Carbon accounting has emerged as a key tool in the global effort to mitigate climate change, enabling organizations to quantify and manage their greenhouse gas (GHG) emissions. Within the framework of the Greenhouse Gas Protocol – the world's most widely used carbon accounting standard – carbon accounting plays a critical role in providing a clear, consistent methodology for measuring emissions, setting reduction targets, and tracking performance over time. 

Central to this guide is the concept of spend-based carbon accounting — a method that estimates GHG emissions based on financial expenditure data – and is used for 90% of carbon calculations. 

We will delineate the definition, underlying principles, and significance of spend-based carbon accounting, particularly its relevance and application within the GHG Protocol standards. More importantly, we will explain how to prepare your accounting data for spend-based emissions reporting.

Spend-based carbon accounting

Spend-based carbon accounting is a method for estimating the greenhouse gas (GHG) emissions of an organization based on the amount of money it spends on goods and services. 

This approach is particularly useful for calculating indirect emissions, known as Scope 3 emissions in the GHG Protocol, which can often be complex to assess directly. Spend-based carbon accounting translates financial  data into carbon emissions data by applying emissions factors, which represent the average emissions intensity of purchased goods or services.

It simplifies the measurement of an organization's carbon footprint, enabling companies to identify high-impact areas and prioritize reduction strategies. Despite its advantages, accuracy depends on the availability and quality of the existing financial data. Organizations must also ensure comprehensive spend tracking to cover all indirect emissions accurately.

Emission factors

Emission factors quantify the average GHG emissions per unit of purchased goods or services. Calculated by organizations like the Environmental Protection Agency and the IPCC, these factors are derived from comprehensive data analysis, ensuring a scientifically and academically verified methodology. They enable accurate carbon footprint assessments by translating financial expenditures into GHG emissions, facilitating targeted reduction strategies.

Examples of spend-based carbon accounting

Carbon accounting softwares use financial data to multiply with emission factors.

These factors can vary widely, depending on the type of activity, the specific conditions under which the activity occurs, and the geographic location. 

At Coolset, we have over 10.000 emission factors in our database which are used for carbon accounting. Below are three examples of how these are applied for spend-based transactions.

‍Office supplies: Consider a company purchasing office supplies for €10,000 annually. Using spend-based carbon accounting – and an emission factor for office supplies which is determined to be 0.5 kg CO2e per euro spent – the GHG emissions for this category would be calculated as €10,000 * 0.5 kg CO2e = 5,000 kg CO2e.

Business travel: A company spends €50,000 on flights. If the emissions factor for flights averages 0.25 kg CO2e per euro spent, the total emissions from company flights would be €50,000 * 0.25 kg CO2e = 12,500 kg CO2e.

Corporate events: Suppose a company allocates €30,000 annually towards hosting corporate events. The emissions factor for events, which includes venue energy use, catering, and materials, is estimated at 0.4 kg CO2e per euro spent. The GHG emissions associated with corporate events is calculated as follows: €30,000 * 0.4 kg CO2e = 12,000 kg CO2e.

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Preparing your accounting for sustainability

Accurate carbon accounting starts with accurate financial data. This involves two essential elements:

1. Clarity of financial descriptions
2. Granularity of data

Let’s begin by explaining the first one. 

Clarity of descriptions

Financial data is loaded into carbon accounting softwares as is – no data is added in between. Because the emission classification process relies 100% on the information provided per financial transaction, this needs to be as clear as possible. 

Generally, financial data is uploaded in the following format:

So how do you ensure these elements of financial data are as clear as possible? Below we provide tips and examples:

Ledgers

Tips: Maintain consistent and detailed categorization of transactions. Use clear, industry-standard account names that align with your business operations and carbon accounting needs.

Example: Instead of a generic "Expenses" account, use specific categories like "Travel expenses - Air", "Office energy consumption", or "Manufacturing supplies". This allows for easier identification and classification of carbon-related expenses.

Vendors

Tips: Record detailed information about each vendor, including their name, the nature of goods or services they provide, and any relevant environmental certifications or sustainability information.

Examples: Vendors like KLM, Microsoft and Albert Heijn give a clear understanding of the product/service supplier.

Descriptions

Tips: Ensure that every transaction entry includes a comprehensive, clear description that indicates the purpose and any relevant environmental impact factors.

Examples: Instead of a vague description like "Travel expenses," specify "Employee air travel from New York to London, Economy class". Add details relevant to carbon accounting, such as the mode of transport, distance, and purpose of the travel or purchase, to facilitate accurate emission calculations.

Granularity of data

Data granularity refers to the level of detail at which financial transactions are recorded. In the context of carbon accounting, granularity is crucial for identifying the specific sources of emissions within an organization's operations. It enables a more precise classification of emissions, facilitating targeted strategies for reduction and more accurate reporting to stakeholders.

Example: Vehicle expenses

Consider the categorization of vehicle-related expenses. A generic ledger such as "Car Costs" provides limited insight. However, disaggregating this into the ledgers "Fuel," "Repair Costs," and "Vehicle Taxes" not only highlights the direct emissions from fuel consumption but also identifies potential areas for efficiency improvements and cost savings.

Benefits of enhanced data granularity

‍Improved emission classification: Detailed categorization allows for a clearer understanding of direct and indirect emissions, aiding in the accurate calculation of an organization's carbon footprint.

Strategic reduction initiatives: With precise data, organizations can pinpoint high-emission areas and develop specific strategies to reduce their environmental impact, such as optimizing energy usage or transitioning to greener alternatives.

Enhanced transparency: Detailed and accurate carbon accounting supports robust sustainability reporting, building trust among investors, customers, and regulatory bodies.

Next steps

To ensure your financial data is optimally prepared for carbon accounting, it's crucial to thoroughly review the examples provided below. These instances are designed to serve as a benchmark, helping you gauge the readiness of your accounting practices for carbon footprint analysis.

Taking the time to align your financial data with carbon accounting principles is a significant step towards achieving your sustainability goals. Use the examples above as a guide, and don't hesitate to reach out to our dedicated sustainability researchers at Coolset for personalized assistance. Together, we can ensure your financial data is not only compliant but also strategically aligned with carbon accounting standards.