Decoding Carbon Accounting and Management: a Dive into the Literature

This article is part of a series of articles derived from my MBA Management Project, "Climate Tech: Developing a Methodology to Evaluate and Select Enterprise Carbon Management Software Solutions". While my previous article explores the carbon management software market and industry trends, this write-up makes a move back and reviews the literature about carbon accounting and carbon management.

Carbon accounting

Even though measuring is not easy, the old mantra “what gets measured gets managed” rings true for most businesses (Howard-Grenville 2021). In other words, carbon accounting is a necessary – but not sufficient – step towards carbon management.

Definitions of carbon accounting

Even though the term “carbon accounting” has gained popularity among scientists and beyond, Stechemesser and Guenther (2012) claim the term has not been defined in a comprehensive and detailed manner. In their literature review on carbon accounting, He et al. (2022) point out the limitations of previous reviews conducted by Hartmann et al. (2013), Ascui (2014), and Borghei (2021) in the accounting literature, notably critiquing their lack of comprehensiveness. Furthermore, their research proves that carbon disclosure is the most studied area within corporate carbon accounting. In their paper, Ascui and Lovell (2011) shed light on the conflicting perspectives and tensions surrounding the various interpretations of what carbon accounting entails. The term can therefore be understood as a combination of any of one or more terms presented in Table below.

Through their systematic literature review, Stechemesser and Guenther (2012) propose a definition focusing on the recognition and monitoring of greenhouse gas (GHG) emissions and their effects on the carbon cycle of ecosystems. They differentiate four scales: national (encompassing a country’s entire GHG emissions), project (specific initiatives or interventions), organizational (a business or administration), and product (focusing on the lifecycle emissions of a specific product or service). More recently, Marlowe and Clarke (2022) insist on the decision-making dimension related to mitigating and offsetting emissions, and underline the importance of monitoring climate impacts and related adaptation actions.

As my research project is interested in outcomes applicable at enterprise-level only (and therefore at organisation-scale) , the definition proposed by Tang (2017) is more relevant to the context: “a system that uses accounting methods and procedures to collect, record, and analyze climate change-related information and account for and report carbon-related assets, liabilities, expenses, and income to inform the decision-making processes of internal managers and external stakeholders”. In other words, enterprise carbon accounting consists of a regular (generally yearly) activity to report all GHG emissions that may take place in a company. Depending on the scope of the study, indirect emissions may or may not be included (Brohé 2016).

The origins of carbon accounting

The concept of “carbon accounting” has multiple roots, with one originating from the evolution of global climate and carbon-focused institutions. In the early 1990s, the international community represented by the United Nations (UN) acknowledged that concentrations of GHGs in the atmosphere were causing an issue and agreed to build up a legal framework intended to “prevent dangerous anthropogenic interference with the climate system” (UN 1992). All the parties of the convention (i.e., almost 200 countries, plus the European Union) therefore committed to produce inventories of their GHG emissions. Among all annual Conferences of the Parties (COP), two agreements created momentum: the Kyoto Protocol that sets binding and measurable objectives for the signatory countries, including submitting annual emission inventories and national reports under the Protocol at regular intervals (UN 1997), and the Paris Agreement that aims at strengthening the global response to the threat of climate change by “taking the actions necessary to limit global temperature rise this century to below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C” (UN 2015).

Early 2000s, some authors point out the limitations of the current accounting system and start thinking of other ways to measure and report extra financial information, notably thanks to environmental accounting. Schaltegger and Burritt (2000) define environmental accounting as a subset of accounting that addresses “activities, methods and systems [as well as] recording, analysis and reporting of environmentally induced financial impacts and ecological impacts of a defined economic system (e.g. firm, plant, region, nation, etc.)”. Burritt et al. (2002) also emphasize two sides of environmental accounting, the nonmonetary and monetary aspects.

Regarding carbon accounting specifically, one of the earliest publications in the literature dates back from 2005 with the work of Freedman and Jaggi (2005). This date coincides with the launch of new regulations to reduce GHG emissions, notably the European Union Emission Trading Scheme (EU ETS) that has then become the largest market for GHG emissions (Joltreau and Sommerfeld 2019). Other regulations like The Greenhouse Gas Mandatory Reporting Program (GHGRP) designed by the US Environmental Protection Agency’s (EPA) aims at answering the limitations of the methodology based on national-level data and provides GHG emissions details at regional and facility levels (Sanchez et al. 2012).

