The difference between Scope 1, 2 and 3 emissions
If you don’t measure, it could be a challenge to manage – and that maxim could be applied to a company’s carbon emissions.
But measuring greenhouse gas emissions can be far from straightforward, which is one reason why the Greenhouse Gas Protocol (GHGP) (1) was developed by the World Business Council for Sustainable Development and the World Resources Institute.
The GHGP covers the seven direct greenhouse gases under the Kyoto Protocol:
Carbon dioxide (CO2)
Methane (CH4)
Nitrous oxide (N2O)
Hydrofluorocarbons (HFCs)
Perfluorocarbons (PFCs)
Sulphur hexafluoride (SF6)
Nitrogen trifluoride (NF3) (2)
The GHGP has helped define how companies manage and report greenhouse gas emissions (GHG) since its first publication more than 20 years ago. The protocols have been developed in that time, notably the establishment of three categories of emissions – Scope 1, Scope 2 and Scope 3. (3)
These are key parts of the comprehensive global framework that is standardised to measure and manage emissions from private and public sector operations, value chains, products, cities, and policies.
The GHG Protocol Corporate Accounting and Reporting Standard was developed and tested with participation from businesses, government agencies, NGOs, and academic institutions from around the world.(4 & 5)
Backed by Government
The GHGP is recognised by the UK government as an independent standard for reporting greenhouse gases and while use of the standards is voluntary, it is seen as an essential element in the mandatory Streamlined Energy and Carbon Reporting (SECR) regulations. (6)
The SECR requires annual reporting and disclosure of energy and carbon information within the accounts and came into effect on 1st April 2019.
These requirements affect:
All UK incorporated companies listed on:
the main market of the London Stock Exchange
a European Economic Area market
or whose shares are dealing on the New York Stock Exchange or NASDAQ
Unquoted large companies incorporated in the UK, which are required to prepare a Directors’ Report under Part 15 of the Companies Act 2006
Large Limited Liability Partnerships (large is defined as per the existing framework for annual accounts and reports, based on sections 465 and 466 of the Companies Act) (7)
The requirements mean that company annual reports now need to include more detailed reporting on energy usage, energy efficiency and greenhouse gas emissions. The government is also encouraging all other companies to adopt similar reporting structures.
Benefits of the scopes
The framework of the three scopes should help to avoid the “double-counting” of emissions and organisations can separate GHG into those that they control and those that they can influence. The scopes are used in accounting procedures.
Use of the three scopes might be helpful in the development of net-zero plans, financial reporting and behaviours as people within businesses become more aware of their own roles within companies that might be increasing their ESG focus.
Net-zero facts
As of January 2023, large companies are required to publish detailed information on sustainability performance, including scope 1-3 emissions, by the EU Corporate Sustainability Reporting Directive (CSRD) (8)
Pressure is on companies to improve emissions reporting; the EY Global Survey indicated that 99% of investors lean on company Environmental, Social and Governance (ESG) disclosures when deciding where to put their money (9)
Scope 1: direct emissions from owned or controlled sources
This will include all the emissions from the activities of an organisation or under their control. Examples include:
Fuel burned in owned or controlled boilers and furnaces
On-site gas powered heating
Fuel used in vehicles
Emissions from chemical production in owned or controlled process equipment
Not included are direct CO2 emissions from the combustion of biomass, which is reported separately and any GHG emissions not covered by the Kyoto Protocol, such as Chlorofluorocarbons (CFCs) and Nitrogen Oxides (NOx), which not reported under Scope 1 but a company can do so separately.
Scope 2: indirect emissions from the generation of purchased energy
This covers indirect emissions from electricity steam, heating and cooling purchased and used by a company. These emissions are created during energy production by the supplier. This covers all electricity usage, including:
Electricity to charge EV fleets
Lighting buildings
Electric heaters
All other electricity used directly
As well as usage, Scope 2 emissions will also depend on the proportion of clean energy in the National Grid. Generating electricity with solar panels will reduce a company’s Scope 2 emissions.
Scope 3: All indirect emissions that occur in the value chain
These are all emissions from sources that the company does not own or control, covering areas associated with, for example, business travel, procurement, waste and water. These emissions are those not included in Scope 2 and extend the reach to account for GHG emissions through the entire value chain of the reporting company, including both upstream and downstream emissions.
Upstream activities or cradle-to-gate emissions
This includes all emissions that occur in the life cycle of a material/product up to the point of sale by the producer.
Downstream activities
Includes emissions produced in the life cycle of a product after its sale by the producer, including distribution and storage, product use and end-of-life.
We show a detailed breakdown of these two categories below.
Scope 3 emissions can often contribute the greatest share of a company’s carbon footprint, so the measurement and reporting of them can be seen as important to the sustained development of effective carbon reduction policies. The process might also enable companies to identify GHG reduction opportunities, track performance, and engage suppliers at a corporate level.
Scope 3 is designed to help with comparisons of a company’s GHG emissions over a period of time but is not designed to support comparisons between companies.
Scope 3 challenges
Not surprisingly, measuring GHG emissions isn’t easy, and nailing down the Scope 3 areas can be even more challenging because of the number of parties and interests involved.
There are 15 separate reporting categories, 8 upstream and 7 downstream, with a few that are relevant to both upstream and downstream, such as transportation and distribution. The categories are:
Upstream
Purchased goods and services
Capital goods
Fuel from energy related activities
Transportation and distribution
Waste generated in operations
Business travel
Employee commuting
Leased assets
Downstream
Transportation and distribution
Processing of sold products
Use of sold products
End-of-life treatment of sold products
Leased assets
Franchises
Investments (10)
Benefits of Scope 3
Companies might be better able to potentially identify and perhaps more fully support suppliers who could be active in developing sustainability practices. The Scope 3 process might also provide assistance in helping companies identify potential areas where the energy efficiency of suppliers’ products could be improved, which could strengthen the relationship for mutual benefit.
Scope 3 might also be an opportunity to engage with employees and work together to help reduce emissions from business travel and commuting.
‘Most significant’ GHG emissions[TG1]
The GHG Protocol advises that Scope 3 data collection will involve engagement with internal departments such as procurement, energy, manufacturing, marketing, research and development, product design, logistics, and accounting.
It recommends prioritising data collection efforts on activities expected to have the most significant GHG emissions, offer the most significant GHG reduction opportunities, and are most relevant to the company’s business goals.
Companies may seek higher quality data for activities that are significant in size; that present the most significant risks and opportunities in the value chain; and where more accurate data can be easily obtained.
And they can also decide to rely on relatively less accurate data for activities expected to have insignificant emissions or where accurate data is difficult to obtain.
The three scopes might help companies to lay foundations for carbon reduction strategies, with the associated financial savings. Within the wider remit, companies might be able to achieve sustainable reductions both within their operations and across global value chains. The three scopes can also help to provide more granular, useful data for investors.
Sources:
1 https://ghgprotocol.org/about-us
2 https://naei.beis.gov.uk/overview/ghg-overview
3 https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf
4 & 5 https://ghgprotocol.org/corporate-standard ; https://ghgprotocol.org/sites/default/files/2022-12/Scope%203%20Detailed%20FAQ.pdf
& https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464
9 https://www.ey.com/en_uk/assurance/how-can-corporate-reporting-bridge-the-esg-trust-gap
10 http://pdf.wri.org/ghgp_corporate_value_chain_scope_3_standard.pdf