Spend-based vs activity-based carbon accounting

Spend-Based vs Activity-Based Carbon Accounting

When measuring your carbon footprint you will eventually come across the terms spend-based vs activity-based carbon accounting. They are two common methodologies used in the ESG world, but can be a bit tricky to pick the right one for your use case and collect all the data it requires.

But don’t worry, Reegy has got your back to help make sense of all this terminology!

In this article, we’ll show you exactly what spend-based and activity-based carbon accounting is, how they differ, and the pros and cons of each method.

Let’s get started!

What is Spend-Based and Activity-Based Carbon Accounting?

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 to get to the estimated emissions, 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. We will look at each one more closely below.

Just from the definitions, you probably guessed that the activity-based method is generally more accurate than the spend-based approach. However, both have their use cases:

Spend-based carbon accounting is usually used for quick top-down estimates of the overall footprint or when specific data is hard to obtain. It is a cost and time-saving approach but not as accurate.

Activity-based carbon accounting, on the other hand, focuses on 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, it is often more time-consuming and resource-intensive, as it requires collecting detailed data on specific processes and activities.

Air Travel

When calculating emissions from air travel, the spend-based method will multiply the amount spent on plane tickets with the corresponding EEIO emission factor. The activity-based approach, on the other hand, looks at mass flows (t of fuel used) or distance traveled (in km or mi).

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

The Spend-based carbon accounting method converts the financial value of purchased goods or services into GHG emissions using specific spend-based emission factors. It is a time and cost-saving approach but sometimes lacks accuracy.

Spend-based emission factors link a specific financial expenditure, for example, the purchase of plane tickets for employees, to its associated carbon emissions. This enables the calculation of emissions per financial unit of a particular activity.

Emission factors are usually expressed like:

  • kgCO2e / EUR
  • tCO2e / USD

The emission factor is then multiplied by the amount spent on the activity, for example on new machinery or travel expenses, to derive the total emissions. Since most if not all companies already track their transactions and expenditures such as energy costs or travel expenses, it is relatively easy to derive activity flows and track their emissions.

Such (EEIO)emission factors are usually given for industry sectors or on a product type base.

Spend-based emission factors typically originate from so-called environmentally extended input-output (EEIOA) models. These models provide a comprehensive view of the environmental impacts associated with economic activities across different sectors and supply chains.

Reliable sources of emission factors are the US EPA, the International Energy Agency, the IPCC Emission Factor Database, the UK government’s conversion factors for company reporting, and the European Environmental Agency database.

Spend-Based Formula

Sum across purchased goods or services:
∑ (value of purchased good or service ($) × emission factor of purchased good or service per unit of economic value (kg CO2e/$)

Example

Let’s say company A spent USD 420,467 on industrial valves for their factories. Since they have not received any specific data from their supplier on the emissions per valve, they use a supply chain emission factor to calculate their carbon footprint.

According to the EPA, the emission factor for Industrial Valve Manufacturing was 0.24kg / USD.

USD 420,467 x 0.24kg / USD = 100,912.08 kg (~100t) of CO2e

This means, 100t of CO2e are emitted by this activity flow according to the spend-based approach.

Advantages

  • Only requires 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.

Spend-based carbon accounting allows companies to quickly calculate their carbon footprint in a time and cost-saving manner. As 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.

It is very useful for executives who are more akin to financial data rather than technical specifications in understanding an organization’s environmental impact.

Disadvantages

  • Less accurate and granular than activity-based methods
  • 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.
  • Emission results are subject to price fluctuations

Spend-based carbon accounting relies on financial expenditures and average emissions factors for entire sectors, which can lead to inaccurate emissions estimates. This is especially bad in regard to the so-called scope 3 or indirect emissions along the value chain which many organizations neglect entirely.

Another issue is that emissions are tied to the prices of goods and services which may fluctuate frequently even within a reporting period. This means emission results can change although they shouldn’t.

It also favors larger organizations which receive better prices for their purchases, although the underlying emissions are identical.

Activity-based carbon accounting

Activity-based carbon accounting focuses on a company’s specific emission-generating activities and operations, by collecting raw data from various sources such as energy use, fuel consumption, production levels, materials, and transport distances. It requires more effort but yields more accurate results.

In a nutshell, activity-based carbon accounting determines the carbon footprint of your organization by breaking down the emissions associated with each activity or process. While in spend-based carbon accounting, we used monetary flows to derive emissions, here we deal with physical flows along the value chain of a company.

These flows can be internal, such as transporting items between company-owned locations, or external, like incoming goods and services or outgoing product sales and service provisions. They are expressed in tangible data metrics like weight (kg processed), travel distance (km covered), or units (number of items sold).

The data is then multiplied by activity-specific emission factors to determine the total emissions of an activity or process. The sum of all these calculations leads to the corporate carbon footprint.

Activity-Based Formula

∑ [(mass of purchased good or service (kg or t) × emission factor of purchased good or service per mass unit ( kgCO2e/kg)]

Example

Company B purchases raw materials to manufacture an electronic device. They buy 200kg of integrated circuits and 400kg of semiconductors. They find emission factors from the GHGP of 10kg CO2e / kg of circuits and 70kg CO2e / kg of semiconductors, leading to the following calculation:

200kg * 10 kg CO2e / kg + 400kg *70kg CO2e / kg = 30,000kg CO2e

This means, 30t of CO2e are emitted by this activity according to the activity-based approach (technically we used a hybrid approach here because we did not look at the raw materials inside like lithium or silicon).

