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Spend Based Method vs Activity Based Method: Our Methodology
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Carbon accounting can already feel pretty daunting - and when you throw in terminology like spend based method and activity based method, it’s easy to feel overwhelmed. But not to worry because Greenly has your back. In this article we’ll outline the two different methods of carbon accounting and look at the advantages and disadvantages of both methods.
What is the spend based method and activity based method? Which methodology is better? What is Greenly’s preferred carbon accounting methodology?
First up, what is carbon accounting?
Before we dive into the detail on the spend based method and activity based method, let's have a quick reminder of what carbon accounting actually is and why it's important.
“ Carbon accounting (also referred to as greenhouse gas accounting) is a methodology that is used to measure and track an organisation's greenhouse gas emissions. Just like financial accounting, it quantifies the impact of a company’s business activities - though instead of calculating the financial position, carbon accounting calculates the emissions impact. ”
Carbon accounting may be required for regulatory or legal purposes - increasing numbers of companies are required to disclose emissions information - but it can also be used as a starting point for any company wishing to reduce their environmental impact.
What's the purpose of carbon accounting?
The primary aim of carbon accounting is to evaluate the amount of greenhouse gas emissions that an organisation is responsible for.
“ Carbon accounting also serves as a basis for carbon assessment. Carbon assessment is the act of evaluating the numerical data. It allows a company to understand the emissions that they’re producing and therefore what actions they can take to reduce their carbon footprint. After all, as the adage says “you can’t manage what you can’t measure”. ”
And finally, carbon accounting may even be required by law. Companies across the world are increasingly being asked to disclose information on their climate impact. Carbon accounting enables companies to accurately report on their emissions footprint.
Carbon accounting methodology
There are two primary methodologies used in carbon accounting. These are the spend based method and the activity based method. There is also a hybrid approach which combines a mix of the two.
Let’s take a closer look at the different methodologies below.
Spend Based Method
“ The spend based method of carbon accounting takes the financial value of a purchased good or service and translates it into emissions with a corresponding spend based emission factor. ”
The spend based emissions factor is a representative value that relates the quantity of an emission that is emitted with a certain financial expenditure. Ie. it allows us to calculate the amount of emissions produced per financial unit of a certain activity.
The financial or accounting data actually matches the activity-based flows insofar as each delivery or action results in payments (energy bills, travel expenses, etc.).
When it comes to the spend based approach, these flows can be divided into two categories:
- Outward flows - i.e. payments made by the company to its suppliers, its employees, the State (taxes), or the repayment of bank loans;
- Inward flows - i.e. payments made by consumers who purchase the goods (or services) of the company.
Good to know: Emissions factors are usually expressed as the amount of emissions divided by a currency unit (for example kilograms of CO2 equivalent emitted per dollar spent on furniture). This emissions factor is then multiplied by the financial value of the good or service in order to calculate the emissions from that activity.
“ Emissions factors use averages that are calculated based on available data, which means that they are frequently updated as new data becomes available. They may relate to a specific geographic area (for eg. national or regional) which is why it’s important to consider their source when selecting an emissions factor - for example technology and practice may vary by country or region and so it’s important to ensure that the emissions factor being used is appropriate. ”
Emissions factors are often provided by a variety of sources: for example the UK government conversion factors for company reporting of greenhouse gas emissions, the US EPA's GHG emission factors hub , the IPCC Emissions Factor Database, the European Environmental Agency database and the International Energy Agency database. Additionally, there are a variety of national emissions factors databases that can also be used.
It’s also worth noting that greenhouse gas emissions are often measured in CO2 (carbon dioxide) or CO2e (which stands for carbon dioxide equivalent) expressed in weight - usually kilograms (kg) or tonne/metric ton (t).
Carbon dioxide equivalent allows us to easily express the emissions value of various greenhouse gases. The various greenhouse gases affect the environment in different ways - for example they warm the atmosphere at different rates and also remain in the atmosphere for different periods of time. This is why these greenhouse gases are calculated as carbon dioxide equivalents - it allows us to compare different greenhouse gases fairly.
Activity Based Method
One of the main ways that the activity based method differs from the spend based method is in the collection of data.
The spend based method collects financial data only, whereas the activity based method of carbon accounting focuses on collecting specific and detailed data from across a company’s entire value chain.
In this context, physical flows or “real flows” include physical data relating to the functioning of the company. They are expressed in terms of mass (kg purchased or processed), in distances travelled (km travelled) or in units (number of products sold).
Physical flows can be:
- Internal - for example, a truck transporting semi-finished products from site A to site B (both owned by the company);
- External - in which case they may include flows of incoming goods (raw materials and supplies - necessary for the manufacture of the goods or for the running of the company), of incoming services, outward flows of goods (sales of finished products), or the provision of services.
“ The activity based method is based on emissions activities performed by the company and involves the collection of the company’s raw data for these different emissions sources. The type of data collected by the company will vary depending on their specific activities but typically includes things like energy consumption, fuel usage, production volumes, transport distances etc. ”
Once the various activity based data sources have been collected, this information is then used to calculate the emissions from each activity by applying the corresponding emission factors.
The activity emission factors represent an average greenhouse gas emission per unit of activity and offer a more accurate reflection of emissions associated with each activity.
