Carbon Accounting Frequently Asked Questions (FAQs)
Authors: Gabriela Payne, CPA
On September 14, 2023, California’s Legislature approved a landmark Senate Bill 253/Climate Corporate Data Accountability Act, which is expected to have global impacts on corporate climate accountability. The bill will require more than 5,000 U.S. corporations earning over $1 billion in global gross revenues and doing business in California to annually report their greenhouse gas emissions.
Carbon Accounting and Reporting is a critical component of Environmental, Social, and Governance (ESG) and ideally should be handled by a CPA or accounting firm. If your company isn’t already disclosing its carbon footprint, it will likely be required to do so somewhere along its value chain. Carbon reporting has been mandated by the European Union (EU) and the State of California, and we anticipate it will soon be enforced by the Security Exchange Commission (SEC) for certain companies. Large corporations like Walmart, Amazon and Target are already participating in carbon accounting and reporting, and they are requesting carbon accounting and reporting from their suppliers.
Carbon accounting is a quantitative, compliance-heavy reporting exercise that requires detailed recordkeeping that must be verifiable. Cherry Bekaert is a Public Company Accounting Oversight Board (PCAOB) CPA firm that can help your company comply with carbon accounting and reporting requirements.
As the Firm has helped clients, Frequently Asked Questions (FAQs) have emerged. Below we share what we believe to be their best answers:
What Is Carbon Accounting?
Carbon accounting quantifies how a business’s activities translate to emissions and impact climate change. Carbon accounting is a factor of climate change under “Environment” in ESG.
How Does My Company Begin Carbon Accounting?
The professionals at Cherry Bekaert can help you get started. It is important to set up a process that is efficient and verifiable. We will work with individual clients to assess existing data availability within the client’s ERP systems to integrate into one of our calculators. After the initial set up, ongoing tracking should be relatively automated and easier to track year over year.
How Do We Properly Measure Greenhouse Gas (GHG) Emissions Data?
Cherry Bekaert has proprietary calculators that can ease the integration into clients’ ERP systems able to calculate global emissions for your company. If you don’t have an ERP system, we can set up the calculators to interact with your power providers to automatically retrieve your power use. Our calculators are consistent with the GHG Protocol, which is the carbon accounting equivalent to GAAP. Our team of experts will guide you in determining your corporate boundaries and begin to enter and track emissions from each location in compliance with the GHG Protocol. Our emission factors cover emissions globally, so no matter how spread out your business spans, we’ve got you covered.
What Are the ESG Compliance Standards?
The International Sustainability Board published International Financial Reporting Standards (IFRS) S1, General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, which apply to over 140 jurisdictions.
The EU Corporate Sustainability Reporting Directive (CSRD) applies to EU companies, non-EU companies that meet certain thresholds for net turnover in the EU and companies with securities listed on an EU regulated market.
The California senate just passed Bill 253, which will affect companies in and doing business with California.
You can learn more about evolving ESG reporting requirements and the current compliance standards in our recent article on ESG compliance.
When Do These ESG Compliance Standards Go Into Effect?
Both the IFRS and CSRD begin on January 1, 2024.
Under California Senate Bill 253, companies have to start reporting emissions and energy usage in 2026, but companies won’t be penalized for mistakes in reporting until 2030.
Who Has to Report Carbon Emissions Under California Senate Bill 253?
U.S. corporations earning more than $1 billion in global gross revenues and doing business in California are required to annually report global carbon dioxide and other planet-warming gas emissions.
What Are the Reporting Obligations for Companies Making $500 Million – $1 Billion?
While the $1 billion specifically mandates carbon disclosure annually, the $500 million threshold requires that companies disclose climate related risks and opportunities following the TCFD (Task Force on Climate-Related Financial Disclosures). Although the $500m threshold (SB261) does not specifically mandate the GHG reporting, the TCFD framework includes recommendations to inventory emissions to assess climate related risks and opportunities.
My Company Doesn’t Do Business in California. Does Senate Bill 253 Still Apply to Me?
Maybe. You might not directly do business in California, but your company could be involved somewhere along the supply chain of a company that does require reporting, and thus you may be asked to begin reporting along your value chain. Learn more about the Climate Corporate Data Accountability Act and how it impacts U.S. corporations earning over $1 billion doing business in California.
What Needs to Be Included in the Report for California Senate Bill 253?
Global emissions of planet-warming gas from their operations and energy use−as a result of their supply chain, contractors, and consumer use of their product−should be included. This means that scope 3 emissions, which are the hardest to measure, are included in the reporting requirements of Senate Bill 253.
Are Carbon Credits the Same as Carbon Offsets?
No. Carbon offsets are discrete carbon deductions used to compensate carbon emissions elsewhere. Offsets are calculated relative to a baseline, which represents a hypothetical scenario for what emissions would have been in the absence of the mitigation project that generates the offsets. An example is a power utility that generates wind power. Carbon offsets can be converted into carbon credits when used to meet an externally imposed target. A carbon credit is a convertible and transferable instrument that is certified by a regulated GHG program.
What Planet Warming Gasses Are Included in Carbon Accounting?
The GHG protocol accounts for six greenhouse gases listed in the Kyoto Protocol. They include: carbon dioxide (CO2), methane (CH4), nitrous oxides (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).
Is There a Standard to Calculate Carbon Emissions?
Yes, the Greenhouse Gas Protocol is the global carbon emissions accounting standard. The standard provides methodology for Corporate Accounting and Reporting (the most common), Project Accounting and Product Accounting. The GHG protocol divides emissions into three scopes:
- Scope 1: Direct Emissions, which are released from sources a company owns or controls, such as during manufacturing or onsite electricity production
- Scope 2: Indirect Emissions released from sources purchased by an organization, such as electricity, steam, cooling or heating
- Scope 3: Supply chain emissions, which are indirect emissions resulting from activities of an organization but not controlled or owned by the organization