How does carbon accounting work?

Carbon accounting helps organizations quantify the total amount of greenhouse gases (GHGs) they produce. It plays a foundational role in sustainability strategy, helping companies track progress toward climate goals and comply with growing and evolving regulatory demands.

Think of carbon accounting as the environmental equivalent of financial accounting. Just as companies rely on financial reporting to assess business performance, carbon accounting enables them to evaluate their environmental footprint. It also provides the data foundation for broader carbon management strategies—enabling organizations to monitor emissions in real time, prioritize reductions, and embed sustainability into decision-making.

This is why a crucial aspect of carbon accounting is collecting and processing business activity data to account for emissions. The most widely used approach for GHG accounting is the Greenhouse Gas Protocol, which classifies business emissions into three scopes:

• Scope 1 emissions
  These are direct emissions from sources an organization owns or controls, such as emissions from manufacturing facilities, fuel burned by company-owned vehicles, or on-site energy generation.
• Scope 2 emissions
  Scope 2 covers indirect emissions from the generation of purchased energy—such as electricity, steam, heating, and cooling—that a company consumes, even though the emissions occur off-site.
• Scope 3 emissions
  Often the largest and most complex to track, scope 3 emissions (also called “supply chain emissions”) come from sources not directly owned or controlled by a company but still tied to its activities. This includes supplier emissions, product use and disposal, business travel, and more.

On average, most companies’ scope 3 emissions far outweigh the combined total of their scope 1 and 2 emissions, presenting the most opportunities for businesses to reduce their carbon footprint.

Why carbon accounting matters for modern businesses

As climate regulations tighten and investor scrutiny intensifies, carbon accounting has become essential for businesses that want to stay competitive, resilient, and credible.

Nearly all major environmental, social, and governance (ESG) frameworks and regulations—including CDP, CSRD, GRI, ISSB, SASB, and TCFD—require companies to disclose their GHG emissions. And as regulations like the EU’s CSRD and California climate bills take effect, the need for structured, auditable carbon data has never been greater. Carbon accounting provides the structure and transparency needed to meet these requirements, equipping organizations with data that’s auditable, repeatable, and useful to decision-making.

But beyond compliance, carbon accounting plays a strategic role in business performance. Tracking emissions helps organizations:

• Identify operational inefficiencies
  High emissions often correlate with wasted energy, materials, or transport. Understanding where those emissions occur can lead to cost savings and more sustainable operations.
• Manage risk and investor expectations
  Investors increasingly view carbon performance as a proxy for future risk. Accurate, defensible carbon data supports ESG ratings, enables better risk modeling, and signals transparency to stakeholders—factors that can help lower the cost of capital and improve access to investment.
• Set and meet credible climate goals
  Companies can’t manage what they don’t measure. Carbon accounting enables businesses to define meaningful net-zero targets, model reduction pathways, and track emissions performance alongside financial KPIs. It also supports compliance with emerging policies like the EU Carbon Border Adjustment Mechanism (CBAM), which places a price on the carbon content of imported goods.
• Respond to customer and market pressure
  Sustainability has evolved from a siloed function to a core element integrated into every part of business operations. Customers, partners, and regulators increasingly demand environmental accountability across the value chain. Carbon accounting allows companies to respond with confidence and consistency.

In short, carbon accounting has emerged as a core business capability, shaping how organizations report, operate, and compete in a low-carbon economy. As companies navigate evolving disclosure expectations, accurate emissions data is key to producing credible, financial-grade ESG reports that meet investor and regulatory demands.

Carbon accounting methods and standards

Organizations rely on established carbon accounting frameworks to report emissions consistently and credibly. The most widely used is the Greenhouse Gas Protocol, a global standard for measuring and managing GHG emissions across scopes 1, 2, and 3.

The protocol offers different GHG accounting calculation methods depending on the type of emissions and data availability, especially for complex scope 3 categories. All methods use business activity data such as economic value (dollars, euros, etc.) or physical quantities such as data on mass (kilograms, tons, etc.) or distance (kilometers, etc.), and then multiply them by emission factors of varying granularity. These four methods are commonly used to account for emissions tied to purchased goods and services—ordered in the typical maturity journey:

• Spend-based method
  This method estimates emissions based on the financial cost of a good or service, multiplied by an EEIO (environmentally extended input-output) emission factor to estimate the average emissions per dollar or euro spent on a product or service. It’s often used when more granular data isn’t available, such as in early-stage assessments.
• Average-data method
  This calculates emissions by multiplying the quantity of purchased goods or services by weight and distance covered in transport by industry-average emissions factors. It balances usability with reasonable accuracy.
• Hybrid method
  A mix of actual and estimated data. For example, a company might collect its suppliers’ specific scope 2 emissions data using industry averages.
• Supplier-specific method
  This approach uses actual emissions data reported by suppliers. It provides the highest accuracy but can be difficult to scale without strong supplier engagement and data-sharing processes.

