Greenhouse gas (GHG) accounting is key for companies to calculate their emissions, track progress towards science-based targets and strategically reduce emissions across their operations. However, different types of GHG accounting exist, each serving distinct purposes and suited to specific applications.

In the context of Scope 3, GHG accounting involves the assessment of indirect emissions that occur in an organization’s value chain. These are grouped in 15 separate categories based on GHG Protocol guidance.

The two fundamental accounting methods for GHG emissions are:

1. Inventory accounting – defined in the GHG Protocol Corporate Standard

2. Project accounting – defined in the GHG Protocol for Project Accounting.

To effectively report on decarbonization efforts, companies can follow two pathways, offering different options for reporting interventions outcomes: 

1. Adhere to inventory accounting principles, following GHG Protocol guidance. Inventory accounting requires companies to demonstrate physical traceability, specifying the spatial boundary within which they are aggregating emissions and conducting their GHG accounting.  

2. Follow project accounting to track intervention outcomes and optimize claims, to be reported separate from the GHG inventory. Claims based on project accounting and claimed through market-based mechanisms offer more flexibility but cannot be directly incorporated into corporate Scope 3 inventories, according to GHG Protocol guidance.

This could change in the future depending on the outcomes of the GHG Protocol’s Actions and Markets Instrument Technical Working Group. Read on to learn more about what each accounting approach means and when to use them.

What is inventory accounting?

The purpose of inventory accounting is to assess the GHG emissions of a reporting company, allocating responsibility to entities for their emissions or removals.

It is widely utilized by corporations. Standards such as the GHG Protocol and the Science Based Targets initiative base their guidance for reporting Scope 3 emissions on this method.

Inventory accounting focuses on quantifying direct emissions related to all sources, sinks, and reservoirs within the organization’s operations. It provides a complete assessment of the annual emissions from sources within the reporting company’s operations in absolute CO2 equivalent emissions. The company’s emissions in the inventory can be tracked year-over-year, relative to a historic base year or period. This accounting method does not account for future consequences of actions but rather focuses on the recorded historical estimation of emissions.

While inventory accounting is the foundation for reporting Scope 3 emissions according to current standards and frameworks, it carries some limitations. One significant limitation involves the emission factors used for the calculations. Emission factors play a crucial role in the establishment of GHG inventories, as they indicate the average amount of GHG emissions released into the atmosphere from specific activities to produce a product. Most corporate inventories rely on default emission factors from databases which are based on averages and therefore do not reflect changes made by interventions on the ground. This makes it challenging to account for on-the-ground emissions resulting from specific interventions. The more primary data and granular emission factors are included, the more accurate an inventory becomes.

What is project accounting?

Project accounting, also known as intervention accounting, estimates the effects of specific projects or interventions on GHG emissions, relative to a counterfactual baseline scenario.

Project accounting evaluates the broader system-wide impacts on the sources, sinks, and reservoirs affected by the intervention. Unlike inventory accounting, it is not limited to organizational boundaries.

The baseline scenario in project accounting is a reference case describing what would have likely happened without the intervention. Project accounting focuses on modelled predictions of emissions changes, resulting in estimates of avoided emissions. Avoided emissions reflect the difference in emissions between what happened in terms of emissions or removals after the intervention and what would have occurred without the intervention.

This accounting approach enables companies to track specific activities and quantify decarbonization outcomes. This can generate financial incentives or payments based on measured or modelled outcomes, as well as demonstrate the effectiveness of projects, incentivizing companies to adopt interventions.

The main limitation is that under current reporting frameworks, project-based results cannot be incorporated in a corporate Scope 3 inventory. Companies would require further calculations such as subtraction or substitution, which can be contested. Alternatively, companies can maintain two separate reporting lines: one for their inventory, showing their historical emissions, and another for their interventions, showing the emission reductions created in their value chains.

Differences between inventory and project GHG accounting

Showing value chain intervention outcomes in inventories

To reflect progress and count towards targets, there is growing interest among companies to directly incorporate the results of their mitigation efforts into their Scope 3 inventories. However, many companies struggle with understanding if and how to show progress created by interventions in their inventories as guidance is currently lacking.

Since the two accounting approaches serve different purposes, companies are often engaged in two pathways:

1. Adhering to inventory accounting principles, by developing updated emission factors to be integrated into the inventory.

2. Using project accounting and/or market-based mechanisms to determine intervention outcomes and allowing for optimizing claims, to be reported outside of the inventory.

Currently, inventory accounting is the only pathway that allows companies to count mitigation outcomes towards their Science Based Targets. Our recent case study explores how inventory accounting could be used to show progress towards Science Based Targets in the context of crop rotations.

Intervention outcomes calculated with the project accounting approach would need to be reported on a separate reporting line, meaning these outcomes are not included in the Scope 3 inventory totals. As such, this method maintains the integrity of the inventory while still acknowledging the impact of the interventions, enabling companies to make claims, assess the effectiveness of their projects, and remunerate farmers based on outcomes.

Learn more about how you can account for the GHG emissions in your value chain

Our latest Food and Agriculture guidance dives deeper into the GHG accounting approaches and calculating emission factors, outlining the pathways that are available to companies according to current GHG Protocol guidance.