In this blog, we discuss the differences between Scope 1, 2, and 3 and provide information on reporting greenhouse gas emissions – focusing on scope 3.
What are scope 1, 2 and 3 carbon emissions?
The scope 1, 2, and 3 emissions classification system was developed in the 1990s to help organisations understand, categorise and manage their greenhouse gas emissions. It is now widely accepted and used by governments, investors, and other stakeholders to assess the climate impact of organisations.
Scope 1 involves direct emissions owned or controlled by the reporting company.
Scope 2 consists of indirect emissions from the acquisition of energy sources, from a third-party company.
Scope 3 includes all other indirect emissions that occur in the upstream and downstream activities associated with a company.
When do companies have to report scope 1, 2 and 3?
In the UK, scope 1 and 2 emissions reporting are already mandatory for large companies with either £36 million annual turnover, £18 million balance sheet total, or over 250 employees. Scope 3 reporting is not yet mandatory, but it is expected to become mandatory for large companies in the UK by 2025.
In the EU, scope 1, 2, and 3 emissions reporting will become mandatory for large companies with over 500 employees starting in 2024. This includes companies with EU headquarters, as well as companies that do business in the EU.
Now let’s discuss scope 1, 2 and 3 in more detail.
Scope 1 emissions:
Scope 1 of the GHG (Greenhouse Gas) Protocol refers to direct emissions that are owned or controlled by the organisation. Such emissions are generated by a company’s own sources including but not limited to the combustion of fossil fuels, industrial processes, and transportation. These emissions are linked to an organisation’s activities, making them easier to quantify and manage.
Scope 1 emissions can be calculated and divided into four categories:
Stationary combustion is fossil fuel combustion in stationary equipment such as boilers, furnaces, burners, turbines, heaters, engines and similar apparatus. These equipment types are used for heating, cooling, and other industrial processes.
Mobile combustion is generated from the use of transportation vehicles, including aircraft, automobiles, trucks and boats.
Fugitive emissions refer to the intentional or unintentional emissions from leakage and other irregular releases of gases or vapours from pressure-containing equipment (e.g., appliances, storage tanks, pipelines, wells). Common industrial gases include refrigerants and natural gas.
Process emissions are chemical reactions and emissions that arise from industrial processes and on-site manufacturing. The chemical transformation of raw materials often releases greenhouse gases such as CO2, CH4, and N2O.
Certain emissions, such as CO2 from the combustion of biomass and GHG emissions outside the purview of the Kyoto Protocol (e.g., CFCs, NOx, etc), should be reported separately and not incorporated into scope 1.
Scope 2 refers to the indirect emissions associated with the acquisition of energy from external providers, such as a utility company. Although scope 2 emissions are produced where the energy is generated and not by the reporting company, the entity is still indirectly responsible for those emissions.
Examples of scope 2 emissions:
- Purchased electricity or heat
- Steam or cooling by an organisation
The increasing use of hybrid cars and electric cars may result in some of mobile combustion (Scope 1) falling under Scope 2.
Scope 3 emissions:
Scope 3, also referred to as value chain emissions, comprises indirect emissions associated with an organisation’s activity. This does not include any emissions included in Scope 1 and 2. Scope 3 can be split into fifteen categories, divided by upstream in the supply chain and downstream in the value chain.
Upstream emissions occur before the organisation receives its goods and services, such as extraction of raw materials, production, transportation, and distribution along with the waste generated by purchased goods and services.
The upstream categories are:
Category 1: Purchased goods and services – Emissions from the production of goods and services purchased by the company in the reporting year.
- Category 2: Capital goods – These are goods used by the company to manufacture products, provide a service, store, sell and deliver merchandise. Capital goods are durable items including buildings, machinery, and equipment used to produce consumer goods or services.
Category 3: Fuel and energy-related activities – Emissions relating to the extraction, production of fuels, and energy purchased and consumed by the company in the reporting year. Scope 1 and 2 are not included.
- Category 4: Upstream transportation and distribution – Transportation of materials and products from suppliers to a company’s facilities and from third-party warehousing, by land, sea, and air.
Category 5: Waste generated in operations– Waste generated during company operations, only includes emissions from third-party disposal and treatment. Waste disposal emits such as methane (CH4) and nitrous oxide (N2O).
Category 6: Business travel – Emissions from employee transportation for business-related activities by air travel, public transport, taxis, and business mileage using private vehicles.