In addition to calculation methods, the GHG Protocol and related carbon accounting standards define rules for setting inventory boundaries, selecting emissions factors, and applying consistent categorization—all essential for auditability and comparability.

Choosing the right methods depends on your reporting and other sustainability goals, available data, and operational maturity. Many organizations start with spend-based or hybrid approaches and evolve toward more precise, supplier-specific data over time.

Turn carbon reporting into a competitive advantage

For many organizations, carbon accounting began as a compliance exercise. But in a rapidly evolving business landscape, tracking and reporting greenhouse gas emissions has become a strategic advantage.

Done well, carbon reporting helps companies move beyond disclosure and into action. Accurate, timely emissions data empowers teams to make more sustainable choices in procurement, logistics, product development, and more. It can also reveal cost-saving opportunities by identifying energy inefficiencies and carbon-intensive processes and avoiding the financial implications of non-compliance with regulations like CBAM.

Moreover, robust carbon reporting sends a clear message to investors, customers, and partners: this business is not only aware of its climate impact—it’s managing it. That kind of transparency builds trust, strengthens brand reputation, and can influence purchasing decisions in sustainability-conscious markets.

Organizations that integrate carbon data into day-to-day decision-making also put themselves in a better position to:

• Model decarbonization scenarios and align investments with long-term sustainability goals
• Respond faster to new regulations or customer demands
• Participate in sustainable supply chains and meet supplier eligibility requirements
• Attract and retain top talent, particularly among employees who value purpose-driven companies

By embedding carbon data into core operations, not just annual reports, businesses can turn a regulatory requirement into a driver of innovation, resilience, and long-term value creation.

Common carbon accounting challenges—and how to solve them

As carbon accounting becomes a business imperative, many organizations face challenges that can slow progress or undermine data quality—especially those relying on fragmented systems or manual processes.

Some of the most persistent hurdles include:

• Data silos and limited automation
  Without centralized systems for emissions tracking, teams often resort to spreadsheets and disconnected workflows that increase risk and reduce transparency. Automation is key to scaling reporting and improving data integrity.
• Complexity of scope 3 emissions
  Scope 3 emissions—those tied to suppliers, product use, and transportation—are typically the largest share of a company’s footprint. Tracking them requires coordination across the supply chain, standardized data exchanges, and tools that support supplier engagement.
• Variability in emissions factors and methodologies
  Inconsistent assumptions or methodologies can undermine auditability and comparability. Organizations need systems that support consistent calculations, documentation, and alignment with evolving carbon accounting standards.
• Disconnect between sustainability goals and core operations
  To drive meaningful change, carbon accounting must be embedded across finance, procurement, logistics, and product development. When carbon data remains siloed, it’s harder to act on insights or meet climate targets.

To overcome these challenges, many companies are:

• Implementing integrated, enterprise-grade reporting systems
  Centralized platforms reduce manual effort and unify sustainability data across business functions—supporting automation, audit readiness, and executive-level oversight.
• Partnering with suppliers to improve upstream data
  Structured collaboration, shared frameworks, and digital tools can help suppliers submit consistent, reliable data—and make decarbonization a joint effort.
• Aligning carbon metrics with financial performance
  Organizations are increasingly integrating emissions data into budgeting, forecasting, and performance tracking, directly linking sustainability and strategic planning.
• Operationalizing carbon insights
  Leading organizations embed emissions tracking into their day-to-day workflows, making carbon performance a shared responsibility rather than a reporting requirement.

By investing in systems and processes that make emissions data accessible, trustworthy, and actionable, businesses can turn carbon accounting into a long-term operational strength.

Achieving reliable, audit-ready carbon data

Reliable carbon data isn’t just a reporting requirement—it’s the foundation for meaningful climate action. But as emissions disclosures face increasing scrutiny from regulators, investors, and auditors, companies need more than high-level estimates. They need systems to generate accurate, traceable, and audit-ready carbon data at scale.

That’s where transactional carbon accounting comes into play.