The basic principles of carbon accounting

Beyond defining a single unit of measurement as CO2-equivalent, some principles of carbon accounting must be defined. These principles have been inspired by and derived in part from generally accepted financial accounting and reporting principles. In their Greenhouse Gas Protocol corporate accounting and reporting standard, World Business Council for Sustainable Development (WBCSD) and World Resources Initiatives (WRI) outline five key carbon accounting principles intended to ensure that reported information represents a “faithful, true, and fair account of a company’s GHG emissions”: relevance, completeness, consistency, transparency, and accuracy (see Table below).

As highlighted by Gillenwater (2022), the term “consistency” brings some confusion as it is colloquially used for other meanings, plus some GHG references use it in different manners. The author argues that the actual objective of “consistency” principle is to ensure that the time series trend for each inventory or emissions estimate remains statistically unbiased. In addition, he questions why the “comparability” principle is excluded from the corporate protocols and standards while advocates for more precision regarding their application.

The boundaries

When it comes to carbon accounting, boundaries and areas of application are essential. A distinction should therefore be made between organizational boundaries and operational boundaries. Organizational boundaries set the geographic scope of a study, such as business units and locations, while operational boundaries delineate the activities, products, and services included in the study (Brohé 2016). These operational boundaries are often referred to as “scopes”.

Scope 1 refers to direct GHG emissions, meaning emissions from sources owned or controlled by the reporting organization. Scope 2 covers indirect emissions associated with production of electricity, steam, heating, or cooling that is imported or bought. Scope 3 includes other indirect emissions that are a consequence of the activities of the reporting company but arise from sources in its supply chain. Most of the activities covered by scope 1, 2, and 3 emissions are highlighted in Figure below.

Methodologies, standards, and tools

Some confusions exist between standards, methodologies, and tools. The below Table clarifies the difference between these terms and showcases some examples.

The Figure below compares corporate financial accounting and carbon accounting standards and frameworks.

The critics of carbon accounting

Several publications point out the limitations of carbon accounting. First critic, corporate carbon disclosure remains largely voluntary in most countries. Therefore, some researchers including Kolk et al. (2008), Haque and Deegan (2010), and Stanny (2018) express concerns about how corporations disclose their GHG emissions. This point of view is also shared by Cotter et al. (2011) who prove that companies tend to lack technical details in their disclosures and mostly focus on more positive aspects of climate change management. Bolton et al. (2021) emphasize that mandatory carbon disclosures for both public and private companies are essential to drive the global economy towards net zero emissions.

In addition, some critics emerge on the carbon accounting system itself. For instance, the dominant system, namely the GHG Protocol, is blamed by Kaplan et al. (2021) for allowing companies to “guestimate” upstream and downstream emissions. According to the authors, carbon accounting practices must evolve to better account for the risks and opportunities associated with climate change. In another article, Kaplan and Ramanna (2022) urge companies to adopt more comprehensive methods of carbon accounting, leverage technology, collaborate with stakeholders, and understand the business benefits of improved carbon accounting, so they can advance their climate objectives and generate enduring benefits for their stakeholders.

The tools to perform carbon accounting

Tools have emerged to operationalize the standards relating to carbon accounting and provide new functionalities. A carbon accounting tool can take various forms.

The first type of carbon accounting tools is spreadsheet. It is the most accessible and widely adopted tool. For instance, the Greenhouse Gas Protocol (2023) offers spreadsheet-based cross-sector and sector-specific carbon emissions calculation tools. Other organizations, including consultancies, corporations, and non-profits, have developed more comprehensive spreadsheet templates offering both measurement and reporting capabilities (see Figure below).

Desktop application software is another type of carbon accounting tools. This format brings a solution to the constraints related to the use of spreadsheets. One of the leading solutions is Bilan Carbone + (see Figure below).

The third type of carbon accounting tools is Software-as-a-Service (SaaS) and is further studied in the previous article about the carbon management software market and industry trends.

