Carbon accounting is essential for businesses looking to measure, manage, and reduce their greenhouse gas (GHG) emissions. However, the choice of methodology can significantly impact the accuracy and usability of emission data. And with this, the accuracy and usability of the outcome of your carbon footprint calculation. In this article, we’ll explore the three primary carbon accounting approaches—spend-based data, activity-based data, and electricity reporting (market- vs. location-based)—along with their advantages, limitations, and best-use scenarios.
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1. Spend-based carbon accounting: a broad estimation
Spend-based carbon accounting calculates emissions by applying industry-average emission factors to financial expenditures. In other words, it estimates your carbon footprint based on how much money you spend on various goods and services.
Spend-based methods are based on environmentally extended input–output (EEIO) models and are derived from national economic and environmental data. There are several databases with spend-based emission factors.
How it works
- A company reviews its financial transactions, such as procurement data.
- Each category of spending (e.g., office supplies, transportation, raw materials) is matched with an emission factor.
- The total emissions are estimated by multiplying the spendings with the corresponding emission factor.
This method is useful for getting a quick estimate of a company’s carbon footprint, especially when more detailed data is unavailable.
Best use case: Initial screening of emissions hotspots, high-level corporate reporting, or early-stage carbon footprinting.
Pros of this method
- Easy to implement. Requires minimal data collection, as most businesses already track financial records.
- Provides a broad overview. Helps identify major sources of emissions and prioritize areas for improvement.
- Useful for companies in the early stages of carbon accounting. This method is a good starting point for organisations without robust data collection processes.
Cons of this method
- Low accuracy. This method assumes that emissions are proportional to spending, which may not reflect reality. In fact, quite often the contrary is true. Cheaply produced products often come with a huge environmental impact.
- Ineffective for reduction tracking. A company that negotiates better prices or spends less on a product may appear to have reduced emissions, even if its actual carbon footprint remains unchanged. In fact, the carbon footprint could even increase.
- Difficulties tracking the emissions. With spend-based emission factors, different products are all grouped into one category (like the overall category “electronic products”), making it hard to know where the impact is exactly coming from and how to reduce it.
- Overestimation risks. Spend-based methods often apply higher emission factors to compensate for data uncertainty.
Example scenario spend-based carbon accounting
A company purchases raw materials from two different suppliers. One offers a discount, lowering the company’s financial expenditure. If the company relies on spend-based carbon accounting, its reported emissions will decrease—even though the same amount of material is being used, and real-world emissions remain unchanged.
2. Activity-based carbon accounting: data-driven precision
Unlike spend-based accounting, activity-based methods rely on actual operational data to calculate emissions. This method measures physical activity data rather than financial transactions, making it much more accurate for emission tracking and reduction planning.
How it works
- A company collects real-world data such as numbers on fuel consumption, electricity usage, transportation distances, or material weight.
- Each activity is linked to an activity-based emission factor (from environmental databases, e.g., kg CO₂ per kWh of electricity used, or per liter of diesel consumed).
- The emissions are calculated based on the actual materials, weights, and usage, providing a much more precise measurement.
So the activity-based method is essential for businesses seeking precise carbon footprint measurements, as it provides accurate emissions data based on real operational activities rather than financial estimates.
Best use case: Companies with sustainability goals, organisations tracking emissions reductions, or businesses preparing for regulatory disclosures.
Pros of this method
- High accuracy. The activity-based method reflects actual emissions rather than financial approximations.
- Enables effective reduction strategies. It allows businesses to track improvements from efficiency measures, renewable energy adoption, and operational changes.
- Required for compliance reporting. Many sustainability frameworks (such as the GHG Protocol and Science-Based Targets initiative) prefer activity-based data, because of its higher accuracy.
Cons of this method
- More data-intensive. This method requires businesses to track specific operational details.
- Needs structured data collection processes. Organisations must ensure accurate and consistent tracking of fuel, energy, and material consumption.
- Potential data gaps. If suppliers or third parties do not provide detailed activity data, businesses may need to rely on estimates, reducing overall accuracy.
Example scenario activity-based carbon accounting
A logistics company is committed to reducing its transportation-related emissions. If it relies on spend-based carbon accounting, it calculates emissions based on how much money it spends on fuel. This means that reported emissions could fluctuate due to market-driven fuel price changes, rather than actual reductions in fuel consumption or improvements in fleet efficiency.
