19 March 2026
Aligning the math of carbon accounting
Why has carbon accounting moved to the forefront of global climate policy dialogue?
By Kevin Birn, Marie-Louise du Bois, Roman Kramarchuk, and Carlos Pascual
This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.
Highlights
Carbon accounting is the language behind emissions performance and carbon markets. Often taken for granted, it defines climate policy exposure, compliance costs, carbon competitiveness and public perception. In short, it is a big deal.
Harmonization to create a common language has pushed carbon accounting to the forefront of climate dialogue. Three key critical developments in 2026 — the implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM), revisions to the Greenhouse Gas Protocol and new industry-driven, product-level carbon accounting efforts — have created pressure to address carbon accounting issues.
Getting this right would align decarbonization incentives with economic benefits. Getting this wrong could negatively impact trade, market access, investment and decarbonization, with knock-on effects on affordability and security.
Carbon accounting — the math of emissions — underpins the language of carbon markets and emissions performance. It is how emissions are calculated, reported and compared. Over the past year, carbon accounting has moved from a back-office exercise to the foreground of global climate dialogue. Proposed changes to carbon accounting standards and new regulations impact market access, trade, investment, competitiveness and decarbonization.
Aligning the math of carbon accounting
There has been a growing realization that existing carbon accounting standards are too flexible, with aspects subject to interpretation or different methodological choices. This has led to inconsistencies and incomparability of emissions. Without comparability, buyers and sellers cannot differentiate, trust and transact on varying emissions profiles. Consequently, companies with lower-carbon products are unable to benefit, and those that could improve their carbon competitiveness are not incentivized to do so. This hinders the effectiveness of carbon markets and the development of carbon-differentiated markets more broadly.
Governments and industry share an interest in a more consistent approach to carbon accounting that can reduce trade friction, increase comparability and give market participants the confidence in emissions data they need to invest in low-carbon products.
Three key developments are driving carbon accounting to the forefront and have material implications for the future of carbon differentiation and commodity markets.
Carbon Border Adjustment Mechanism implementation
The EU’s Carbon Border Adjustment Mechanism places a carbon cost on imports to Europe based on carbon intensity and relative differences in carbon prices. The EU prices carbon internally through its Emissions Trading System, which requires domestic power and industrial facilities to cover their emissions with allowances. This raises costs for European manufacturers relative to competitors in countries without comparable measures. CBAM seeks to address this imbalance by applying an equivalent carbon cost to selected imported goods, ensuring that products entering the EU market and domestic producers face the same carbon price.
On Jan. 1, 2026, the EU’s CBAM started charging a fee on imports based on the difference in carbon intensity and relative carbon price. This policy now affects steel, aluminum, cement, fertilizers, hydrogen and electricity, with an expansion to other products planned.
Assessing the carbon intensity of commodity imports is central to CBAM, which is defined by a specific accounting methodology. Under CBAM, manufacturing and industrial processing, such as smelting iron into steel, are covered. However, there are some unique treatments and inconsistencies. For example, emissions associated with power use are counted for fertilizer and cement imports, but not for iron, steel, aluminum or hydrogen. The policy tool’s focus on process emissions means upstream feedstock production emissions are out of scope. Yet the greenhouse gas intensity of feedstock can vary, and properties such as feedstock quality influence the intensity of processing.
These nuances, in addition to the headline price and the carbon pricing policy of the origin nation, impact import compliance costs, influencing product competitiveness and market share. Any uncertainty around these parameters can hamper market activity. For example, as CBAM implementation on Jan. 1 approached, the lack of precision in default carbon intensity values led market participants to delay negotiations and deals. Then, as the European Commission introduced the possibility of a CBAM exemption for fertilizers, uncertainty around costs and the durability of CBAM stifled European fertilizer trade ahead of the spring planting season. Broader uncertainty in fertilizer costs may influence farmers’ purchasing decisions, potentially leading to reduced fertilizer applications, which could inadvertently impact crop yields.
