What is Carbon Accounting?

Will somebody please tell us what it all means?

Carbon accounting is the measurement of a company’s Greenhouse Gas (GHG) emissions - that is, the greenhouse gases that are emitted by the company from its activities and operations.

For organisations quantifying their emissions for the first time, you’ll be performing a ‘baseline emissions assessment’. This involves identifying and quantifying all of the sources of emissions within an organisation’s operations, including direct emissions from activities like burning fossil fuels (like driving a car), as well as indirect emissions associated with the consumption of electricity, freight of materials, or from the purchase of goods and services you buy (from suppliers within your value chain).

Tell me there’s standards for this…(we hear you accountants and finance teams)

There is! The GHG Protocol supplies the world’s most widely used Greenhouse Gas accounting standards. (Need a recap? Visit What is the GHG protocol). Nearly every other framework (think of the endless acronyms you’ve heard) is underpinned by the GHG Protocol for the carbon accounting part. These standards set out the things you need to include and the methods you can follow (and yes, they cover methods where you don’t have perfect data because nobody does). 

You don’t have to be a scientist - but here’s the quick low down

The standards really are accounting standards more than environmental science. But let’s take a minute to go a little deeper for context. What are greenhouse gases or GHGs? They are gases present in our atmosphere that absorb and emit energy within the thermal infrared wavelength of light (IPCC, 2018) (wavelengths slightly longer than the visible spectrum we see in). Stay with us! 

These gases essentially trap some of the incoming solar radiation, warming our planet. Basically, greenhouse gases are responsible for the rising temperatures that are leading to climate change and its catastrophic consequences. The primary greenhouse gases that drive the greenhouse effect are water vapour (H2O) (in the form of clouds etc.), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and ozone (O3).

Applying This to Carbon Accounting

So when it comes to carbon accounting, you’re calculating the quantity of those gases generated from the businesses activities, and the output is usually expressed as kg of CO2-e.

What does CO2-e (even mean)?

Each one of those gases has a global warming potential (‘GWP’ for short). When you multiply any of those gases by its GWP - you get CO2-e. Essentially, the idea is that you are expressing the impact of each greenhouse gas in terms of the amount of carbon dioxide or CO2 that would be required to create the same amount of warming. It simplifies things and provides a common unit. Don’t worry, you don’t have to know what activity creates exactly what gas and what the equivalent amount of carbon is based on your own knowledge and research - Sumday helps you perform that calculation, so read on (we know you nearly called it quits there).

How do you know what to account for?

Under the GHG Protocol, emissions are split up into ‘scopes’ (categories of emissions essentially). There are three scopes used in GHG accounting, which differentiate between direct and indirect emissions:

• Scope 1 Emissions: Direct GHG emissions from sources that are owned or controlled by the company, such as burning fuels from cars, trucks, gas stoves, boilers, and bbqs.
  
  
• Scope 2 Emissions: Electricity, indirect GHG emissions from purchased electricity consumed by the company (like what’s on your power bill). Scope 2 emissions are generally straightforward, it’s the emissions associated with the electricity, steam, heat or cooling a business buys from a utility or retailer. Scope 2 represents one of the largest sources of GHG emissions globally, with generation of electricity and heat now accounting for at least a third of global GHG emissions (hence the push towards renewable energy). These emissions are categorised as indirect, as they are technically emitted from sources owned by other entities i.e. the electricity provider, rather than a business generating the electricity themselves.
  
  
• Scope 3 Emissions: Other indirect emissions which are a consequence of the activities of the company but occur from sources not owned or controlled by the company (like all the suppliers the business buys goods and services from, more on this below).

Scope 3 Emissions - further breakdown

Definition under the standards: Other indirect emissions which are a consequence of the activities of the company but occur from sources not owned or controlled by the company.

From its brief description, this category probably makes the least sense… Scope 3 emissions are essentially every other emission in the value chain other than Scope 1 and 2, meaning most of a company's emissions are related to Scope 3 sources, in fact, it’s often around 80-90%! So it’s absolutely critical to account for Scope 3 emissions.

