What are scope 3 emissions?
Scope 3 emissions refer to emissions produced in the value chain, both upstream and downstream. These indirect emissions are distinct from direct emissions produced by owned or controlled sources. The purpose of calculating scope 3 emissions is to create a more complete and accurate picture of an organization’s overall emissions, accounting for the reach and influence that all organizations have both up and down the supply chain. Because scope 3 emissions result from the value chain, scope 3 accounting entails considerable collaboration with suppliers and other value chain members to obtain accurate data. Supplier engagement is consequently a key part of scope 3 emissions management.
Given the wide range of scope 3 emission sources, scope 3 often makes up the vast majority of a company’s overall emissions profile. In fact, the World Resources Institute (WRI) estimates that, on average, scope 3 emissions account for 75% of a company’s total GHG emissions. This figure jumps to more than 90% of overall emissions for the financial services, transport OEMS, real estate, construction, metals and mining, and agricultural sectors. Investors, government regulators, and other groups have consequently shone a spotlight on scope 3 emissions in recent years, with many calling for increased scrutiny and more detailed, transparent reporting on these categories of emissions.
The Greenhouse Gas Protocol (GHG Protocol)
Created by the WRI and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol sets an international standardized framework for GHG emissions management and reporting. The GHG Protocol standards established the scope 1, 2, and 3 system that is in wide use today and has been utilized by other frameworks and organizations including CDP, the TCFD, GRI, GRESB, and global government agencies.
Scopes 1, 2, and 3
To help improve transparency and manage both direct and indirect emission sources, the GHG Protocol’s Corporate Standard introduces the concept of “scopes” of emissions.
Scope 1 emissions include direct GHG emissions from sources that are owned or controlled by the entity. Examples include emissions from fossil fuels burned on-site, emissions from entity-owned vehicles, and fugitive emissions from refrigerants.
Scope 2 emissions include indirect GHG emissions from the generation of purchased electricity, heating and cooling, or steam generated off-site.
Scope 3 emissions are indirect GHG emissions from sources not owned or directly controlled by the entity but related to the entity’s activities. In other words, scope 3 emissions are emissions that occur in the value chain and are not already included in scope 2. For example, employee travel and commuting, transmission and distribution (T&D) losses associated with purchased electricity, leased space, vendor supply chains, and use of sold products are sources of scope 3 emissions.
Scope 3 categories
Scope 3 emissions can further be broken down into fifteen categories, as defined by the GHG Protocol. This includes eight upstream emission categories (emissions related to purchased goods and services, e.g. supplier emissions) and seven downstream emission categories (emissions related to sold goods and services, e.g. customer emissions).
The upstream categories include:
- Purchased goods and services: Lifecycle emissions of purchased goods and services up until point of receipt by the reporting company. May include everything from extraction of raw materials and agricultural activities to electricity consumed by upstream activities.
- Capital goods: Emissions from the production of physical assets used to produce goods and services, such as facilities, equipment, and vehicles.
- Fuel- and energy-related activities: Emissions from the production of fuels or energy purchased and consumed by the reporting company. Note that this category excludes emissions that occur when the reporting company directly consumes energy, as these are already accounted for in scopes 1 and 2.
- Upstream transportation and distribution: Emissions from the transportation and distribution of purchased products. This category excludes emissions from transportation and distribution in vehicles owned by the reporting company.
- Waste generated in operations: Emissions from third-party disposal and treatment of waste generated in owned or controlled operations, including solid waste and wastewater.
- Business travel: Emissions from the transportation of employees for business-related activities in vehicles owned or operated by third parties. This excludes transportation in owned vehicles, which are accounted for in scopes 1 and 2.
- Employee commuting: Emissions from the transportation of employees between their homes and worksites. May include emissions from remote work.
- Upstream leased assets: Emissions from the operation of leased assets.
The downstream categories include:
- Downstream transportation and distribution: Emissions from the transportation and distribution of goods and services sold, including retail and storage.
- Processing of sold products: Emissions from the processing of sold intermediate products by third parties, occurring after sale by the reporting company.
- Use of sold products: Emissions from the use of goods and services sold, including use by either consumers or business customers.
- End-of-life treatment of sold products: Emissions from the disposal and treatment of products sold, such as landfilling and incineration.
- Downstream leased assets: Emissions from the operation of owned assets that are leased to other entities.
- Franchises: Emissions from the operation of franchises that are not already included in scopes 1 or 2.
- Investments: Emissions associated with investments that are not already included in scopes 1 or 2, primarily applicable to investors and financial institutions.
Dividing scope 3 emissions into categories helps streamline the scope 3 data collection and calculation process and allows reporting companies to provide greater transparency in a standardized format. This level of insight also gives companies the information they need to identify areas of their value chain that may be most suitable for mitigation.
Scope 3 calculation methods
Each scope 3 category has its own rules around how to calculate emissions, so we recommend reviewing the GHG Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard for details on each category. ADEC ESG Solutions also provides a useful guide on Carbon Accounting Methods for Estimating Scope 3 Emissions and how to better understand your GHG inventory.
For instance, when calculating scope 3 emissions for capital goods (category 2), you’ll want to account for upstream emissions from the production of capital goods purchased in the reporting year. Emissions from the use of those goods should be accounted for in either scope 1 or scope 2, instead of scope 3.
On the other hand, emissions from employee commuting (category 7) should include emissions from the transportation of employees between their home and worksites—as well as scope 1 and 2 emissions of third-party transportation providers.
For example, when calculating emissions from employee remote work—an optional component of employee commuting (category 7)—we may use the following formula:
(Average U.S. household energy usage per day) x (Average working days per month) x (Number of employees working remotely) x (Corresponding electricity emission factor)
In this example, we assume the following factors:
Average household energy usage per day = 29.5 kWh = 0.0295 MWh
Days of remote work per month = 20
Number of employees working remotely = 50
Emission factor for electricity* = 818.3 lb CO2/MWh
Therefore, our calculation is as follows:
tCO2 per month = 0.0295 MWh x 20 x 50 x 818.3 lb/MWh x 0.0005 ton/lb
tCO2 per month = 12.07
Companies both new to and familiar with the ESG disclosure process will encounter the topic of scope 3 emissions as they design and report on their ESG programs. In an effort to account for emissions-related risks, both government regulators and investors have begun asking for scope 3 reporting—a trend that we expect to continue.
To learn more about how ADEC ESG Solutions can help you manage your emissions, set science-based targets, and create thoughtful and strategic carbon mitigation plans, talk to our team today.