Carbon Management

Like carbon accounting, the literature about carbon management has been flourishing over the past two decades. Most studies about carbon management examine either practices and organizational shifts associated with these practices or the elements that influence a company's approach to managing carbon emissions (He et al. 2022).

Definition of carbon management

According to Hartmann et al. (2013), carbon management refers to the “practices a firm undertakes to mitigate its operational GHG emissions”. Tang and Luo (2014) argue that advanced carbon accounting can provide corporate management with project-and company level data and financial impact of emissions that can facilitate decision making. Their view of carbon management is therefore broader and refers to all carbon-related issues of a company.

Objectives of carbon management

There are many good reasons why carbon management should be implemented within companies. Beyond measuring carbon-related information, this practice provides business leaders with various opportunities such as measuring performance (Lee and Wu 2014), mobilizing capital to perform low-carbon investment (Vesty et al. 2015), implementing carbon strategies (Bui and Fowler 2019), handling GHG emissions trading (Engels 2009), mitigating exposure to risk (Kumarasiri and Gunasekarage 2017), controlling carbon costs (Ratnatunga and Balachandran 2009) or supporting adapting measures to climate change (Linnenluecke et al. 2015).

Carbon management journey

For organisations, carbon management can be seen as a continuous improvement journey where every step forward matters. It is about “making gradual progress, not perfection” (Molthan-Hill et al. 2023). The authors describe the key steps managers should take to measure and manage their organization’s three scopes of GHG emissions (Figure below).

Carbon management strategy and implementation

To develop a carbon management strategy, companies can leverage the four-pillar approach designed by The Exponential Roadmap Initiative (Figure below). Each pillar has key carbon emissions reduction actions that business leaders can consider for implementation in their own organization.

To fight against corporate net zero and carbon neutrality claims, some initiatives like the Net Zero Initiative also provide firms with tools to contribute fairly to the global neutrality (Figure below). Indeed, the only carbon neutrality target that truly makes sense is net zero at a global scale.

Once their carbon management strategy has been designed, companies can implement their strategy through various policies and practices. To reduce the GHG emissions in their organization, Molthan-Hill et al. (2023) recommend business leaders to devise an all-encompassing execution strategy akin to what is depicted in Figure below.

Introducing new practices such as carbon accounting and management within an organization brings the risk of being exposed to internal resistance of change. An empirical case study by Vesty et al. (2015) highlights that implementing these practices may impact the actors by changing their work and behaviour, as well as their responses to authority and climate issues.

Carbon management tools

Specialized technologies can enable adoption of carbon management practices within organizations. He et al. (2022) define an enterprise carbon management system as a “functional tool used by a firm to implement its carbon policy, manage carbon risks and efficiently mitigate carbon emissions.” These tools can cover one or multiple dimensions of the carbon management journey. My previous article focuses on one type of these carbon management solutions, namely carbon management software.

Conclusion

The expedition through the evolving literature of carbon accounting and management unveils the critical necessity for businesses to align their strategies towards reducing GHG emissions. As the climate crisis accelerates, so too does the need for transparent, accurate, and comprehensive accounting practices regarding these emissions. This literature review not only emphasizes the importance of rigorous carbon accounting and effective management but also sets the stage for an in-depth exploration into enterprise-level solutions capable of navigating the complexities of carbon management.

In a domain where measurement is the precursor to management, carbon accounting emerges as the cornerstone. However, the literature also points towards an urgent need for advancing current practices to capture the full spectrum of a business's carbon footprint. Amidst a landscape of varied definitions and approaches, there is a growing consensus on the imperative of robust emissions management strategies that transcend mere compliance and venture into realms of proactive climate action.

The role of carbon management software solutions in facilitating this transition is undeniable. As the narrative shifts from 'why' to 'how,' businesses are in pursuit of tools that not only measure but also provide actionable insights to mitigate emissions effectively. The forthcoming discussion in my next article aims to navigate through the intricate process of selecting the right carbon management software, aligning organizational objectives with global sustainability goals.

Feel free to reach out if you are interested in obtaining a complete copy of my research. Thank you for reading.

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