Scope 3 emissions are divided into 15 categories:

1. Purchased Goods and Services
2. Capital Goods
3. Fuel and Energy-Related Activities
4. Upstream Transportation and Distribution
5. Waste Generated in Operations
6. Business Travel
7. Employee Commuting
8. Upstream Leased Assets
9. Downstream Transportation and Distribution
10. Processing of Sold Products
11. Use of Sold Products
12. End-of-life treatment of Sold Products
13. Downstream Leased Assets
14. Franchises
15. Investments

Let’s say for example, we are a very small-scale company that sells one cake a day. Scope 3 emissions would therefore come from the purchasing of ingredients for the cake, the freight associated with taking the cake from our kitchen to the shopfront, the disposal of any waste generated from the cake (eggshells, for example) and the equipment required to create the cake (oven, electric mixers etc.)

Now this is where it gets tricky. You might be thinking, what if this business gets its eggs from a large company, and they have no idea how many emissions are involved with their chicken farm? How are we supposed to account for that? This is a big problem – most of the time they don't know.

Step one is asking the supplier if they have the data, if they don't have that information, we are forced to use a generic industry average to get to the CO2e equivalent of buying these eggs. Sumday has a large database of emissions factor averages you can use and the standards say if you’ve tried everything else reasonable, then ok, rely on an average. BUT this isn’t practical for the rest of eternity. You need to actually measure how your suppliers are reducing emissions so you can reduce yours too.

That’s why Sumday makes it easy to engage with your suppliers, you can upload details and ask if they have started carbon accounting so you can include primary data. Like you, they’re probably getting their head around this too, so if they don’t have their data, you can pass on free access to Sumday’s training and software to help them get started. This can form part of your plan to improve the quality and availability of your data, so you can get a better understanding of your emissions and track your progress towards net zero year on year (and your suppliers can reap their own benefits too).

How do accountants and finance teams play a role in all this?

Have you ever thought about how hard it is to know whether a business is truly sustainable? If you were buying new office equipment for your own business, could you easily understand whether one keyboard or desk supplier emitted less carbon than another? The answer is no. And that’s because not all businesses are carbon accounting properly. This means it’s very hard for businesses to make informed decisions from a carbon or sustainability perspective, despite the desire to do so.

At Sumday, we believe accountants and bookkeepers will assist in driving the desperately needed shift in practices to make carbon accounting as transparent and robust as financial accounting. We believe with the support of accountants and bookkeepers, businesses can affordably make carbon an extension of their existing financial accounting and reporting. Often they have access to a good portion of the data required to make a start and they can help improve the systems and processes required to improve on the data that’s low quality or missing. They’re also used to reporting against standards in a transparent way. 

Are we bias? Yes, yes we are. Here’s the quick take on the role of advisors from Sumday’s Head of Accounting and education, Lindsay: 

“Accountants (of which I am one) are really an interesting group of people. They're details and process focused. And once they understand a set of principles or standards, they build processes around these things really efficiently. So, if you go back to the systems thinking approach, we need to get people to do emissions assessments in a cost effective and timely way. The key piece of solving the puzzle is delivering this at a price point that everyone can afford. Whether you’re a giant enterprise or an SMB, you’re going to be asked at some point, by someone, to do an emissions assessment, so it needs to be accessible to everyone.

The other side of things is the data quality. Obviously anyone can put in random numbers into a carbon accounting calculator and get an output. But how do you know that that's right? And how do you know that the information is true and fair? Accountants provide that rigour and transparency to enable the data quality, first to be understood but then for it to be improved over time. So the combination between being able to do it efficiently and cost effectively and to a high standard is what's going to drive the creation of this amazing database, where everyone can share carbon accounting information and for people to have trust in that information.”

Keen to hear more about Lindsay’s journey from accountant to Sumday co-founder? Read his interview here.

We absolutely need to be able to walk through the supermarket and trust the carbon impact printed on the milk bottle. We need to trust that when an airline shares its carbon impact, it reflects the same methodology used by a competitor, so we can choose based on who has invested in decarbonisation technology. We must know that when we select a super fund that is investing in ‘green’ companies, we know it’s true because we trust the data they have.

All of that is close to impossible unless every business is following carbon accounting standards, so we start getting actual data rather than industry averages. And for the first time in history, we are entering a compliance driven world when it comes to carbon. Soon, getting support for a carbon emission assessment will be as normal as getting help with a tax return.

Carbon accounting has never been more important. It’s essential if businesses are to make informed decisions, and if industries and countries are to meet net zero targets. Accountants and finance teams are a key piece to the puzzle. That’s why at Sumday, our job here is to support accountants to help their clients and their teams to do this incredibly important work