Advantages

  • Provides more accurate and granular estimates of carbon emissions
  • Allows for better identification of emission hotspots and targeted opportunities for emissions reductions.
  • Takes into consideration scope 3 emissions
  • Independent of price fluctuations

Remember the example of air travel from before?

Instead of just looking at money spent, we would now consider the consumption of fuel or distance traveled to determine our environmental impact. This obviously makes the results more accurate and also prevents false results due to price fluctuations (and we know how plane ticket prices can change on a daily basis).

Activity-based carbon accounting is therefore often used in Life Cycle Assessment (LCA) or process-based methods where it helps detect the sources of carbon emissions and identify areas where reductions can be made.

If you have access to specific data necessary to carry out activity-based carbon accounting, it is almost always the better and more accurate choice.

Disadvantages

  • Time-consuming and resource-intensive, as it requires collecting detailed data
  • Challenging to obtain accurate and complete data for all stages of a product’s life cycle or an organization’s operations

While activity-based carbon accounting is accurate, it is also difficult and complex. For each activity, we need to collect all connected data, find appropriate emission factors, and ensure consistent accounting standards.

This is why activity-based carbon accounting almost always requires dedicated carbon accounting software like Reegy’s Eco Hub which takes care of the manual labor and calculations.

We also provide you with the most recent updates on all required emission factors and make data exchange with suppliers easier!

Real-World Example of Spend-Based vs Activity-Based Carbon Accounting

Now that you know the differences between the two approaches, it is time for an example that shows you the different outcomes of each method. For that, let’s consider the case of shipping 1 ton of steel from China to Germany, including steel production and transportation.

The most common method for producing steel is the Basic Oxygen Furnace (BOF) process, which takes pig iron derived from iron ore and incorporates recycled scrap steel. Another method is 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.

Steel production
Steel is a frequently exported good in China.

We’ll make some assumptions and use average values, but you’ll get the point. If you don’t want to read through the calculations, just skip ahead to the final result.

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 CO2e 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 CO2e / $
  • Shipping: 1.5 kg CO2e / $
  • Truck transportation: 1.0 kg CO2e / $

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 x 2.5 kg CO2e / $ = 1,500 kg CO2e
  • Shipping: $100 x 1.5 kg CO2e / $ = 150 kg CO2e
  • Truck transportation: $50 x 1.0 kg CO2e / $ = 50 kg CO2e

Result: Total = 1,500 + 150 + 50 = 1,700 kg CO2e (1.7 tons CO2e)

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.

Steel production

According to the World Steel Association, the average CO2e emissions for steel production are between 1.91 – 2.32 tons of CO2e per ton of steel. BOF steel in 2021 was rated at 2.32 tonnes of CO2e 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.

Maritime Transport

The distance from China to Germany is approximately 12,000 kilometers via 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 CO2e per kg of fuel.

Cargo ship approaching shore
Maritime transport is a huge contributor to overall emissions.

We can now estimate the carbon emissions for shipping 1 ton of steel from China to Germany:

  1. Convert the distance to miles: 12,000 km x 0.621371 = 7,456.45 miles
  2. 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
  3. Calculate the carbon emissions: 205.05 kg of fuel * 3.17 kg CO2e / kg of fuel = 649.97 kg CO2e

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.

Land Transport

In the final part of the journey, the steel needs to be moved by truck for an additional 200 km. The average CO2e emissions for heavy-duty trucks are approximately 150 g CO2e/t-km.

This brings us to: 200 km * 150 g CO2e/t-km = 30,000 g or 30 kg (0.03 tons) of CO2e

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 CO2e

Eww…that’s a lot of calculations for just of activity, isn’t it?

Comparing the results

  • Spend-Based: 1.7 tons CO2e
  • Activity-Based: 3 tons CO2e

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 CO2e emissions for the steel production and transportation scenario. It’s also almost double the amount!

But that’s not all!

We also need to keep in mind that the spend-based method assumes the same emissions, no matter which type of transport is chosen, the actual distance covered, or which truck fuel was used.

Moreover, if the company manages to negotiate better shipping or raw material prices, the amount of declared carbon emissions is significantly reduced.

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.

Does the Spend-Based Method Lead to Lower Emissions than the Acitivity-Based Method?

There isn’t a definitive answer to whether spend-based derived emissions are usually lower than those calculated using activity-based approaches. The differences in emissions estimates 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.

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 negotiating power of the company, as well as other factors play a huge role in these results.

Reegy’s Hybrid Methodology

Reegy follows a third approach, as recommended by the GHG Protocol: The Hybrid Approach.

The concept is simple:

Hybrid carbon accounting combines the best of both spend-based and activity-based approaches. Wherever primary data is available, activity-based calculations are carried out and spend-based estimates are used to fill the gaps.

Our software assesses on a case-by-case basis which approach should be applied so that our customers can get results fast.

We apply the spend-based approach to make quick estimates of the corporate carbon footprint and detect major causes of emissions within the company. We then assess primary data on an activity basis wherever possible to provide the most accurate and reliable carbon footprint calculations.

Our Reegy Eco Hub applies this methodology to help you get carbon insights quicker. Because we know that in order to achieve the 1.5°C goals of the UN, we need to act now!

However, you can also turn this off and base all your carbon accounting solely on activity-based data or spend-based.

Get in Touch with Reegy

We hope you now have a much better understanding of the differences between spend-based and activity-based carbon accounting. We also showed you how Reegy’s hybrid approach gets you more accurate results even faster.

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!

All of our customers get a dedicated climate expert who will help them step-by-step through their decarbonization journey.

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