I have a deep problem with the current approach for carbon accounting. We measure carbon emissions and list how much they are.

Unfortunately, most people just aren't calibrated for carbon. It doesn't mean anything to us at all, so we ignore them (80g of carbon emissions in a 30g bag of crisps?). And, unfortunately the figures present only one aspect of the carbon cycle.  Even worse, as Nigel Hastilow has pointed out in Talk Accountancy recently, the numbers are often wrong.

Carbon accounting even lets companies get away with downright lies, such as Southern Trains's claim that their new trains "reduce CO₂ emissions".  They're supported by the Carbon Trust in their lie.  Think about it - self-evidently, the train actually increases CO₂ emissions.  It's only when you think about the old trains they used to run that you could even begin to make such a statement.  Yet they allow such misleading advertising to continue.

In this post, I set a novel approach to carbon accounting that avoids some of these flaws. In doing so, it creates some of its own, which I acknowledge below. However, I hope that this can trigger a discussion of how we can take the current framework forward.

Carbon is a cycle. Apart from any radioactive freakery, it isn't created or destroyed. It just goes around and around. We have observed a number of sinks for carbon which store the world's carbon. And carbon can be transferred between these sinks.

The main sinks, again with thanks to Wikipedia, are:

• The atmosphere
• The terrestrial biosphere, which is usually defined to include fresh water systems and non-living organic material, such as soil carbon.
• The oceans, including dissolved inorganic carbon and living and non-living marine biota,
• The sediments including fossil fuels.
• The Earth's interior, carbon from the Earth's mantle and crust is released to the atmosphere and hydrosphere by volcanoes and geothermal systems.

Mankind is mostly responsible for one type of transfer - from all the other sinks into the atmospheric sink.  For example, oil companies move carbon out of the sediments sink and convert it into fuel, whereby it ends up in the atmosphere (or, if a disaster happens, it ends up all over the American coast).

But wait - this sounds rather like what accountants do when we perform double-entry book-keeping.  We instinctively want to transfer between accounts rather than deal with something being presented as if it's created out of nothing.  And you could, theoretically at least, account for carbon on the same basis - as a description of what the company has done to move carbon between sinks.

For example, thinking about our oil company again, it would account for the extraction of oil as a transfer from one sink to another.  For the purposes of this exercise, we might need to introduce an additional 'suspense' sink to account for the carbon temporarily held in human systems.  If we do this, then oil extraction becomes:

DR Sediments  X

CR Human systems   X

You could then present a table showing how the company's activities affect the balance between sinks.

This would be quite neat, as it would allow us to focus our scientific efforts on a really important question - how resilient are the various sinks to shocks?  Just how much additional inward transfer can the atmospheric system take without becoming overburdened?

We could consolidate several companies together to get a better idea of how particular industries or countries are ameliorating or contributing to global warming.

However, this approach isn't perfect.  It would be susceptible to the same game-playing and mismeasurement that Hastilow identifies in his article.  This would need some careful regulation or external assurance (although this post shouldn't be read as a job creation scheme for accountants).

An additional, potentially more serious problem would be that companies would have to account for the full carbon impact of all their activities. This would include things that aren't ordinarily captured within the company's accounting systems, such as employee transport. Conceptually, we would expect a company that - for example - makes it easier for its employees to cycle to work should be able to report a more beneficial position to one where its employees all drive many miles. However, this sort of measurement is likely to be an intrusive and fairly arbitrary exercise, making it difficult to audit effectively.

Are these problems insurmountable?  I don't suppose so.  In the early days of the accounting profession, there were no standards either.  Accountants got together and worked some out.  I don't doubt that we can crack these problems too.  And it's worth doing, because I believe my approach is a significant improvement to the way carbon accounting is currently dealt with.  Your comments are, as ever, welcome.

People who read this post also read:

• New ICAEW publication on sustainability assurance
• In carbon we trust
• New ACCA paper on risk and reward
• The ICAEW annual review and AGM 2011
• Ritchie on the teaching of accountancy

Filed under: Accounting, Exclusives with tags carbon footprint, double-entry book-keeping, icaew, nigel hastilow, southern trains, sustainability