Demystifying Carbon Accounting

Feb 21, 2024 | Blog

In the complex world of carbon accounting, understanding the methodologies behind emission estimates is crucial for businesses aiming to reduce their environmental footprint. We understand that it can all feel pretty daunting – terminologies like ‘spend-based’ and ‘activity-based’, ‘LCA’ and ‘EEIO’ can all feel like an abstract tangle.

In this article, our Head of Data Strategy, Josh Couchman, unravels the intricacies of spend-based emission estimates versus activity-based analysis. From the fundamental principles to the future of carbon accounting, he delves into valuable insights of the evolving landscape of sustainability measurement.

Exploring the Basics: Spend-Based vs. Activity-Based Emissions

Let’s start with the basics. Spend-based and activity-based are two methods of calculating the carbon emissions of products and activities. The difference between them lies in the type of data utilised. Spend-based emissions are calculated based on financial data, while activity-based emissions rely on non-financial data such as quantities consumed. Activity data can be challenging to collect, making spend-based estimates a more accessible option for many businesses. Nevertheless, they are two different ways of measuring the same thing.

To get to grips with this, Josh has a great analogy. “Similar to how calories are a starting point but not the entirety of nutrition, spend-based emissions estimates serve as an initial analysis in carbon accounting. This ‘hotspot analysis’ helps identify major emission sources based on spending patterns”

At Connect Earth, we prioritise activity-based data when possible for more accurate estimates. Additionally, there’s a direct spend-based estimation method for straightforward products like fossil fuels, where price correlates directly with quantity.

“Our focus on actionable data and collaboration with banks and partners distinguishes us in the market. By tailoring our models to fit specific data sources and prioritising user engagement, we provide customised solutions for sustainable finance and carbon management” Josh explains.


What are EEIO models, and how do they relate to spend-based estimates?

EEIO (Environmentally Extended Input-Output) models are a form of spend-based analysis. They provide spend-based emissions estimates based on the dependence of a product on other products and industries. They are especially useful for products with complex supply chains. “EEIO analysis is really vital for sectors where direct emission tracing is challenging due to long or complex supply chains, like clothing” explains Josh. 

These models allow us to assess total emissions across industries based on expenditure, offering valuable insights into regional variations and import/export impacts. 

EEIO models and other spend-based methods are used to analyse expenditure data, giving a complete perspective on your organisation’s emissions. This is especially helpful early in the decarbonisation process, where most organisations are just trying to get to a point of understanding their total footprint. Once you have this, you can add granularity, and even activity data to get a higher resolution view on your most important contributors.

What’s LCA and where does it fit in? 

Life cycle analysis (LCA) is a comprehensive method for assessing a product’s environmental impact across its entire life cycle. While LCA offers granular data specific to products and manufacturers, its comparability between analyses may vary. This variation can be due to differing methodologies, differences in production processes between manufacturers, or even just differences in the way the boundaries of the analysis are chosen. Care must be taken to ensure that any LCA data used is truly representative of the products it’s being applied to. In the context of spend-based and activity-based emissions analysis, LCA informs both approaches by providing insights into product and activity-related emissions. 

For spend-based analysis, LCA data aids in determining emission factors associated with specific products or services, improving the accuracy of emission estimations based on expenditure data. Similarly, for activity-based analysis, LCA informs the selection of relevant activities and the development of emission factors based on resource consumption or process emissions. Overall, LCA complements both approaches by guiding the estimation of emission factors and informing the selection of activities for analysis.

Why is This Essential for Banks and Financial Institutions? 

By analysing spend-based and activity-based emissions, banks gain valuable insights into the carbon footprint associated with their financing activities and the businesses they support. Through harnessing the power of spend-based and activity-based emissions data, banks can drive positive environmental outcomes while fulfilling their role as key enablers of decarbonisation, sustainable development and responsible finance.

“Banks control the flow of money in our economy, they hold a lot of the data we need to enable better decision making. Not to mention that they also control the flow of funding for sustainable development and SME behaviour” Josh states.

Understanding the environmental impact of financial transactions allows banks to align their lending and investment strategies with sustainability goals. By proactively managing the emissions of the activities they finance, whether they take a spend- or activity-based approach, financial institutions can influence SME behaviour towards more increasingly conscious, efficient practices, whilst the bank can be recognised as a climate leader.

Challenges We Face, and the Opportunities They Bring

“Not all countries publish comprehensive emissions data, which can affect the accuracy of estimates. We use the best data available in each case to ensure our analyses remain accurate and valuable for identifying emission hotspots and guiding carbon management strategies, including by sourcing data from various national and local bodies” Josh assures. Some governmental bodies, like DEFRA in the UK, are leading the charge by providing precise emission factors for reporting in their state, and we anticipate more widespread data availability as more governments prioritise decarbonisation, which will further improve the accuracy and reliability of carbon accounting.

A key challenge for harnessing and optimising data is the need for standardised models and methodologies to ensure the comparability and reliability of data. At Connect Earth, we are currently particularly committed to optimising granularity, particularly in spend-based emissions analysis, where precise categorisation and differentiation between activities are crucial for effective carbon management strategies.

How do we envision the future of carbon accounting?

“In the next decade, we aim to enhance data quality and accessibility, focusing on actionable insights for businesses. AI technology will play a significant role in improving categorisation and prediction accuracy, empowering users to make informed decisions, using data they already have available, in most cases” Josh anticipates.

Looking ahead, Connect Earth anticipates a positive shift in data availability as awareness grows regarding its importance. While acknowledging the challenges associated with data collection—primarily its cost and complexity—the organisation remains optimistic about the prospects of increased data availability. The emergence of models like FIGARO holds promise for augmenting existing datasets. 

Connect Earth believes that as reporting uptake improves, stakeholders will better grasp the significance of robust data, thereby catalysing investments in data quality. This cyclical process, whereby enhanced data leads to improved planning, greater returns on green strategies, and heightened investment in data quality, underscores the transformative potential of comprehensive and accessible data in advancing sustainability initiatives.

Connecting Data Which Impacts 

In exploring what sets Connect Earth apart, Josh states that “Our focus is on agency and actionability – making data that is actually useful to our customers, enabling decarbonisation alongside cost savings. That’s our priority”. 

Tailoring our models to fit the specific data that banks can provide, rather than imposing a rigid and resource-intensive model, is the most tangible way to engage and facilitate real impact. This involves a collaborative process to understand the extent of data available and shareable by the banks. We then adjust our models to leverage this data in the most effective way possible, ensuring a customised and effective approach for each banking institution.

Understanding the nuances of spend-based emission estimates versus activity-based analysis is essential for businesses navigating the complex landscape of carbon accounting. By integrating carbon accounting solutions like Connect Earth’s APIs, banks can quantify the emissions associated with their portfolios and identify opportunities to finance environmentally responsible initiatives. This enables them to channel funds towards projects that contribute to carbon reduction efforts, renewable energy adoption, and climate resilience.

With a commitment to innovation and collaboration, Connect Earth empowers organisations to make informed decisions for a future set up to transcend opportunity. Our team is here to demystify, personalise, and drive impact. If you’d like to chat about your options, get in touch.

About Connect Earth:

Founded in 2021, Connect Earth is a London-based environmental data company that democratises easy access to sustainability data. With its carbon tracking API technology, Connect Earth is on a mission to empower consumers and SMEs to make sustainable choices and bridge the gap between intent, knowledge and action. Connect Earth supports financial institutions in offering their customers transparent insight into the climate impact of their spending.


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