and tax collection authorities can use to determine the due amount. It plays a pivotal role in carbon reporting for compliance and taxation. 

*It's important to note that the structure of carbon taxation systems in each country varies.

An aerial view of a manufacturing plant showing steam stacks pumping out steam and other industrial buildings

Cap and trade versus carbon tax

Besides carbon tax systems, there’s another scheme similar to taxing carbon emissions: a trading system. Commonly called a cap-and-trade system, it limits emissions and allows low emitters to trade carbon credits with high emitters. 

For instance, a gas company can exceed its emissions limit in a year if it purchases unused carbon credits from another company (one whose emissions are below the limit). Although the idea behind climate tax credits and actual carbon taxation is the same, they’re different in practice. 

The European Union’s Emission Trading System (ETS) is the blueprint of cap and trade systems. It limits the total amount of GHG emitted by factories, power plants, and other companies. While the companies have a set emission cap, they can purchase emission allowances and even trade with one another. Companies that emit emissions lower than their cap can also sell their remaining limit to others.

It's a pretty nifty incentive! But the system also involves penalties for those who exceed the cap and fail to buy additional emission allowances. Introduced in 2005, this system aims to incentivise low emissions through caps and the ability to trade. 

Several other nations have enacted similar systems to tackle climate change and reduce GHG emissions. Again, such systems wouldn’t be possible without accurate carbon accounting and reporting. 

How does a carbon tax reduce emissions?

It all comes down to money. Carbon taxes are based on the idea that increased taxation would push emitters to reduce their emissions and find alternatives to reduce their carbon footprint. In other words, they’ll find ways not to have to pay such taxes and, in that way, work on reducing emissions. Simple, right?

The concept is easy and straightforward to implement locally or nationally. These taxes mainly target sectors such as oil and gas, which are well-known for their negative environmental impact. The taxes are applied according to emissions, typically per metric tonne of GHG emissions. They can be collected alongside fuel or sales tax, which governments worldwide already collect. 

There are successful examples of carbon tax systems reducing emissions. According to a research article published in Environments and Research Economics, the Canadian province of British Columbia reduced transportation emissions through carbon taxation. However, the same article notes that the impact is not that significant compared to efficiency improvements in sectors notorious for emissions. 

While it’s safe to say that carbon taxation helps reduce GHG emissions, it shouldn’t be the only instrument for lowering carbon footprint. Policy changes that prioritise renewable resources for energy and transport and adopt efficiency in practice can make a bigger impact. 

Why carbon accounting is crucial 

Companies can’t effectively reduce their emissions if they can’t measure them accurately or gain access to that data easily. Carbon accounting provides a way to measure the emissions an enterprise and its supply chain produce so they can take appropriate measures to achieve a net-zero carbon footprint. 

Carbon accounting is crucial for implementing climate policies, energy optimisation projects and building certifications like BREEAM or DGNB. Similarly, companies that are required to report their emissions must adopt carbon accounting to present accurate data. It helps companies stay under their emission limits where applicable. 

As always, it’s important to realise that carbon accounting can only be beneficial if it provides accurate data. Unfortunately, many businesses rely on estimates which leaves room for error. Inaccurate data creates gaps in environmental policies, creates questionable reports, and meaningless benchmarks.

Besides climate and regulatory benefits, carbon accounting can also benefit business growth. It demonstrates a company’s commitment to sustainability and shows its stakeholders that it takes global warming seriously. 

Not to mention that consumers are beginning to prefer climate-conscious brands. In one Deloitte survey, 60% of respondents said they want to see more CEOs do more for social issues and work on reducing carbon emissions. The public has spoken!


What is the highest carbon tax in the world?

As of 2023, Uruguay has the highest carbon taxation rate globally, at 155.87 USD/tCO₂e. Other states with high carbon taxes on fossil fuels include Liechtenstein, Sweden, and Switzerland. 

Which country introduced carbon tax?

Finland was the first country in the world to implement a carbon tax in 1991. It was quickly followed by Sweden and the United Kingdom. 

How many countries have a carbon tax?

Over 27 countries worldwide have implemented carbon tax systems in some form. Most of the European countries have a carbon tax targeting high emitters like fossil fuel industries. More countries are expected to adopt carbon taxation to reduce emissions and comply with the Paris Agreement. 

What is the difference between carbon accounting and GHG accounting?

Carbon accounting focuses on carbon dioxide emissions, whereas GHG accounting considers all GHGs, such as methane and nitrous oxide. However, carbon accounting is often used interchangeably with GHG accounting and quantifies all GHG emissions. 

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Ryan Stevens

Technical content creator
Ryan is a senior technical content creator, helping tech businesses plan, launch, and run a successful content strategy. After an extensive academic career in engineering, he worked with dozens of tech startups and established brands to reach new clients through proven content creation strategies.
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