Carbon accounting: A beginner's business guide for 2023

According to National Oceanic and Atmospheric Administration (NOAA), greenhouse gas (GHG) emissions are at a historic high and governments are encouraging organizations of all sizes to begin reducing GHG emissions' largest contributor, carbon. Enter: Carbon accounting as a way to see where your business’s emissions are coming from and how to create a targeted strategy to reduce them.

Anyone can begin incorporating carbon accounting into their financial practices to track, analyze, and reduce their carbon emissions. 

But, what is carbon accounting, and how do you integrate it into your business plan? Read our beginner-friendly guide to learn how carbon accounting has the potential to  help your small business make big changes in reducing greenhouse gas emissions and become a more sustainable business.

Why carbon accounting matters for businesses

Carbon accounting is not only a matter of compliance or reporting but also a strategic opportunity for businesses to create, test, and achieve sustainability goals. Businesses can improve their performance, reputation, and competitiveness in a low-carbon economy by measuring and managing their carbon emissions. Here are a few real-world examples of how emissions accounting is important for any business of every size.

GHG accounting monitors your carbon footprint

A carbon footprint is a measure of the greenhouse gas emissions that are associated with the activities of your small business. It includes both direct emissions, such as from fuel combustion or refrigeration, and indirect emissions, such as electricity use or transportation of goods and services.

Carbon accounting helps small businesses track and reduce their carbon footprint by providing a clear picture of their environmental impact and identifying opportunities for improvement in how they can run their business more sustainably. 

Help fulfill GHG reporting requirements

Carbon accounting helps fulfill GHG reporting requirements by providing a standardized and transparent way of quantifying and disclosing the environmental impact of different business activities. The following global climate action initiatives require the use of carbon accounting to lower emissions:

• Greenhouse Gas Protocol: The GHG protocol provides guidance on measuring, managing, and reducing GHG emissions across different scopes and sectors.
• ISO 14064: A protocol designed by the International Organization for Standardization international framework that standardizes the quantification and reporting of greenhouse gas emissions.
• Global Reporting Initiative: The GRI helps organizations develop carbon accounting best practices via online courses, certificate programs, and specialized training.

These carbon accounting standards represent the global effort to lower greenhouse gas emissions, including carbon. As climate action continues to grow in importance and urgency, GHG reporting may also become the new normal for small businesses across the globe. 

Increase efficiency at your small business

Understanding the emissions of your small business is the first step toward creating a more sustainable supply chain. Not only do carbon emissions take a toll on the environment, but they can also contribute to high energy costs.

Understanding which processes of your business contribute to the most GHG emissions could show you which areas could benefit from redevelopment. Perhaps this looks like redesigning how a good is processed or transported to consumers.

Demonstrate climate action to your customers

Show your customers, stakeholders, and supporters that you know the urgency of climate action and that your business is playing its part in creating a more sustainable future for the planet. Allow your actions to speak for themselves by investing in something tangible, like sustainable packaging materials. 

Sharing these changes with your audience continues the conversation about climate action in your community, and it can establish your small business as being ahead of the sustainability curve.

Build long-lasting brand equity

Brand equity can influence customer loyalty, satisfaction, and willingness to pay. By adopting carbon accounting, small businesses can demonstrate their commitment to environmental and social responsibility, differentiate themselves from competitors, and attract and retain customers who value sustainable business practices

Carbon accounting can help businesses to comply with regulatory requirements regarding GHG emissions, avoid potential fines or penalties, and access incentives or subsidies for low-carbon activities. Investing in sustainability now is also a means of future-proofing your company’s Environmental, Social, and Governance (ESG) efforts.

How carbon accounting works (GHG protocols explained):

You do not need a carbon accountant to begin collecting GHG emission data from your business. In fact, this approach may feel familiar if your small business already has efficiency processes, like water conservation initiatives, currently in place. 

To begin carbon accounting, your business needs to follow these steps:

1. Define the scope and boundaries of the carbon accounting exercise. This includes deciding which emissions sources, activities, and periods your reports will include.
2. Collect data on the emissions factors of each activity and organize them in a spreadsheet.
3. Calculate the emissions for each source and activity using a spend-based, activity-based, or hybrid carbon accounting method.
4. Report and communicate the results of the carbon accounting exercise to relevant stakeholders, customers, investors, regulators, and employees. 
5. Monitor and verify the accuracy and completeness of the carbon accounting process.
6. Review and improve carbon accounting periodically to reflect changes in your activities, offerings, and methodologies.

To begin taking your next steps towards climate action, you'll want to know which scope the emissions of your small business falls under according to the GHG protocol.

Scope 1 

Scope 1 emissions are direct greenhouse gas emissions that occur from sources that your small business owns or controls. For example, Scope 1 can be emissions from a retailer’s fleet of delivery vehicles

Chemical leakages are also Scope 1 emissions since they directly stem from business production. Since Scope 1 emissions directly impact the other scopes, reducing this type of emission is crucial in achieving sustainable business practices that are better for your bottom line.

Scope 2

Scope 2 emissions are the indirect greenhouse gas emissions that result from the generation of electricity, heat, or steam a company purchased from a utility provider. For example, Scope 2 emissions can be the electricity small business owners use for their storefronts.

Small businesses can begin lowering their Scope 2 emissions by exploring the benefits of energy-efficient upgrades in their storefronts. Investing in renewable energy sources that decrease your business’ dependence on fossil fuels is also a viable climate action goal.