Hybrid Based Method
The hybrid based carbon accounting method is - unsurprisingly - a hybrid of both the spend based method and the activity based method. Essentially, it is the practice of using all of the activity based data available, and then supplementing any missing activity based data by using the spend based approach to calculate the rest.
This is, more or less, Greenly's carbon accounting method. Let's find out why we believe it's the best option.
A quick note on scope
Regardless of what methodology is used, the process is repeated for each activity of the organisation in order to establish the company’s overall carbon footprint. However, one important consideration is the scope of emissions, because depending on the scope the final carbon footprint may not in fact paint the whole picture.
Emissions estimates are often divided into different emissions ‘scopes’. This is arranged depending on where the emissions originate from.
The Greenhouse Gas Protocol outlines three different emissions scopes.
Scope 1 emissions
Scope 1 emissions are direct greenhouse gas emissions that come from sources that are either directly controlled or owned by the organisation. For example vehicle fuel use or emissions from fuel combustion in furnaces or boilers.
Scope 2 emissions
Scope 2 emissions are those that an organisation causes indirectly when the energy it purchased and uses is produced. For example the emissions from the generation of electricity used to power a company’s electric vehicle fleet.
Scope 3 emissions
Scope 3 emissions are those that arise from activities or assets not owned or controlled by the organisation, but that the organisation indirectly affects in its value chain. For example the emissions resulting from purchased goods or services, or business travel.
“ A lot of the time companies are either only required to, or choose to only include scope 1 and 2 emissions within their carbon footprint calculation. However, scope 3 emissions are really important as they usually account for the bulk of an organisation's emissions (more than 70% of the average company’s carbon footprint) and by forgoing scope 3, a company doesn’t have an accurate picture of their greenhouse gas emissions. ”
To find out more about the different scopes and what activities they cover, read our article on the topic.
Benefits of the different accounting methodologies
Spend Based Method benefits and challenges
The spend based method of carbon accounting has the benefit of being pretty easy to source and compare. It uses readily available data which makes the whole process simple and time efficient.
The spend based method is also very useful for organisations with large and complex supply chains, where it may be tricky to obtain individual data for all emissions associated with the value chain.
However, the drawback to the spend based method is that it’s somewhat less accurate than the activity based method. This is because it assumes that all goods and services have the same emissions intensity, and spend based emissions factors are derived from industry averages which means that they don’t take into account the particularities of individual organisations.
Another limitation of the spend based method is that because it relies on financial data, it may not cover all activities (and associated emissions) within the company's scope.
Activity Based Method benefits and challenges
The activity based method relies on the collection of granular, detailed data which allows for a more precise carbon footprint calculation. It also - generally speaking - provides a more complete picture of an organisation's emissions because it tends to encompass a wider range of emission sources, both direct and indirect.
The limitations of the activity based method however lie in its complexity. It is often more time consuming and complex to compile all the different sources of data. Most organisations will have a wide variety of emissions activities (both direct and indirect) which means that collecting data is not straightforward.
An organisation may also find that it struggles to procure all the data sources necessary - for example from third party suppliers. This means that gaps may exist in the data collection.
Hybrid Based Method benefits and challenges
The hybrid based approach to carbon accounting merges the advantages of both the spend based method and the activity based method, allowing for a more balanced and comprehensive approach.
It ensures that organisations can optimise their accuracy by providing activity based data whenever possible, while also limiting any data gaps by allowing for the spend based method to be used where activity based data is unavailable.
In terms of limitations, the hybrid approach may also prove to be complex given that it doesn’t rely on a single data type but combines both activity based and financial based data.
Where Greenly comes in
Greenly's methodology
As you’ve probably realised - calculating an organisation’s carbon footprint is a complex process which requires a certain amount of balancing of different priorities in order to establish the best carbon accounting approach. This is why it’s so useful and important to enlist the specialist help of a carbon accounting provider such as Greenly.
Greenly’s expert team is on hand to guide you through every step of your carbon accounting journey - from providing the best advice on how to measure it, to actually calculating your greenhouse gas emissions, to helping you to implement a plan of action that starts you on your net zero journey.
“ Greenly’s methodology is the best of both worlds and uses both the activity based approach and the spend based approach. We flex these two methodologies on a case by case basis to ensure that each individual client has a tailored approach that works for their specific scenario. By combining these two complementary methodologies we’re able to ensure that your carbon footprint is as accurate and reliable as possible. ”
How does it work?
“ Greenly starts by categorising the company's spendings, and then completes the carbon assessment with physical analyses - which are associated with more accurate emission factors and help to overcome price variability. ”
Greenly’s carbon assessments systematically take these two approaches into account, as the monetary approach alone is insufficient to obtain an accurate overview of a company’s emissions.
This does not mean that the spend based method is ruled out by our experts. It is very useful for taking into account issues related to purchase of goods and services for which physical data collection would be too time-consuming.
However, the physical approach is preferred where the data already exist (emission factors of a process, activity, product). This reflects the company’s real impact.
“ Normally, Greenly will recommend starting with data collection using the monetary approach, in order to identify the main issues. The physical approach is then used to deepen the analysis and facilitate the development of an action plan. ”
Get in touch with Greenly
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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