The Origins of Carbon Accounting Standards

As part of her thesis at ESCP, supervised by Aurélien Acquier, on the tools and methodologies developed and used by carbon consultants, Camille Habé, with support from Hélène Chauviré and Mélodie Pitre, presents a series of articles offering an overview of what the research says about carbon accounting.

In previous articles, we examined the motivations behind companies' efforts to measure and report their greenhouse gas (GHG) emissions (Who measures their emissions, and why?), and after reiterating the importance of taking a critical look at published figures—whose reliability can sometimes be called into question (Do companies report reliable GHG emissions?) – Let’s now take an academic step back to examine how existing accounting standards were developed.

To ensure the reliability of a carbon footprint measurement, it must comply with the carbon accounting standards existing ones. By offering a historical overview of the emergence and development of these standards, we can better understand the dynamics they create. In this article, we therefore invite you to take a detour through The History of Carbon Accounting Rules, from the perspective of management research.

Carbon accounting emerged as awareness grew of the human-caused nature of climate change

In fact, measuring CO2 concentrations in the atmosphere is a result of research into and the study of the Earth’s biogeochemical system. This “carbon measurement” has long been the domain of natural scientists, geologists, and chemists, driven by a desire to understand natural phenomena such as the causes of ice ages (Ascui and Lovell 2011). The greenhouse effect, for example—which was identified thanks in large part to the pioneering work of Fourier, as well as Newton Foote, followed by Tyndall and Arrhenius—had thus been theorized as early as the late 19th century (Ascui and Lovell 2011).

Carbon accounting is becoming a political and economic issue

It was not until the second half of the 20th century that carbon accounting became a political and economic issue (Ascui and Lovell 2011). Between the 1960s and 1980s, measurements from the Mauna Loa Observatory confirmed the increase in the concentration of greenhouse gases in the atmosphere, and the potential consequences of this rise began to attract interest beyond the scientific community (Ascui and Lovell 2011). The adoption of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 thus marked the beginning of political and economic carbon accounting.

However, directly measuring the emissions of a country, an organization, or an activity is impractical because emissions are so widely dispersed. It has therefore been necessary to establish conventions for estimating them, which allow for the multiplication of “activity data,” that is, quantities expressed in monetary terms or using the metric system (liters, kWh, kilometers traveled, kilograms produced, etc.) by a conversion factor to CO₂ equivalent known as the “emission factor” (Le Breton 2017). The IPCC has played a fundamental role in developing greenhouse gas accounting methods by publishing, as early as the 1990s, international methodological guidelines to help countries establish national greenhouse gas inventories. These methodological reports are regularly updated to enhance transparency and reflect the latest scientific knowledge, notably through the publication of the 2019 revision of the guidelines for national greenhouse gas inventories. Carbon accounting, therefore, encompasses all the rules used to convert an activity into CO2 equivalents.

Various standards are being developed for organizations and companies, driven by a range of stakeholders

Whether they originate in the private sector, the public sector, or standards-setting organizations, several carbon accounting methodologies have emerged over the years and coexist today. The most widely used internationally is that of the GHG Protocol, developed between 1998 and 2004 by the World Resource Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), with financial support from numerous companies and private foundations (Andrew and Cortese 2011). This methodology has become widely adopted: since 2007, it has been promoted by the Carbon Disclosure Project (CDP) climate reporting database (Andrew and Cortese 2011); it is also the methodology that must be followed to submit emissions reduction targets to the Science Based Targets initiative (SBTi) and is recommended by the European Corporate Sustainability Reporting Directive (CSRD) for climate-related reporting (ESRS E1).

In France, the Bilan Carbone® methodology was developed in the 2000s by Jean-Marc Jancovici (with funding from ADEME, a public agency to which Jean-Marc Jancovici subsequently transferred the rights) (Le Breton 2017).

Finally, since 2006, the ISO 14064 standard and the associated technical report TR 14069 have established international guidelines for measuring emissions for organizations (Weng and Boehmer, n.d.).

As things stand, these various standards are highly compatible with one another.

These standards are becoming institutionalized and are gradually spreading

The process of institutionalization—understood here as the process through which the use of these standards becomes the norm—has not been the same for the GHG Protocol and Bilan Carbone®. According to Aggeri and Le Breton, the private versus public nature of the organizations behind these standards is a key factor in explaining this difference (2019).