Scope 3

Scope 3 emissions are indirect greenhouse gas emissions that occur in an organization's value chain—both upstream and downstream. They include emissions from sources that an organization doesn't own or control, such as business travel, waste disposal, and the use of sold products.

Since scope 3 emissions can be challenging to omit entirely, some businesses invest in carbon offsets to neutralize indirect emissions. Although it’s not a perfect solution to reducing GHG emissions, carbon offset accounting is a viable way for small businesses to begin taking climate action.

Carbon accounting methods

There are two main methods to calculate GHG emissions. However, some businesses use a hybrid of both methodologies to improve the quality of their carbon accounting by gathering the most accurate data possible. Let’s examine the pros and cons of each carbon accounting method to determine which is right for your small business.

The spend-based method

The spend-based method of carbon accounting assumes that every purchase or expense made by the business has an embedded carbon footprint, which reflects the emissions generated throughout the supply chain of the product or service. 

To calculate the GHG emissions of your business, begin by multiplying the financial value of a good or service by an average emission factor of the sector. The equation looks like this:

Financial value of good or service x average emission factor = GHG emissions 

Emission factors can be obtained from the Environmental Protection Agency. The sum of all the emissions from each category gives the total carbon footprint of the business.

The activity-based method

The activity-based method of carbon accounting involves identifying the activities that generate emissions and assigning emission factors to each activity based on the number of resources consumed. 

To calculate the GHG emissions of your business, begin by multiplying the amount of resources consumed by a good or service by an average emission factor of the sector. The equation looks like this:

Resources consumed by a good or service x average emission factor = GHG emissions 

Next, calculate the small business's total emissions by summing up the emissions from each activity. This method can help small businesses to understand their environmental impact, identify opportunities for reducing emissions, and communicate their performance to stakeholders.

The hybrid model methodology

The hybrid model methodology relies heavily on the activity-based model and utilizes the spend-based model to fill in the gaps. The specificity of the activity-based approach is great for getting accurate data, but it isn’t always possible for indirect emissions.

Spend-based GHG emissions + activity-based GHG emissions + total GHG emissions

Although using both methods may appear erratic, it is an attempt to balance the trade-offs of both accounting methods and provide the most accurate results possible.

Benefits of carbon accounting

Similarly to the global implications of carbon accounting, calculating GHG emissions also has a direct impact on your small business. Some of the benefits of carbon accounting include the ability for your business to:

Save money

 Carbon accounting can help small businesses identify and reduce their energy consumption and waste, which can lower operational costs. Reporting on your GHG emissions can grant your small business access to incentives and subsidies from governments or Non-governmental organizations (NGOs) that support low-carbon initiatives, such as renewable energy, energy efficiency, and carbon offsetting.

Innovate products

Taking stock of your emissions also has the potential to help your small businesses create innovative products or services that are more appealing to the eco-conscious market. Novel ideas backed by carbon accounting data facilitate the development and adoption of clean technologies such as renewable energy, energy efficiency, and carbon capture.

Enhance your reputation

Carbon accounting may help small businesses enhance their reputation and brand image since consumers and investors are increasingly aware of the environmental impact of their purchase decisions. GHG emission reporting can increase customer loyalty, attract new customers, and create a competitive advantage in your niche.

Challenges of carbon accounting

There’s no doubt that carbon accounting and GHG emission reduction strategies are wonderful ways for small businesses to become more sustainable and create a lasting impact in their sector. However, going green does come with its fair share of challenges that can lead to businesses dealing with the following.

Inconsistent or unreliable data

You may notice some reporting inconsistencies in the early stages of your carbon emissions accounting journey. This could be due to faulty accounting software, a change in business procedure, or several other factors outside of your control. Understand that it may take some time before you’re able to gather accurate information regularly.

High starting costs and time commitments 

Although you can hire live bookkeeping services anytime, you may be used to managing your business accounts on your own. Given the learning curve of some carbon accounting methods, you may spend lots of time and money keeping your data organized and easily accessible.

Fluctuating sustainability initiatives

As the Earth continues to become warmer, our steps towards sustainability may begin to feel more rapid and ever-changing. Be prepared to navigate fluctuating initiatives that must remain adaptable to the planet's needs and understand how this could affect your business's ability to produce accurate reports on a regular basis.

How to choose carbon accounting software

Carbon accounting software is a green business solution that helps small businesses measure and report their greenhouse gas emissions. It can help identify sources of emissions, track progress towards reduction goals, and comply with local environmental regulations. Effective carbon accounting software should potentially include:

• Hierarchy management tools that allow you to prioritize data groups
• Global coverage options to best comply with current climate action goals 
• Automated data capture that you can access remotely
• Goal tracking options that you can customize to your small business

Although carbon accounting focuses on emission reductions, it also plays a part in your overall accounting routine. When choosing carbon accounting software, consider how easily it will integrate into your current small business accounting practice. 

Can going green be good for your bottom line?

Carbon accounting is a pragmatic solution for small businesses that are eager to participate in climate action while improving the efficiency of their small businesses. Begin the journey to a more sustainable business by utilizing paperless accounting software that keeps your finances at your fingertips.

If you really want to level up your commitment to going green, learn how to conduct an energy audit for your brick-and-mortar business. This practice will quickly show your business how to create tangible results while combating climate change in your community.