Introduction
Carbon accounting has played a notable role in making decarbonization a business priority, not just an academic topic. With businesses responsible for 80% of global greenhouse gas emissions, leaders are now fixated on reducing emissions. But here’s the bottom line: carbon is not an accounting problem.
At Terralytiq, we go beyond carbon accounting to look at decarbonization from a business operations perspective. Decarbonization is not an accounting problem, it is a deployment, finance, technology, policy, and behavior problem. By delving into the complex truths and misconceptions of carbon accounting, we discover that positive outcomes like profits and decarbonization – or negative outcomes like losses and emission increases – have nothing to do with accounting and everything to do with business operations, like sales, manufacturing, procurement, and strategy.
The Problem with Carbon Accounting
The Misconception of Carbon Accounting
As we enter 2024, after 2023 broke climate records in all the wrong ways, the current generation of business leaders is confronting three harsh truths about their decarbonization plans. They are far off track from their decarbonization targets, their 2030 deadlines are approaching fast, and their carbon accounting tools cannot close the gap with real-world emission reductions. The true purpose of carbon accounting is like financial accounting. Like money, emissions need to be counted, organized and reported. It exists to report outcomes, not create outcomes. Whether it’s money or emissions, a company’s operations create the outcomes.
The Loop of Overconfidence
The boundary around accounting became blurred, especially amid a venture frenzy that deployed nearly $1.5B into carbon accounting since 2020. Business leaders needed to show they were doing something about climate, investors needed to prove to LPs that their climate thesis was deployable, and tech entrepreneurs were keen to pivot to a mission-driven industry. But in that same period, global emissions continued to reach all-time highs.
The hurried embrace of carbon accounting revealed an ironic twist. Its greatest strength is its ultimate failure: its familiarity gave business leaders false confidence. Faced with the complex imperative to reduce emissions, leaders were quick to believe that overlaying the principles of financial accounting onto carbon would deliver decarbonization. And the marketing of carbon accounting tools was eager to claim as much. This oversimplification resulted in an impossible expectation on carbon accounting, that it could achieve tangible emission reductions it was never designed for.
Shifting the Focus Away From Carbon Accounting
These challenges are where business leaders need solutions to change the trajectory of their emissions. Carbon accounting will not cut it. Not because it is a bad tool, but because it delivers a different service. The two outcomes of carbon accounting are more ESG reports and greater demand for carbon credits, both of which are in existential reckoning with their integrity and accuracy. This topic is a separate issue and an important one to solve, but better measurement methods, emission factor database integrations, and report automation will still not reduce emissions.
Solutions and Steps Moving Forward
Pivoting From Compliance to Action
It’s tempting to believe that “what gets measured gets managed” is a good argument that carbon accounting is a precursor to action. Let’s put a finer edge on that position: carbon accounting is a precursor to compliance. Compliance is good, especially in highly regulated markets. But it is not a precursor to action. The opposite is just as likely. Amidst a sea of ever-evolving climate policies, standards, and requirements, companies risk diverting vital resources to mere reporting rather than concrete action. Carbon accounting’s true place is in the administrative aftermath of proactive steps, not as a precursor. At that point, audit-ready, ERP system-integrated, CDP/SBTi/GHG Protocol/IFRS/TCFD/ISSB/ISO-aligned, AI-enhanced reports might be welcome.
Companies desperately need tools that empower rapid, informed decisions, not just paperwork. In reality – take it from two seasoned consultants – major strategic and investment decisions in big corporations are often made using simple spreadsheet models. They’re built by professionals who understand their industry and focus on only the critical data needed to make big decisions. They don’t waste time and money on the clutter of excessive detail, that’s for accounting and for later.
Opportunities for Change
As business leaders approach the deadline of their decarbonization targets, there is a huge opportunity for climate software to professionalize tech-enabled decarbonization. However, these tools must follow the same principles to go far beyond accounting and provide actionable pathways to decarbonize.
It is time for a new decarbonization SaaS market to emerge. Carbon accounting can continue to perfect its accountancy tools for a compliance-driven market, while new players will build actionable decarbonization solutions focused on implementation. The latter holds the promise of reaching net zero. For both paths, continued investment and growth are necessary to compete. Those who stagnate in a saturated market will fade.
- Carbon Management. Firms that choose the compliance market will continue to invest in perfecting their accounting methods and follow the latest guidance from standards bodies. This approach will work well for investors and entrepreneurs who entered the climate from a prior career in the tech sector, where platforms deliver functional services at the lowest marginal costs.
- Decarbonization SaaS. Software companies that choose the commercial market will continue to invest in business transformation solutions that evolve with the ever-changing frontier of the transition. This approach will work well for the investors and entrepreneurs who truly understand the fundamentals of climate, where platforms deliver actionable services at the greatest marginal value.
Conclusion & Future Prospects
At Terralytiq, we’re convinced that decarbonization SaaS is what will empower our customers to thrive in transition as they are net zero in practice, not just on paper. Carbon accounting and paper offsets will evaporate or shrink into a residual compliance market. The winners in the net-zero transition will already emerge in this decade. They will be the companies that deploy physical climate technologies today, particularly in their value chains where 80-90% of their emissions lie.
