Corporate accounting for the cost of carbon is on the rise. According to survey data from the CDP Project, the number of companies that report Scope 3 emissions in the CDP platform has more than tripled over the last decade. About one-third of the close to 6,000 companies surveyed disclosed that they currently used an internal carbon price or plan to implement one within the next few years.
The term “carbon accounting” is typically used to refer to a range of practices aimed at calculating how much carbon a company or country emits. The most common methodology to compute carbon emissions is the Greenhouse Gas (GHG) Protocol, which classifies corporate emissions based on their source. “Scope 1” emissions relate to direct GHG emissions from sources that are owned or controlled by the company; “scope 2” emissions relate to indirect emissions from purchased heat and electricity; “scope 3” are indirect emissions from employee business travel, outsourced business activities, and other parts of the supply chain. Carbon accounting can be done at the corporate level but also at the level of business units and products. In that case, firms may need to define allocation rules akin to those used in traditional cost accounting.
One rationale for implementing carbon accounting systems is that information on emissions is essential for firms seeking to increase their environmental performance. Beyond intrinsic environmental preferences, firms could have an incentive to reduce emissions as a response to government initiatives that put a price on emissions (i.e., carbon taxes and emission trading systems). In some cases, environmental efforts could also give a competitive edge in the product markets in terms of attracting environmentally conscious consumers. Consider, for example, the growing use of carbon footprint labels to provide customers with verified information about the carbon impacts of their purchasing decisions. The benefits of reducing emissions could also extend to capital markets (i.e., lower cost of capital) or to labor markets (i.e., attraction of young talent).  
In light of these potential benefits, perhaps it is not surprising that in recent years we have witnessed numerous companies around the world issuing voluntary “net-zero pledges” with regard to their greenhouse gas emissions. According to a recent survey, more than two-thirds of Fortune 500 firms have now articulated the goal of reaching a net-zero position by 2050. 
Carbon accounting is also becoming increasingly important from a regulatory perspective, with many governments introducing mandatory disclosure requirements for large businesses. The EU has recently adopted the Corporate Sustainability Reporting Directive (CSRD), which requires large companies to report on their carbon emissions. In the US, such reporting is mandatory for large emitters and several states have passed related legislation. In a proposed rule change, the SEC has recently called for mandatory disclosure of GHG emissions, including scope 3. In all these cases, to the extent that large organizations need to collect data from across their value chain, the disclosure requirement might trickle down to smaller private firms.
Firms can use emission data in several ways. Critically, environmental KPIs are often used by executives and directors to set strategic targets. Operationally, defining internal policies on carbon pricing (which integrate environmental costs into corporate decision making) requires carbon accounting. CO2-related KPIs are also often used in compensation packages for employees and executives.
Nonetheless, we should be aware that accounting for carbon is not an easy task. On the practical side, it is widely acknowledged that assessing a company’s emissions entails enormous data collection challenges, particularly for scope 3. Another problem is that the carbon emissions incurred along a company’s downstream supply chain cannot be measured reliably at the time a product leaves the company. As such, the computations based on the GHG protocol are necessarily speculative. The conceptual and practical difficulties associated with the estimation of indirect emissions are particularly troubling, as scope 3 emissions are by far the largest in terms of volume (according to the Rocky Mountain Institute supply-chain emissions are more than five times higher than direct emissions).
Recently, scholars from the accounting field have made methodological contributions based on an accrual accounting system for carbon emissions that mirrors the accounting for operating assets in financial reports. Such technical innovations certainly deserve serious consideration, but implementing these methodologies requires a formidable coordination effort; the method needs to be implemented across the supply chain. This seems a daunting task, but it can be tackled with technological innovation and business creativity. In fact, there are already start-ups offering supply chain emissions tracking platforms that enable traceability and product carbon footprinting.
All the above suggests that carbon accounting deserves the attention of corporate boards. Producing reliable corporate emission data is strategically important not only for shareholders, but also for civil societies aiming to meet their environmental goals.