For example, if fuel prices drop significantly, the company's spend-based calculation would show a decrease in emissions—even if the company used the same amount of fuel and emitted the same amount of CO₂. Conversely, if fuel prices rise, its emissions could appear higher, even if the company has taken measures to improve fuel efficiency.
By using activity-based carbon accounting, the company instead tracks actual fuel consumption in liters, distances traveled in kilometers, and vehicle types used. As a result, the company can make data-driven decisions about fleet upgrades, alternative fuels, and logistics strategies, ultimately leading to more effective and verifiable emissions reductions.
Read this client-case, about the way CCV calculated their carbon footprint with the activity-based method: https://www.hhc.earth/knowledge-base/articles/case-ccv-calculating-carbon-footprint-with-activity-based-data
3. Market-based vs. location-based carbon accounting for electricity emissions
For Scope 2 emissions (indirect emissions from purchased electricity), there are two carbon accounting approaches:
- Location-based approach: uses the average emission factor of the regional electricity grid where the consumption occurs. So for a company based here in Amsterdam, this would mean calculating based on the predominant electricity grid here in town.
Note: this is not necessarily the exact electricity you as your company is using. You could be using green electricity, whereas your location-based electricity is grey. - Market-based approach: Reflects the emissions associated with your exact electricity supplier or contractual purchases (e.g., renewable energy certificates or power purchase agreements). This method has a higher accuracy level, since it is specifically about your electricity usage.
How it works
- Location-based emissions are calculated using regional electricity grid factors (e.g., the national grid mix).
- Market-based emissions are calculated using supplier-specific data or renewable energy contracts.
The GHG Protocol Scope 2 Guidance , the official standard for carbon accounting, requires companies to report emissions using either the location-based method, the market-based method, or both, depending on their operational context.
When to opt for the location-based method?
For companies operating only in markets that do not provide product- or supplier-specific data (such as electricity contracts, renewable energy certificates (RECs), or power purchase agreements (PPAs)), only the location-based method should be applied.
Example scenario location-based approach
A company operates solely in a country where no formal renewable energy purchasing options exist. Since it cannot procure electricity from a low-carbon supplier or obtain RECs, it must calculate and report Scope 2 emissions using the location-based method, reflecting the regional grid’s average emissions factor.
When to opt for both market-based and location based?
Companies with operations in markets where product- or supplier-specific data is available (such as the EU Economic Area, the U.S., Australia, Japan, India, and most Latin American countries), are required to report Scope 2 emissions in both ways.
Example scenario market-based and location-based carbon accounting
A multinational company has operations in both Germany (where renewable energy certificates are available) and Thailand (where no market-based instruments exist):
- In Germany, it procures 100% renewable electricity through a certified PPA.
- In Thailand, it uses grid electricity without renewable procurement options.
When reporting Scope 2 emissions:
- Germany: The market-based method reflects the near-zero emissions from its PPA, while the location-based method reports the emissions factor of the German grid mix.
- Thailand: Since no contractual instruments are available, both methods use the location-based emissions factor, leading to identical results.
Comparing the two methods; market-based and location-based
Market-based
Pros: Recognises investments in renewable energy (PPAs, RECs), aligns with corporate sustainability goals.
Cons: Requires supplier-specific data, not always available.
Location-based
Pros: Reflects actual grid electricity mix, standardised approach.
Cons: Doesn’t differentiate between businesses investing in renewables and those using standard grid power.
Your carbon accounting method can evolve over time
Carbon accounting is a continuous improvement process. Most businesses start with spend-based estimates due to their simplicity. And this is a great method to get started and understand the hotspots in your organisation, especially for purchased goods.
However, as data quality improves, transitioning to activity-based accounting ensures greater accuracy and better decision-making for emission reductions. We often see this with our clients; when they get the hang of carbon accounting, the interest in (even more) accurate insights increases.
By improving the quality of your carbon accounting data, you can set realistic sustainability targets, track progress effectively, and make informed decisions for long-term emissions reductions.
Would you like to refine your carbon accounting approach? Contact our sustainability experts for tailored guidance.
