Why calculating your company’s carbon footprint matters

With the focus on climate issues and potential policy approaches, businesses need to know their carbon footprint and how they may be affected.

In brief

• Company environmental, social and governance policy and reporting has become increasingly important.
• Climate change and climate risk have taken center stage, and companies need to understand their carbon footprint to properly disclose risks and opportunities.
• Close examination of both direct and indirect carbon emissions in a company’s supply chain can help them measure and understand their carbon footprint.

Company environmental, social and governance (ESG) policy and reporting has become increasingly important. Investors are weighing ESG considerations when making investment decisions, and consumers and employees seek additional engagement and transparency on these issues. Climate change and climate risk have taken center stage in these discussions, and companies need to understand their carbon footprint to allow them to appropriately disclose risks and opportunities.

This article examines the sources of carbon dioxide (CO2) emissions throughout the US economy and highlights issues companies need to think about when determining their carbon footprint. It uses the EY Carbon Modeling Tool to show how a close examination of both direct and indirect carbon emissions embedded in a company’s supply chain can help companies measure and understand their carbon footprint.

Direct vs. indirect carbon emissions

Included in a company’s carbon footprint are both its direct and indirect carbon emissions. Direct carbon emissions are emissions incurred directly by the company via heating/cooling, company-owned vehicles, etc. Indirect carbon emissions are those emissions embedded in a company’s supply chain.

Direct carbon emissions as a share of a company’s total carbon footprint (i.e., the sum of its direct and indirect emissions) can vary significantly across industries.

For example, while the average carbon footprint for a company in electric power generation is 97.8% direct emissions (and 2.2% indirect emissions), the average carbon footprint for a company in wholesale and retail trade is only 1.3% direct emissions (and 98.7% indirect emissions).

Emissions sources — the hot spots

While concentrated more heavily in some industries, carbon emissions occur throughout the US economy. Industry is responsible for 71% of these emissions, while residential petroleum and natural gas emissions, light-duty vehicles and government functions are responsible for the remaining 29%. Electric power generation accounts for nearly half of industry emissions, or 1,776 of the total 3,756 million metric tons (MMT) of industry emissions. Transportation and manufacturing each account for nearly a quarter of industry emissions.

The carbon footprint of some industries stems primarily from their use of fossil fuels. For other industries, it arises primarily from carbon embedded in the goods and services they purchase from other businesses. Carbon is embedded in the goods and services a company purchases when its suppliers use fossil fuels in the production of those goods and services.

The industry categories of electric power generation, transportation, manufacturing, agriculture, mining and construction have the highest direct emissions share. For the electric power generation and transportation industries, more than 90% of their carbon footprints result from their use of fossil fuels. In contrast, all of the other industry categories have a majority of their carbon footprint embedded in their supply chains. Within each industry, carbon footprints vary from company to company.

Comparing different industries that contribute similar overall amounts of emissions to the economy reveals how varied emissions sources can be. It also illustrates why strategies for addressing emissions need to be tailored to the specifics of each industry and company.

Notably, the carbon footprint of a company is often segmented into Scope 1, Scope 2 and Scope 3 emissions. This segmentation follows the Greenhouse Gas (GHG) Protocol typically used in ESG reporting. 

Case studies — two hypothetical companies

An examination of two hypothetical companies of the same size ($1 billion in annual sales) but in different industries — the truck transportation industry and the aluminum refining and production industry — further illustrates how greatly carbon footprints can vary based on specific company characteristics.

These two hypothetical companies have economic characteristics and carbon emissions representing the average of their respective industries. The estimates are derived from the EY Carbon Modeling Tool, which includes data and modeling of the economic characteristics and carbon emissions of more than 400 industries, as well as supply-chain modeling.

Next steps

The increasing importance of ESG to consumers, employees and investors, as well as the increasing attention policymakers are paying to carbon mitigation policies, makes it more vital than ever for companies to understand their carbon footprint. Knowing the size of a company’s carbon footprint and its composition helps quantify its exposure from ESG reporting and carbon-related policy changes as well as identify potential focus areas for mitigation strategies. Company-specific financial modeling and scenario planning can be a helpful tool as companies work through these issues, engage with consumers, employees, investors and policymakers and prepare for a world with rapidly developing ESG reporting, carbon mitigation policies and environmental challenges.