What is the spend-based method, you ask?
The spend-based method is used to assess the greenhouse gas emissions arising from a purchased good or service based on the amount spent on it by a person and/or a company.
A bit of spend-based background
It is derived from Environmentally Extended Input-Outputs (EEIO) models. This method is based on Input-Output analysis, a macroeconomic analytical framework developed by Professor Wassily Leontief in the late 1930s to understand the interdependencies between different economic sectors or industries and to estimate the impacts of positive or negative economic shocks. This analysis is based on input-output tables which depict rows and columns of data that quantify the supply chain for all the sectors of an economy.
Three types of impacts are modelled in an Input-Output analysis: direct, indirect and induced impacts. Professor Leontief extended this framework to cover environmental impacts in the 1970s and won a Nobel Prize for his contribution to economics in 1973. Thanks to this framework, multiple input-output tables (think of them as the ‘production recipes’ for a good or service) are now publicly available and databases of “financial emissions factors” have been created. These factors convert the amount spent on buying a specific good or service into greenhouse gas emissions.
So, how does EEIO work?
The basic concept of the EEIO is to use an input-output matrix that shows flows, usually monetary, between economic sectors in order to evaluate the upstream environmental impacts associated with downstream economic consumption and the embodied environmental impacts in traded goods. Let’s have a look at how the Environmentally Extended Input-Output (EEIO) method would work for a business buying machinery and equipment:
The first step is to identify and calculate all the inputs required from all economic sectors to create £1 of output of machinery and equipment (e.g. £x amount of fabricated metal, £x of insurance). This is where Professor Leontief’s work comes in handy.
Then the emissions for each of these inputs (e.g. metal, insurance etc) are calculated.
With these two figures, the financial emissions factors, amount of emissions per £1 of output of machinery, can be calculated (e.g. Let’s say, 0.1 kgCO2e per £ spent).
Finally, you measure your total emissions by multiplying the financial emissions factors by the total amount spent (e.g. So, when your company spends £100,000 on machinery, that would be 10,000kg CO2e).
EEIO provides a rapid mechanism for a person or a company to understand the emissions associated with the things they buy.
The defence: 3 redeeming qualities of the spend-based carbon method
Spend-based data is easy to get
Companies often struggle with data collection when they want to assess their carbon footprint. With the spend-based method, data can easily be found by companies. Financial spend is already collected for accounting purposes. It is reasonably well organised and at a company’s fingertips, allowing organisations to rapidly assess their carbon emissions.
The spend-based method is comprehensive
Input-output models have been built to deal with economic flows’ complexity and interdependencies. This means financial emissions factors are quite comprehensive, taking into account a multitude of inputs (and therefore emissions) from different economic sectors.
The spend-based method helps to prioritise efforts
Using the spend-based method helps organisations to rapidly identify carbon hotspots (spend areas that are associated with the highest carbon emissions). This is useful to prioritise decarbonisation efforts and focus on suppliers that have a large impact on carbon emissions.
The prosecution: 3 shocking revelations about the spend-based carbon method
The spend-based method is averagely average
Spend-based methods uses average of averages to be able to distil the complexity of all those economic flows. It will not be using accurate data based on a specific transaction between two companies. Instead, it is based on industry-wide averages. It will therefore not give an accurate measure of a company’s emissions associated with purchasing goods and services. You can read more about using average data in carbon accounting here.
The spend-based method puts too much weight on price
Image you did a really good deal with your supplier, after a hardcore negotiation, and manage to reduce the price. If you use the spend-based method to measure the carbon emissions associated with this purchase, the lower price you negotiated would lead to a lower carbon footprint. Yet the quantity would remain the same. It would not accurately reflect your actual carbon emissions.
The spend-based method isn't action-oriented
The point of assessing your carbon impact is to do something about it. But using the spend-based method gives you insufficient detail to guide or track carbon reduction actions. To reduce your carbon emissions with the spend-based method, you could buy less (which is, to be fair, a carbon-positive action, but not necessarily one your business can undertake), buy different types of things (not always possible unless you change your business model), or pay less for the same good/service (which in reality would not impact your carbon emissions).
All carbon accounting models are wrong, but all have a purpose
The spend-based model is not the only carbon accounting model to have its benefits and flaws. There are three alternative model to assessing emissions:
Proxy models for usage (e.g. the average fuel used by a typical business vehicle, or average power used per sqm of a typical building).
Actual usage (e.g. units of measurement for a specific asset or activity, like kWh of energy, distance travelled or litres of fuel used) set against typical carbon intensities.
Supplier-specific such as assigning an emissions value to how much something has been used based on who produced or provided it (e.g. a particular supplier’s energy provision, or the embodied carbon in one producer’s laptops).
All of these methods, including the spend-based method have something in common: none are really measuring carbon emissions, they are always modelling them. And all these methods have their use when assessing a business’ carbon footprint.
How does xtonnes manage carbon emissions modelling?
At xtonnes, we’ve always been a bit suspicious of the spend-based method, because we are very attached to action-driven data. It is why our software allows you to use different methods to assess your carbon emissions.
Nevertheless, the spend-based method is a great screening tool for deciding where to put data collection efforts when measuring Scope 3 emissions (both to inform supply chain mapping and to provide early insights during new product development).
It should be used with other methods to maximise impact. Using different methods is always challenging but necessary– so that’s something we’ve worked hard to incorporate into the xtonnes software!