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Carbon Accounting Methods: A deep dive into activity-based vs. spend-based

Updated: Jan 11

Carbon accounting, unlike traditional accounting, meticulously measures a company's environmental impact. By transforming intricate operations into measurable metrics, carbon accounting serves as a navigational guide, enabling companies to identify and address emission sources. There are several methods utilized by companies to quantify and understand their carbon footprint: activity-based and spend-based methods.



What is carbon accounting?


Carbon accounting goes beyond simple emission measurement; it's about thorough organization and understanding. Carbon accounting defines three scopes, each representing a specific category of emissions:


  • Scope 1: direct emissions from company-owned or controlled sources, such as stationary combustion, flaring, and fugitive emissions.

  • Scope 2: indirect emissions from the purchased and consumed energy, including electricity, steam, heating, and cooling.

  • Scope 3: all other indirect emissions that occur in the upstream and downstream activities of a company, including business travel, employee commuting, waste disposal, or upstream and downstream supply chain emissions.



To standardize the measurement and facilitate aggregation from diverse sources, carbon accounting uses carbon dioxide equivalents (CO2e). This metric allows for a consistent assessment of the climate impact of various greenhouse gases.


By calculating and analyzing their emissions data, companies can identify areas for improvement and implement strategies like transitioning to renewable energy, optimizing production processes, and adopting sustainable transportation options.


The carbon accounting data can be used to generate comprehensive and verifiable reports that assist companies in:

  • Communicating their sustainability efforts to stakeholders by providing information on their greenhouse gas emissions, emission sources, emission reduction actions, and progress made.

  • Complying with climate change regulations by offering accurate and complete data on greenhouse gas emissions.

  • Tracking their trajectories and goals by measuring progress in reducing greenhouse gas emissions.



What are the different methods of carbon accounting?


To quantify emissions and calculate their carbon footprint, companies can use two main carbon accounting methods:


  • Activity-based method: Involves a detailed look at a company's operations, focusing on activities contributing to greenhouse gas (GHG) emissions. From manufacturing processes to vehicle use, it identifies specific emission sources, guiding targeted reduction efforts.

  • Spend-based method: Taking a financial angle, the spend-based method examines a company's monetary transactions related to goods, services, and energy. Particularly useful for those with intricate supply chains, it provides a comprehensive financial view of carbon emissions.



What is the activity-based method of carbon accounting?


Understanding Activity-Based


At its core, the activity-based method is centered on a granular examination of a company's operations. This method breaks down the organization's activities into distinct components, aiming to identify and quantify the specific processes that contribute to greenhouse gas (GHG) emissions. By focusing on the details of each operational aspect, businesses gain a comprehensive understanding of their carbon footprint.


Pros and cons of using the activity-based method


Pros:

The activity-based method is characterized by its high precision, allowing for a detailed breakdown and accurate identification of a company's emission sources. This specificity facilitates the implementation of targeted and effective reduction strategies. By encompassing all operational aspects, it provides a comprehensive view of a company's carbon footprint. The collection of detailed data from the entire operations and value chain represents a strategic investment, enabling an in-depth analysis and a holistic understanding of emission hotspots.


Cons:

It requires the collection of detailed and often siloed data from across an organization's operations and supply chain. This data management can be complex, time-consuming and resource-intensive, especially for large organizations. The implementation and maintenance of an activity-based carbon accounting system demand specialized expertise in data analysis and emissions measurement. The effectiveness of this approach depends significantly on the accessibility of accurate and comprehensive data, posing a challenge if not readily available.


Implementation challenges and solutions


Gathering detailed data on every operational activity can be resource-intensive and time-consuming. Businesses may also face difficulties in ensuring the accuracy and completeness of the data. To address these challenges, companies can invest in advanced monitoring technologies, carbon accounting software/carbon management platforms, and data collection systems. Automation of data-gathering processes can streamline the information flow, reducing the burden on resources. Collaborating with industry experts and leveraging best practices can enhance the accuracy of emission calculations.


For instance, a manufacturing company employing the activity-based method could invest in sensors, IoT devices, and dedicated software to monitor energy usage and emissions in real time. This not only improves accuracy but also provides timely insights for proactive emission reduction strategies



What is the spend-based method of carbon accounting?


Understanding spend-based


The spend-based approach involves converting a monetary value into carbon dioxide equivalents (CO2e) using monetary ratios, such as kgCO2e/€. This method allows for estimating the greenhouse gas (GHG) emissions associated with the company's expenses, such as the purchase of goods and services. It is particularly well-suited for quickly and simply calculating emissions related to service expenditures, for example.


Pros and cons of using the spend-based method


Pros:

The spend-based approach provides a financial overview, simplifying the assessment of a company's carbon impact. This method is generally easier to implement and cost-effective. It relies on the company's accounting data, which is typically more accessible and less complex to gather than physical data.


Cons:

The spend-based approach often proves insufficient for a comprehensive assessment of a company's carbon footprint, limiting its ability to develop a relevant low-carbon strategy. This method is less precise and granular compared to the activity-based approach. Using a ratio in tCO2e per euro spent relies on a fluctuating monetary value, making calculated emissions dependent on this value (such as energy price volatility). Additionally, recognized standards for corporate carbon accounting define arbitrary rules and conventions, potentially constraining the precision of the spend-based approach.



What about the hybrid method in carbon accounting?


A third method commonly employed by businesses is the so-called "hybrid" approach, which integrates both activity-based and spend-based elements. This method balances the assessment of a company's greenhouse gas emissions by combining the precision of the activity-based approach with the utility of the spend-based approach to address gaps where activity-based data is unavailable or too complex to obtain.


While this method is a valuable approach, it's important to note that it can be more complex and time-consuming to implement than utilizing a single data source, as it requires collecting and analyzing data from both spend-based and activity-based sources. The combination of different data sources can increase sensitivity to errors, especially if the data is not properly harmonized or if approximations are used to fill gaps, which can impact accuracy.


Therefore, while the hybrid method proves beneficial by leveraging the strengths of both primary methods, companies should strive to gradually transition from a hybrid to a comprehensive activity-based approach. This ensures a more accurate measurement of their environmental impact, facilitating the establishment of consistent reduction strategies and objectives.



Conclusion


Carbon accounting remains a crucial tool for businesses committed to combating climate change. The activity-based approach provides unparalleled precision, albeit complex, while the spend-based approach simplifies assessments at the cost of granularity. The choice between the two methods should consider the level of expertise available, the time and budget, and the organization's data collection capabilities. The hybrid method strikes a balanced compromise, yet businesses are encouraged to gradually shift towards a comprehensive activity-based approach for even more precise measurements. This transition will enable more effective emission management and the establishment of consistent, impactful carbon reduction goals.




Image credit: Image by pvproductions on Freepik

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