Carbon accounting is a general term for a process of defining and tracking a company or nation's carbon footprint, or the amount of greenhouse gas emissions that are released into the atmosphere. There are four well-recognized methods of carbon accounting — the Intergovernmental Panel on Climate Change (IPCC) method, the European Union Renewable Energy Directive, the Clean Development Mechanism (CDM) method and Voluntary Carbon Standard (VCS) carbon accounting. Each approach attempts to deal in a broad and detailed sense with the complex issues of deforestation and reforestation emissions for greenhouse gas accounting.
The IPCC method is focused largely on land use on a national basis. One of the downfalls of this is that the IPCC accounting process places emissions from biomass energy, which have net zero contributions to greenhouse gas totals, as a change in natural resources of a nation including agriculture, forestry, and so on. Many biomass emissions, however, are a part of what is known as the informal economy, not accounted for in national energy consumption statistics. Also, several developing nations that rely largely on forest products for energy do not participate in the 1997 Kyoto Protocol aimed at curtailing global warming, upon which IPCC carbon accounting practices are based.
The European Union Directive attempts to account for energy consumption overall, including from renewable resources, as well as new technologies that are more energy efficient and less polluting. Problems with the EU methodology center around a lack of transparency in the rules and how they are interpreted by various bodies in the EU that authorize compliance with the Kyoto Protocol. Standards established by the IPCC are seen as the appropriate base for carbon accounting methods by the EU, but have not been incorporated into the EU Directive in such a way that they provide clear guidance to industry.
Clean Development Mechanism carbon accounting is only focused on reforestation and afforestation, the process of converting bare or previous farm land into forest. It is entirely based on land use, with projections into the future, and assumes that carbon sequestering by forests is only a short-term, temporary removal of emissions gasses, with a five-year time span in which they are likely to be released into the atmosphere once again. Because CDM calculations involve annual readings that are averaged over five-year periods, they tend to be a less accurate method of carbon accounting on a yearly basis.
The Voluntary Carbon Standard approach is a sort of catchall method that is used for otherwise non-compliant and voluntary reductions of greenhouse gas emissions. It utilizes CDM calculations to average out yearly cycles. It is the one approach that does not strictly comply with standards set by the United Nations Framework Convention on Climate Change (UNFCCC).
Neither the UNFCCC or the Kyoto Protocol detailed how carbon trading would be undertaken to comply with emissions standards. Both carbon sequestration and the trading of carbon emissions credits between nations and industries were carbon accounting methods that involved many gray areas in the process. Using real-time carbon accounting, where carbon emissions are calculated, for instance, as forest timber is harvested then replanted, is the most accurate accounting method for what is taking place. The costs of such accurate and up-to-date calculations, where credits and debits must constantly be worked into the balance sheet, create inventory systems that are impractical and too costly to maintain. For this reason, the carbon accounting process tends to look at only broad areas of change, such as whole forests and averages based over several years.