The GHG Protocol, a private organization, relied heavily on an ecosystem of very large companies to spread and establish itself as standard practice in the business world (Andrew and Cortese 2011; Le Breton and Aggeri 2019). It was therefore necessary to secure funding and, to do so, to partner with large companies, despite the risk of a conflict of interest (Le Breton and Aggeri 2019).

To promote the Bilan Carbone®, ADEME relied primarily on a dedicated strategic initiative: it organized training for a group of carbon consultants and companies of all sizes on how to use it^[1] and then passed the methodology on to a dedicated association (the ABC, the Association for the Low-Carbon Transition) (Le Breton and Aggeri 2019). For Aggeri and Le Breton, the fact that ADEME is a public agency with a dedicated budget shielded it from the need for external funding, unlike the GHG Protocol. One consequence was that the Bilan Carbone® tool, developed by an independent consultant (J.-M. Jancovici), was less expensive and could be used by smaller companies; the other consequence was the ability to draw on a profession of carbon consultants whom ADEME helped train (Le Breton and Aggeri 2019) through the ABC. In this regard, France appears to be an exception: the professionalization of climate consultants is particularly strong and has served as a case study for management research (Gibassier, El Omari, and Naccache 2020). Furthermore, as early as 2010, France introduced a mandatory emissions reporting requirement (BEGES)—albeit using a methodology that is less ambitious than the Bilan Carbone® (see below) (Le Breton and Aggeri 2019).

These standards were originally designed to achieve different objectives, but their uses are tending to converge

The development of indicators is never neutral with regard to the interpretations and decision-making support they offer: developing an accounting methodology involves significant trade-offs, which can lock future possibilities into a certain type of development (Lovell and MacKenzie 2011). Beyond the question of whether the organizations developing these methodologies are public or private, the disciplines of the actors involved in these developments and the objectives they project onto the role of carbon accounting can also influence the forms these methodologies take.

Thus, the development of carbon accounting required collaboration across several organizational fields, including scientists, standards-setters (including consulting firms), and external stakeholders (public authorities, NGOs, and investors). Bowen and Wittneben examined how each group of actors had different expectations: scientists would prioritize accuracy in the production of figures, while external stakeholders would be more interested in consistency—and, by extension, comparability. However, these objectives may prove incompatible in practice; the pursuit of precision, for example, leads to placing great emphasis on an organization’s specific characteristics and context, whereas the pursuit of consistency and comparability tends to drive a form of standardization of practices.

Two approaches are at odds: the approach focused on management and action versus the approach focused on generating non-financial information

Le Breton explored this idea by directly examining how the tensions between precision, certainty, and consistency play out in the development of the GHG Protocol and the Bilan Carbone® (Le Breton 2017). For Le Breton, the Bilan Carbone® was developed using an “engineering-based approach.” The figures produced by carbon accounting must first and foremost be in the order of magnitude, as these figures are intended for managers to analyze a dependence to identify emissions-generating activities within the value chain and to trigger and guide actions. In contrast, the GHG Protocol’s objective is rooted in a “financial logic”—that of producing information that is as accurate, neutral, and auditable as possible, intended primarily for reporting to investors. The implicit approach is therefore indirect and relies primarily on the idea that investment decisions will be influenced by carbon reporting. This difference in the purpose of the two methodologies has had concrete consequences: for example, ADEME immediately encouraged the calculation of indirect emissions—known as Scope 3 emissions—while for a long time the GHG Protocol did not promote this, considering that companies conducting their carbon accounting were not responsible for them.

Toward the Convergence of Carbon Standards and the Integration of Scope 3

Subsequently, the various standards began to converge. In France, the implementation of the BEGES regulations—which required companies to report only Scope 1 and 2 emissions between 2010 and 2022—led companies to use carbon accounting less as a tool for self-reflection and more as a reporting tool (Le Breton, 2017). As a result, the use of the Bilan Carbone® has declined in France in favor of the GHG Protocol or the BEGES-specific methodology.

Nevertheless, the influence of engineering-based thinking remains strong. As a result, the GHG Protocol has finally incorporated a module on accounting for Scope 3 emissions that draws heavily on the Bilan Carbone®. The GHG Protocol now serves as the basis for developing transition plans, particularly because it is recommended by the SBTi and the Efrag’s VSME (Voluntary Sustainability Reporting Standard for non-listed SMEs). Similarly, the BEGES has come to require Scope 3 reporting, as does the comprehensive version of Efrag’s VSME, and as did the CSRD prior to its suspension.

