Carbon accounting: No longer just a ‘nice-to-have

At the heart of the effort to combat climate change is the need to measure and track greenhouse gas emissions. A company’s “carbon footprint” is the sum of all greenhouse gases (GHG) it emits. But how can companies measure how much carbon dioxide (CO2) equivalents they emit, and drive mitigation decisions? Companies have a big role to play in the reduction of the world’s emissions. In fact, most companies around the world will either voluntarily maintain their own sustainability goals or be mandated to do so – there is no way around this. And, according to the Intergovernmental Panel on Climate Change (IPCC), further commitment, in the form of factoring climate change into business decisions, is now required of companies in order to help reach net-zero emissions. In addition, new initiatives such as the Carbon Border Adjustment Mechanisms (CBAM) in Europe, are introducing powerful regulatory tools that will have financial consequences. And, the recently approved/signed Inflation Reduction Act of 2022 will also reenergize the clean-energy transition in the US and beyond.

All of this gives rise to the need for robust carbon, or GHG accounting tools to help measure and manage a company’s sustainability efforts as a business imperative and  reduce business risk.

Growing climate expectations and carbon neutrality goals, coupled with aggressive pressure from investors, advocacy groups and regulators, will drive the price of CO2 up, making carbon accounting a must have for all companies. For example, new initiatives such as carbon tax on imports, will introduce responsibilities for documenting and paying for carbon footprints. Where financial accounting quantifies the financial impacts of a company's business activity, carbon accounting measures climate impact by using a method to count, inventory, track, and report emissions. It helps organizations understand their carbon footprint so they can identify target areas and begin to establish  reduction efforts with high-impact actions.

Carbon emissions are defined in three scopes: Scope 1 covers emissions resulting from direct operations of an organization, such as combustion processes from facilities and automobiles owned or controlled by the organization. Scope 2 covers emissions resulting from the generation of purchased power utilized by an organization, such as purchased electricity, steam, and heating and cooling systems. Scope 3 covers emissions resulting from all other additional indirect sources of emissions in an organization’s supply chain(e.g., acquired raw materials, distribution and logistics, employee travel, consumption of sold goods, and end-of-life remediation). Reporting is mandatory for Scopes 1 and 2. At this point, Scope 3 is voluntary and harder to monitor.

Carbon accounting is generally divided into two categories, physical carbon accounting and financial carbon accounting. Physical carbon accounting is the method of measuring both the direct and indirect carbon emissions (Scopes 1, 2, and 3) in tons of CO2, taking into account all industrial activities, also referred to as GHG inventory. It allows companies to set reduction targets to limit emissions.  In March, the SEC released a proposed rule (see fact sheet) that would require public companies to disclose GHG emissions and report on how the company is managing climate risk starting in 2024. The proposal would public companies to disclose (in their annual 10Ks) their direct Scope 1 GHG emissions and emissions intensity (emissions relative to output), plus indirect Scope 2 GHG emissions. Quantifying GHG emissions is complex, hence the rising need for robust carbon accounting software, such as EmissionsTracker. Adopting digital tools and advanced technology makes it easier for businesses to calculate, monitor, and track their carbon emissions and CO2 reduction efforts accurately across business units. Interestingly, many companies don’t have a clear idea of the impact of the emissions from their activities.

Financial carbon accounting gives the carbon produced and absorbed a financial market value so that they can be accurately expressed in numbers as a financial value in the carbon market. This pertains mainly to the accounting around tradeable carbon allowances. Participants in emissions trading programs have allowances or obligations to surrender allowances, and financial carbon accounting is about how to report the financial value of carbon allowances and liabilities. Carbon allowances are issued by a government under an emissions cap-and-trade regulatory program. There are programs in the European Union, United States (California and RGGI), Canada (Alberta and Quebec), and emerging systems all over the world, including China, Korea, and South America. So, carbon accounting not only provides emissions visibility but may be used as a commercial tool. Buying and canceling allowances from a cap-and-trade system offers an alternative to carbon offset credits for claiming emission reductions.

A carbon credit is a tradable certificate that allows a company to emit an equivalent amount of carbon dioxide or greenhouse gases. This certificate allows them to emit a ton of carbon dioxide (GHG) or an equivalent amount. If companies use fewer credits (resulting in fewer emissions) they can trade and sell their remaining credit to others who need it. A carbon offset refers to a reduction in GHG emissions or an increase in carbon storage (e.g., through land restoration or the planting of trees), that is used to compensate for emissions that occurred. Carbon offsets are usually done through programs such as reforestation and investment in renewable energy. In other words, a carbon credit refers to the right to remove that carbon, while the carbon offset refers to the production of a certain amount of sustainable energy to offset the use of fossil fuels.

As the costs and effects of carbon are a growing global concern, large emitters are now faced with the challenge of how to price carbon and account for its impact. Prices of carbon credits or offset credits, may differ depending on whether they are coming from the compliance market for certificates such as CERs (Certified Emission Reductions) or the voluntary markets for certificates such as VERs (Verified/Voluntary Emission Reductions). These carbon markets make it possible to put a price on carbon produced or absorbed. Thus, the ability to capture, confirm, risk manage and settle purchases and sales absolutely rounds out an end-to-end solution for carbon accounting and trading.

The focus on net-zero targets has intensified scrutiny on measurement and disclosure of greenhouse gas emissions. There is increasing interest in using corporate GHG data to assess climate-related risk. As a result, carbon accounting is becoming an industry requirement. Carbon accounting delivers three significant benefits:

1. Environmental – it helps reduce CO2 in the atmosphere
2. Economic – it helps companies reduce the amount of energy and resources used resulting in lower costs
3. Reputation – it provides a positive brand experience for companies that employ it as they are viewed as socially responsible. 

Hitachi Energy’s EmissionsTracker is designed to support enterprise-wide inventory tracking, trading and compliance with greenhouse gas accounting standard and reporting requirements. The software allows businesses to automate many of their carbon accounting activities, including tracking the advancement of their net-zero strategy. Comprehensive carbon accounting helps companies go beyond emissions inventories and reporting allowing them to proactively and strategically manage their carbon footprints in this dynamic landscape.

Learn more about energy trading and risk management (ETRM) from Hitachi Energy.