Carbon accounting is an incredibly important piece of the climate crisis puzzle. With extreme weather events becoming more common, time is of the essence. And corporations worldwide need to be more responsible with their carbon emissions.

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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 - wowzer!

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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 dig deeper into 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' carbon footprint. They can use carbon accounting to create targets and comply with applicable regulations in their jurisdiction.

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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 carbon taxes implemented by Denmark as part of its green tax reforms.

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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*.

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The purpose of carbon taxation is to deter businesses and consumers from using planet-warming fossil fuels and adopt greener practices. Countries typically set a price per tonne of GHG that emitters must pay at the end of the tax year.

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So where does carbon accounting fit in all of this? Carbon accounting provides the data companies and tax collection authorities can use to determine the due amount. It plays a pivotal role in carbon reporting for compliance and taxation.

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The European Union’s Emission Trading System (ETS) is similar to a carbon taxation system, except it’s a cap and trade system. The system 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.

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

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Several other nations have also enacted taxation systems to tackle climate change and reduce GHG emissions. Such systems wouldn’t be possible without accurate carbon accounting and reporting.

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

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.

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‍Side note: Have you never seen the tC/TJ unit before? It simply means the amount of carbon (in tonnes) per terajoule of energy.

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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.

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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.

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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.

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Why carbon accounting is crucial

Companies can’t effectively reduce their emissions if they can’t measure them accurately. 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 the implementation of climate policies. Similarly, companies required to report their emissions must take up carbon accounting to present accurate data. It helps companies stay under their emission limits where applicable.

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Furthermore, companies can take strategic actions and target operations that produce the most emissions. We'll harp on about this again, but it’s important to realise that carbon accounting can only be beneficial if it provides accurate data. Unfortunately, many businesses rely on estimates with room for error. Inaccurate data creates gaps in environmental policies, which ultimately result in more emissions harming the planet.

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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.

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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!

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How can comundo help with carbon accounting?

Energy consumption is a major contributor to a company’s carbon footprint. It forms a critical component of comprehensive and accurate carbon accounting. comundo is an automated solution for building owners and companies with real estate holdings that provides accurate data on a property’s energy usage.

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It’s a plug-and-play solution that doesn’t rely on estimates but on actual power, heat, and water usage data. With actionable data on energy consumption, you can pivot your efforts to achieve annual climate targets while complying with regulations.