IN SUMMARY:

• Carbon accounting standards for businesses, which stem from different historical approaches, are now largely aligned in terms of their methodological principles.
• The GHG Protocol has been the most widely adopted by international companies, as it is cited as a benchmark by other standards for setting emissions reduction targets (e.g., SBTi) and for non-financial reporting (e.g., CSRD).

Carbon Accounting According to Carbone 4

Carbon accounting, which forms the basis of virtually all climate strategy frameworks, is the subject of much debate. One of the main criticisms leveled at carbon accounting is that it is not precise or consistent enough.

These shortcomings stem primarily from the fact that carbon accounting is still in its infancy and from the nature of the system itself…

The criticism of imprecision and inconsistency likely stems from drawing a parallel between carbon accounting and financial accounting: people would like the former to be the younger sister—or even the twin sister—of the latter: financial accounting for the economy and carbon accounting for the environment.

However, it’s worth noting that carbon accounting is a much more recent practice than financial accounting—the latter predating the invention of writing! Carbon accounting is a few millennia behind, so financial accounting will always be nothing more than its great-great-great-aunt. This is why the level of sophistication and precision in carbon accounting is lower than that of financial accounting within organizations: financial accounting has had time to develop its structure and establish conventions, whereas carbon accounting is still in the process of being structured, and its adoption by organizations is less mature.

Two different conventions for representing reality in financial accounting and carbon accounting

Furthermore, these two accounting systems are based on fundamentally different principles. The first measures intangible, purely conventional elements that have no physical existence but are essential to the functioning of our societies: financial valuations and transactions^[2]. Conversely, carbon accounting aims to measure physical quantities, but the term is misleading, as it is more akin to a modeling system than to an actual process of counting the gas molecules it purports to represent. Furthermore, this modeling system also has its own inherent inaccuracies (e.g., monetary emission factors can have an uncertainty rate of over 80%, which reflects the lack of available physical data).

For these reasons, expectations regarding carbon accounting—particularly with regard to accuracy and consistency—cannot be modeled after financial accounting.

However, changes are expected from standards-setting organizations. For example, the GHG Protocol is currently updating its greenhouse gas accounting standards. Carbone 4 is closely monitoring this work to share real-world insights from the field with the various companies we support and to provide in-depth analysis for our clients.

Improvements to carbon accounting are possible depending on the resources allocated to it

Criticism of the imprecision and inconsistency of carbon accounting also stems from the relatively limited resources allocated to its implementation in companies, compared to those allocated to corporate accounting.

Indeed, both the development and the practice of carbon accounting require significant financial and human resources. The resources allocated to carbon accounting are significantly less than those allocated to financial accounting. If, as the research articles mentioned above indicate, we are seeing a professionalization of carbon accounting, it is essential to invest even more in carbon accounting systems within companies (human resources, training courses, information systems, etc.).

Is it possible to integrate financial and non-financial accounting systems?

Let’s be even more ambitious in aligning these accounting systems: beyond ensuring equal treatment between financial accounting and carbon accounting (support for structuring, resources allocated to implementation), it is desirable for these two accounting systems to interact—and even, at times, to be integrated. Indeed, the low-carbon transition is a central challenge for our economic resilience. Both financial accounting and carbon accounting are necessary for addressing economic and environmental challenges. In this context, the issues of “connectivity” between carbon accounting and financial accounting are being studied more and more closely.^[3] : How do carbon issues—or, more broadly, ESG issues—as described in non-financial reports relate to the financial issues described in financial reports? These questions are a key area of focus for Carbone 4.

Finally, it is important to remember that carbon accounting is only one aspect of accounting for financial externalities. Further consideration is needed to bring to light the other externalities associated with organizations: accounting for impacts on biodiversity, accounting for water use, and accounting for social and societal impacts… The Corporate Sustainability Reporting Directive (CSRD) shows us just how complex this topic can be, and highlights the urgent need for structure and training in order to integrate these issues in a way that is seamless and beneficial for stakeholders.

Environmental accounting should be a tool for representing reality that is as widely used as financial accounting, in order to inform all decisions aimed at effectively reducing environmental impacts and to identify the unsustainability of certain economic models.