Carbon reporting methodologies
There are two ways to measure greenhouse gas emissions.
While appropriate for different kinds of entities, both quantify greenhouse gas emissions in tonnes of carbon dioxide equivalent.
Method 1: carbon footprint
- This ‘project’ model isolates a particular entity — an individual, small business, multinational, country etc. — and systematically calculates a snapshot of all the emissions for which it is responsible.
- Carbon footprints are like financial statements, except governments reward businesses for year-on-year reductions, rather than shareholders benefitting from year-on-year increases.
- There are various different methodologies, but most follow the Greenhouse Gas Protocol (GHGP) model. This divides emissions into Scope 1 (direct emissions from your business), Scope 2 (indirect emissions from your business), and Scope 3 (everything eles).
- Scope 3 requires accurate data not just from your own business, but from your supply chain.
Method 2: Life Cycle Assessment (LCA)
- Instead of focusing on corporate entities, the LCA model is applied to particularly energy-intensive sectors, like steel and cement.
- LCAs calculate the detailed impact for specific products, counting all the energy/emissions from raw material to disposal.
- These calculations are simplified into certified ‘conversion factors’ that apply to specific products.
- This ‘one-off’ calculation is complex to calculate, but once done makes accurate reporting more efficient by avoiding repetitive, complex reporting.
So long as double-counting is avoided, it’s possible to combine these two methodologies, as they both output the same unit, metric tonnes of carbon dioxide equivalent reduced or sequestered (‘CO2e’).
CO2e is the same metric used by climate scientists to track climate change, unmediated by money-denominated proxies, like offsetting schemes.
Business’s new carbon reporting environment
‘Carbon Reporting 1.0’ was adapted, over three decades, to suit the self-regulation of the Age of Voluntary. Carbon reporting’s new Mandatory Era requires a significant re-boot, rather than minor tweaking.
Legislation like the EU’s Green Deal requires all parties to evolve Carbon Accounting 2.0 to enable businesses to comply with the new regulatory environment.
As this new ecosystem emerges, businesses are scrambling to find symbiotic partners who will help them thrive, rather than risk extinction.
Businesses that to manage something, they first need to measure it. For this reason, much of Mandatory Era regulation addresses the long-neglected first step of accurate measurement, as a necessary (but insufficient) precursor to carbon reduction.
Reflecting this challenge’s complexity and urgency, the EU Green Deal directives and regulations have different focuses:
- Some are directed at the biggest companies, like the Corporate Sustainability Reporting Directive (CSRD). ‑Others target energy-intensive products, like Carbon Border Adjustment Mechanism which covers iron / steel, cement, fertilisers, aluminium, hydrogen and electricity.
New environments bring opportunities as well as threats. Crocodiles, sharks and lobsters are still with us; pterodactyls, T. Rex and mastodons are not. Most mammals are extinct, humans are among the current survivors.
As businesses consider how to adapt to the Mandatory Era of carbon reporting, they’re asking questions like:
- How does the new environment differ from the old?
- What kinds of businesses might thrive, survive, diminish, or die?
- How can we identify symbiotic partners who will improve our odds?
- Is there an ecosystem where we can thrive like lobsters and not decay like mastodons?
Corporate response: reactive to proactive
Business responses to the EU’s mandatory environment vary widely. Many are still unaware, others are deciding between evading, exploiting and embracing. Broadly, businesses can be reactive or proactive.
Reactive businesses
Conservative businesses, responding to the letter of the law, view new environmental regulation as a new ‘cost of business’, and seek minimal compliance at the lowest cost. In Tour de France terms, they prefer to lurk in the peloton, pedalling just fast enough not to be left behind, but alert to respond to rivals who break away to take the lead.
While arguably rational in the short term, this response can only succeed long-term if governments give up trying to reduce greenhouse gas emissions, the climate fixes itself. Timing is everything.
Proactive businesses
The most competitive cyclists want to get ahead of the peloton. Visionary, entrepreneurial businesses see opportunities in embracing the spirit of the law by ‘getting ahead of the game’. For them, new carbon reporting regulations presents many opportunities:
- Future-proof their businesses against inevitable future regulatory tightening as the climate crisis worsens
- Gain access to favourable finance and funding by demonstrating best practice
- Avoid the reputational risk of persisting with discredited greenwashing schemes
- Earn reputational gain through transparency and rigorously-audited proof of emissions reduction
- Create new business opportunities by providing their customers with compliance services or compliant products.
New challenges and opportunities: lemons and lemonade
Carbon reporting’s Age of Voluntary has left a toxic legacy. Companies who pay commercial entities, via voluntary schemes to claim ‘carbon neutral’ status via discredited offsetting schemes and not reporting Scope 3 emissions, now face an awkward, but inevitable, PR challenge.
In the short term at least, reporting their true carbon footprints, as required by the new EU legislation, is the lemon they’ll have to suck up some time soon. To return to the cycling analogy, they’re riding penny-farthings, and need to switch to modern racing bikes as soon as possible.
Companies that never made ‘carbon neutral’ claims face no such climbdown. They have a short-term advantage, and are better positioned to pioneer accurate emissions reporting in their sector.
For them, Mandatory Era legislation like the EU’s Green Deal are an opportunity to make lemonade. Rather than abandoning penny farthings, they’re looking to add electric motors to their racing bikes.