When measuring your carbon footprint your will eventually come across the terms spend-based vs activity-based carbon accounting.
Both are important methodologies to quantify your carbon emissions and we’ll explain how they differ and which one to use.
What are spend-based and activity-based carbon accounting methods?
Spend-based and activity-based carbon accounting are two different methodologies for measuring the carbon footprint of an organization, product, or service. The spend-based approach takes the financial value of a good or service and multiplies it with an emission factor, while activity-based accounting uses case-specific data provided.
Both methods aim to quantify greenhouse gas (GHG) emissions but use different data sources and focus on different aspects of the carbon accounting process.
There is no “better” or “worse” option, as they have different goals.
Spend-based carbon accounting is usually used for quick top-down estimates of the overall footprint or when specific data is hard to obtain.
Activity-based carbon accounting, on the other hand, focuses on the unique characteristics of individual processes, activities, or products, and typically provides more accurate and detailed emissions estimates. It is more suitable for a bottom-up analysis that aims to identify specific emission hotspots and opportunities for targeted emissions reductions.
However, this method can be more time-consuming and resource-intensive, as it requires collecting detailed data on specific processes and activities.
Ultimately, the choice should depend on the desired level of accuracy and granularity, as well as the availability of data and resources.
Let’s look at the pros and cons of each.
Spend-based carbon accounting
Spend-based carbon accounting, also known as environmentally-extended input-output analysis (EEIOA), estimates GHG emissions based on the financial expenditure of an organization. The emissions associated with a particular activity are calculated by multiplying the expenditure in that sector by a corresponding emissions intensity factor.
Spend-based carbon accounting relies on financial expenditures and average emissions factors for entire sectors, which can lead to less accurate and less granular emissions estimates.
As mentioned before, it is a relatively easy and straightforward way to estimate a corporate carbon footprint.
Most companies have a good idea of their financial ins and outs and with the right emission factors, the spend-based method delivers quick results.
However, it is much less accurate than using actual data from operations, transportation, and other activities. This is especially bad in regard to the so-called scope 3 or indirect emissions along the value chain which many organizations neglect entirely.
It often underestimates emissions rather than overestimates them.
- Relatively simple and easy to implement, as it requires only financial data as input.
- Useful for high-level, top-down analysis of carbon emissions across an organization.
- Most companies already have their financial data in digital form.
- Less accurate and granular than activity-based methods, as it relies on average emissions factors for entire sectors.
- Doesn’t account for differences in the emissions intensity of specific products, services, or processes within a sector.
- Often neglects indirect scope 3 emissions along the value chain.
Activity-based carbon accounting
Activity-based carbon accounting, often used in Life Cycle Assessment (LCA) or process-based methods, estimates GHG emissions by analyzing the emissions associated with specific activities, processes, or products. It involves collecting detailed data on the inputs and outputs of a process, such as energy consumption, raw materials, and waste, and then calculating emissions using specific emissions factors.
The activity-based approach requires much more data than the previous one but yields more accurate results.
It determines the carbon footprint of your organization by breaking down the emissions associated with each activity or process. This approach can provide more accurate information on the sources of carbon emissions and help identify areas where reductions can be made.
A big advantage is that the results are a much better representation of your operations’ carbon emissions.
If you have access to the data necessary to carry out activity-based carbon accounting, it is almost always the better and more accurate choice.
- Provides more accurate and granular estimates of carbon emissions, as it considers the unique characteristics of individual processes or products.
- Allows for better identification of emission hotspots and targeted opportunities for emissions reductions.
- Takes into consideration scope 3 emissions.
- More time-consuming and resource-intensive, as it requires collecting detailed data on specific processes and activities.
- May be challenging to obtain accurate and complete data for all stages of a product’s life cycle or an organization’s operations.
Example of spend-based vs activity-based carbon accounting
Let’s understand the differences between the two approaches and their impact on your disclosed carbon emissions with an actual example.
Let’s consider the example of shipping 1 ton of steel from China to Germany, including steel production and transportation.
The primary method for producing steel is through the Basic Oxygen Furnace (BOF) process, which uses pig iron from iron ore and recycles scrap steel. Alternatively, steel can also be produced using the Electric Arc Furnace (EAF) process, which relies primarily on scrap steel.
BOF is more common in China, so we’ll base our example on that.
We’ll make some assumptions and use average values, but you’ll get the point.
There are some calculations below and you can skip right to the results, if you want to.
Spend-based carbon accounting example
Assume the following cost breakdown for 1 ton of steel production and transportation (in USD):
- Steel production (BOF): $600
- Shipping: $100
- Truck transportation: $50
We also need emissions intensity factors for these sectors, expressed in kg CO2 per dollar spent. These factors vary by region and data sources, but for the sake of this example, let’s assume the following average factors:
- Steel production (BOF): 2.5 kg CO2/USD
- Shipping: 1.5 kg CO2/USD
- Truck transportation: 1.0 kg CO2/USD
As you can see, we don’t differentiate between types of shipping like maritime or aerial. However, we know that cargo ships and planes produce vastly different emissions.