Category 7: Employee commuting – Emissions from employees commuting to and from work by automobile, bus, rail, and other modes of transportation.
- Category 8: Upstream leased assets – Includes emissions from leased assets such as buildings and equipment of the company in the reporting year that are not already included in the reporting of the companies’ Scope 1 and Scope 2 inventories. It is applicable only to companies that operate leased assets (i.e., lessees).
Downstream activity transpires after the organisation delivers its goods and services. Including the processing and utilisation of purchased products and services, as well as the transportation and distribution of sold products and services. Additionally, it includes the end-of-life treatment of said sold products and services.
The downstream categories are:
- Category 9: Downstream transportation and distribution – Transportation and distribution of sold products in vehicles and facilities not owned or controlled by the company.
Category 10: Processing of sold products – Emissions from processing sold intermediate products by third parties (e.g., manufacturers). Intermediate products are products that require further processing, or inclusion in another product before use.
- Category 11: Use of sold products – Usage, maintenance, and repair of sold products or services by reporting the company to end users.
Category 12: End-of-life treatment of sold products – Disposal or recycling of products sold by the reporting company in the reporting year. It requires assumptions about the end-of-life treatment methods used by consumers which is difficult to measure.
- Category 13: Downstream leased assets – Emissions from the operation of assets that are owned by the organisation (i.e., lessors) and leased to other entities that are not already included in Scope 1 and Scope 2
Category 14: Franchise – Emissions from the operation of franchises not included in scope 1 or scope 2, which companies that grant licenses to other entities to sell or distribute its goods or services in return for payments.
- Category 15: Investments – Largely for investors and companies that provide financial services. Investments fall under the following categories: equity investments, debt investments, project finance, managed investments, and client services.
Scope 3 emissions typically make up more than 90% of a company’s carbon footprint. Addressing these emissions is crucial, not just for the company but for the global effort to transition to a low-carbon economy.
Reporting Scope 1 & 2 Emissions
Scope 1 and 2 emissions are generally easier for a company to report, as they are primarily linked to direct purchases of gas and electricity. Companies usually have the necessary data to calculate these emissions in greenhouse gas equivalents (GHGs). This data may be housed in various departments like procurement, finance, facilities management, or sustainability.
Why Focus on Scope 3 Emissions?
Various factors are pushing companies to pay more attention to their Scope 3 emissions:
- ESG Reporting Standards: Compliance with ISSB (International Sustainability Standards Board) issued its sustainability disclosure standards and TCFD (Task Force on Climate-related Financial Disclosures) frameworks often involves full disclosure of Scope 3 emissions to understand risks in high-emitting sectors.
ESG Ratings: Companies aim to improve their ESG scores, like CDP (Carbon Disclosure Project), to attract investors.
Investor Demands: ESG metrics are increasingly being used in investment decisions, and complete greenhouse gas disclosure, including Scope 3, is a key criterion.
- Supply Chain and Clients: Businesses frequently receive requests to disclose their emissions data from suppliers and clients who are also looking to enhance their own Scope 3 visibility.
- Consumer Preferences: Companies aim to show environmental responsibility to attract environmentally conscious customers.
For more information on reporting standards, read our blogs on the updated ISSB standards.
- Setting Targets: To establish credible net-zero goals, companies need a comprehensive Scope 3 emissions inventory.
Cost and Emissions Management: A detailed Scope 3 review can pinpoint areas for cost and emissions reductions in the supply chain.
- Regulatory Preparedness: Companies anticipate that future environmental laws will likely require Scope 3 reporting.
Scope 3 Emissions Reporting Update
The UK’s Transition Plan Taskforce (TPT) is emphasising the need for companies to clarify their carbon emissions and plans for becoming net-zero. Starting in 2023, the UK Government will mandate large companies to be open and precise about their Scope 3 emissions accounting.
Additionally, on July 31, 2023, the European Commission officially put the European Sustainability Reporting Standards (ESRS) into effect. These guidelines outline how companies should disclose their sustainability impacts, opportunities, and risks, and are a crucial component of the Corporate Sustainability Reporting Directive (CSRD). The implementation of ESRS represents a major move towards comprehensive sustainability reporting. Companies will be required to include Scope 3 emissions in their value chain sustainability reports.
Due to external factors like ESG standards and internal needs such as setting net-zero goals, there is an increasing need for companies to report their Scope 3 carbon emissions. CRP’s team of carbon management experts has been working with a number of clients, using the dc LCA Certificate to help them measure and reduce their Scope 3 emissions.
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