By tracking emissions at the same level of detail as financial data, down to individual business activities or products, organizations can gain a far more granular view of their carbon footprint. This approach, sometimes referred to as maintaining a “green ledger,” enables companies to:

• Replace averages with actuals for more precise emissions tracking
• Maintain transparency with full audit trails and documentation
• Adapt quickly to structural changes such as acquisitions, divestments, or regulatory shifts

Run “what-if” scenarios and simulate decarbonization pathways with greater confidence

Real-world applications of carbon accounting methods

For example, an organization might use transactional-level emissions data to analyze the carbon intensity of a specific product line—tracking materials, manufacturing energy use, and downstream logistics. By combining that data into financial planning systems, the company can make more informed decisions about pricing, product mix, or design changes that reduce emissions without compromising margins.

Another example: a company engaging in scope 3 reduction initiatives might model the carbon impact of switching to preferred suppliers with lower emissions footprints. By tying supplier-level emissions data to procurement systems and applying consistent emissions factors, sustainability and sourcing teams can collaborate on decarbonization targets while still meeting operational goals.

Building a foundation for audit-ready carbon reporting

Critically, audit-ready carbon data supports cross-functional alignment. The financial quantification of carbon impact makes it easier for finance, sustainability, and business teams to collaborate using a shared, trusted source of truth.

To achieve this level of data quality, many organizations are embedding emissions tracking into their enterprise systems—ensuring carbon data is captured at the point of activity, not retrofitted at year-end. They’re also investing in tools that:

• Automatically ingest and normalize data from internal systems and external partners
• Apply validated emissions factors based on activity type, geography, or time period
• Flag anomalies and surface gaps for review before reporting season
• Maintain continuity through version control, audit logs, and baseline recalculation tools

As emissions reporting becomes more sophisticated, organizations that invest early in data integrity and automation will be better positioned to meet compliance demands and steer the business with clarity and confidence.

What to look for in a carbon accounting platform

Choosing the right platform is critical as carbon reporting becomes more complex and high stakes. The right solution doesn’t just support emissions calculations—it enables data confidence, operational efficiency, and alignment across the business.

Whether you’re just starting to formalize carbon tracking or scaling a mature sustainability program, here are key capabilities to look for in a carbon accounting platform:

• Automated data capture
  Manual collection from spreadsheets or emails isn’t sustainable. Look for platforms that can ingest data from core systems (such as finance, operations, and procurement) and external sources like suppliers, utility providers, and logistics partners. Some platforms even offer AI-enabled sustainability reporting capabilities.
• Emission factor flexibility
  Ensure the system supports both standardized and custom emission factors. This includes time-based updates, regional variation, and the ability to integrate third-party datasets.
• Scope 1, 2, and 3 emissions calculation
  A robust carbon accounting platform should enable the ability to share and request emissions data across all scopes—especially scope 3, which often accounts for most of a company’s footprint.
• Audit trails and data governance
  As regulatory scrutiny increases, so does the need for transparency. Your platform should offer detailed audit logs, traceable transaction history, and tools for validating data accuracy.
• Baseline management and recalculation
  Organizational changes, like acquisitions or divestitures, require updates to historical emissions baselines. Your platform should make it easy to recalculate baselines while preserving reporting continuity.
• Performance tracking and goal-setting
  Integrated dashboards and reporting templates can help sustainability teams and business leaders monitor progress toward emissions reduction targets in real time.
• Integration with business processes
  To drive action, carbon insights must inform decisions. Look for a platform that can embed carbon data into processes like procurement, product lifecycle management, and budgeting.
• Multi-entity, multi-jurisdiction support
  If your company operates across regions, you’ll need global capabilities: multi-currency, multi-unit, and multi-framework support, as well as the flexibility to meet evolving local regulations.

Ultimately, the best carbon accounting platforms help organizations move from compliance to control—streamlining reporting, strengthening governance, and enabling smarter sustainability decisions across the enterprise.

From insight to action: What’s next in carbon accounting

With carbon emissions under growing scrutiny, organizations can no longer treat sustainability data as a minor concern. The future of carbon accounting lies in deeper integration—combining emissions insights directly with financial, operational, and strategic decision-making.

This means moving beyond annual disclosures toward high-quality data streams that continually inform operations: which suppliers to engage, where to improve efficiency, how to structure product portfolios, and how to adapt to policy changes.

To stay ahead, leading companies are:

• Embedding emissions tracking into core business systems
• Aligning sustainability metrics with financial KPIs
• Engaging suppliers and partners through shared platforms
• Using advanced analytics and automation to model future impact

These aren’t just sustainability goals—they’re business imperatives. Organizations that treat carbon accounting as a strategic capability, not just a reporting obligation, will be best positioned to adapt, differentiate, and thrive in a low-carbon economy.

SAP sustainability customers in action