Now it’s time to calculate the carbon emissions based on the values above:
- Steel production: $600 * 2.5 kg CO2/USD = 1,500 kg CO2
- Shipping: $100 * 1.5 kg CO2/USD = 150 kg CO2
- Truck transportation: $50 * 1.0 kg CO2/USD = 50 kg CO2
Result: Total = 1,500 + 150 + 50 = 1,700 kg CO2 (1.7 tons CO2)
Activity-based carbon accounting example
The activity-based approach takes a lot of data, so we will simplify our calculations a bit. Our carbon accounting platform will help you determine the carbon footprint of all your activities accurately and fast.
According to the World Steel Association, the average CO2 emissions for steel production are between 1.91 – 2.32 tons of CO2 per ton of steel. BOF steel in 2021 was rated at 2.32 tonnes of CO2 per tonne of crude steel cast.
Emission factors like this change frequently. Many publications simply use the average of all steel types or refer to older emission factors to obtain lower numbers. With Reegy, you always get the most accurate and up-to-date data.
The distance from China to Germany is approximately 12,000 kilometers when accounting for the maritime route. The majority of cargo ships use heavy fuel oil (HFO) or marine gas oil (MGO), both of which are fossil fuels that produce carbon emissions when combusted. Here, we’ll assume the cargo ship uses HFO.
The carbon emissions from shipping depend on the fuel consumption rate and the carbon intensity of the fuel. According to the International Maritime Organization (IMO), the average fuel consumption for cargo ships is around 25-30 grams of fuel per ton-mile (g/t-mile). The carbon intensity of HFO is approximately 3.17 kg CO2 per kg of fuel.
We can now estimate the carbon emissions for shipping 1 ton of steel from China to Germany:
- Convert the distance to miles: 12,000 km * 0.621371 = 7,456.45 miles
- Calculate the fuel consumption: 7,456.45 miles * 27.5 g/t-mile (using the midpoint of the average range) = 205,052.25 g or 205.05 kg of fuel
- Calculate the carbon emissions: 205.05 kg of fuel * 3.17 kg CO2/kg of fuel = 649.97 kg CO2
This rough estimate suggests that around 650 kg of CO2 emissions are generated to ship 1 ton of steel from China to Germany. Keep in mind that this is a simplified calculation, and actual carbon emissions can vary depending on the ship’s efficiency, specific route, and other factors.
In the final part of the journey, the steel needs to be moved by truck for an additional 200 km. The average CO2 emissions for heavy-duty trucks are approximately 150 g CO2/t-km.
This brings us to: 200 km * 150 g CO2/t-km = 30,000 g or 30 kg (0.03 tons) of CO2
Total Activity-Based Emissions
- Steel production (BOF): 2.32 tons
- Shipping: 0.65 tons
- Truck transportation: 0.03 tons
- Total: 2.32 + 0.65 + 0.03 = 3 tons of CO2
Comparing the results
- Spend-based carbon accounting: 1.7 tons CO2
- Activity-based carbon accounting: 3 tons CO2
As we can see, the spend-based method provides a rough estimate, while the activity-based method provides a more accurate and granular calculation of CO2 emissions for the steel production and transportation scenario. It’s also almost double the amount!
The example above shows a higher value for activity-based data than spend-based. However, there are cases where spend-based approaches lead to higher calculated emissions. Examples are small consumer electronics like mobile phones.
The differences in the results highlight the importance of selecting an appropriate carbon accounting method based on the desired level of accuracy, granularity, and available data. Our carbon accounting platform can automate these calculations for you and will always select the right data.
Are spend-based emissions usually higher than in activity-based approaches?
There isn’t a definitive answer to whether spend-based emissions are usually higher than those calculated using activity-based approaches. The differences in emissions estimates are largely depend on the specific situation, the sectors involved, and the accuracy of the underlying data.
While raw materials like steel often yield higher activity-based than spend-based emissions, there are some examples of high-value goods where this is not the case.
Carbon accounting is not black and white and, therefore, hybrid methodologies are recommended by the GHG Protocol.
Here, we use activity-based carbon accounting as much as possible and apply spend-based estimates to fill the gaps.
While this does not give 100% accurate results in comparison to pure activity-based calculations, it helps companies start their decarbonization journey much quicker.
Our Reegy Eco Hub applies this methodology to help you get carbon insights quicker. However, you can also turn this off and base all your carbon accounting solely on activity-based data.
We hope you now have a much better understanding of the differences between the different carbon accounting approaches
If you want to skip the hassle of doing these calculations manually or trying to obtain accurate emission factors for each activity in your operations, let’s talk and see how we can automate this process for you!
Reegy is a complete software solution for ESG & Carbon Footprint Management. Our Reegy Eco Hub enables enterprises, financial institutions and governmental organizations to manage their climate action in one central location along the entire value chain. Track, measure, reduce, and offset your carbon emissions, disclose them to regulators, stakeholders, and customers and lead your company to Net Zero on autopilot!