Some of the EU’s major trading partners have raised concerns over the protectionist nature of CBAM and its impact on developing economies. Criticism made it into the final presidency report of the 2025 UN Climate Change Conference (COP30), indicating further debate. Other countries signaled an interest in creating their own version of the policy tool, and in the next two years, Norway and the UK are set to introduce their own CBAMs. While the UK's version shares similarities with the EU model, it differs in its compliance threshold, sector coverage and default emissions intensity values. If CBAM-like policies are pursued internationally without alignment on the underlying accounting and reporting, trade could be negatively affected.
GHG Protocol modernization
The GHG Protocol is the most widely used carbon accounting standard. It underpins corporate reporting and is currently being revised. Significant changes could lead to the restatement of corporate emissions for prior years and to changes in the relative understanding of emissions performance.
The GHG Protocol has issued the first round of feedback on proposed changes to Scope 2 guidance. Future consultations are expected, which will cover the GHG Protocol's corporate standard (Scope 1) and corporate value chain standard (Scope 3).
The scope of some potential changes is notable. The proposed update to Scope 2 guidance could introduce hourly matching and geographical deliverability for companies’ grid electricity claims. Under the proposal, for renewable certificates to count when a facility uses grid power, the renewable power must come from a nearby source during the same hours the electricity is being consumed. This change would be significant for voluntary REC markets and virtual power purchase agreements, which have supported clean energy projects globally. Achieving hourly matching could require more complex combinations of clean energy technologies, such as batteries to complement intermittent renewables. Meanwhile, locational matching could impact demand for renewable projects’ generation in regions far from demand centers.
In North America, this reframing of Scope 2 may significantly reshape REC markets, potentially leading to further market fragmentation. While the definition of a deliverable market boundary in the US has yet to be determined, proposed changes could be material, given the concentration of voluntary clean energy procurement in Texas.
Overall, discussions point to disagreement over the definition of physical deliverability within electricity procurement and market-based accounting. The outcome could significantly reshape the procurement of incentives and market behavior.
Industry-driven, product-level carbon accounting efforts
There is a growing realization that a “green premium” — a higher price for lower-carbon products — has yet to consistently emerge. Many corporate strategies and government policies were developed under the assumption that some form of carbon-based competition would take hold in the market. Without this signal, companies have struggled to allocate capital toward larger-scale decarbonization projects and the development of lower-carbon products.
Inconsistencies in product-level carbon accounting are a barrier to realizing this green premium. Existing standards and best practices were designed to be intentionally vague to ensure emission estimates were consistent over time and to be flexible enough for applicability across multiple sectors. These approaches helped accelerate corporate reporting and emissions disclosure. Today, however, the market needs less flexibility and more uniformity. This will ensure better comparability across similar products and different sectors, helping to generate changes in consumer behavior and support greater consistency in global carbon policy.
Product-level consistency is key as this is how companies compete and nations trade globally. The current lack of comparability means buyers and sellers cannot differentiate products based on emissions performance. There are limited financial incentives for lowering carbon intensity or for investing in improving the carbon competitiveness of products. Companies that have committed to cutting emissions, assuming the market would value lower carbon, face an untenable reality: Their obligation to protect shareholder value could be at odds with their commitment to lower emissions.
The recognition of this challenge contributed to the creation of a new industry association, Carbon Measures, to develop a new framework for product-level carbon accounting, as well as the decision by the International Organization for Standardization and GHG Protocol to seek greater alignment between their standards.
Looking forward
The implementation of CBAM, revisions to the GHG Protocol and creation of new initiatives such as Carbon Measures have highlighted carbon accounting and created pressure to address these issues now. The potential for solutions exists, but so does the potential for these efforts to run at odds with one another.
Greater alignment in carbon accounting standards would build the trust needed to incorporate carbon into market transactions, aligning decarbonization and economic incentives. Experience shows that product-level carbon accounting is essential to differentiate products and stimulate investment in decarbonization. Data quality, transparency on emissions allocation to coproducts (e.g., oil and associated gas), consistency in system boundaries and comparability in units are part of the fabric needed to make a market work.
The consequences of getting this wrong are profound, from a perpetuation of limited decarbonization incentives to a dislocation of trade, with knock-on effects on affordability and security.
Harmonization to create a common language will be the challenge in 2026. Differences of opinion could prove too strong to find consensus. But the goal will be to make 2026 the year in which action accelerates to realign carbon accounting, ensuring a transparent, equitable basis to measure and report emissions across regions.