The Ultimate Guide to Understanding Scope 1, 2, and 3 Emissions

Defining Scope 1, 2, and 3 Emissions

What is a carbon emission?

Carbon emissions are the release of carbon dioxide gas and other greenhouse gasses into the atmosphere from burning fossil fuels like coal, oil, and natural gas. When we burn fossil fuels for energy, carbon that has been stored underground for millions of years is released into the air as carbon dioxide. This leads to a buildup of carbon dioxide in the atmosphere, which traps heat and causes global warming.

The Greenhouse Gas (GHG) Protocol delineates a company's carbon emissions into three categories based on the source of the emissions and how that source is controlled. The three categories of GHG emissions are referred to as Scope 1, Scope 2, and Scope 3.

Scope 1 emissions

Scope 1 comprises direct emissions from sources owned or controlled by the company. These sources include

• Stationary combustion of fuels in boilers, furnaces, turbines, heaters, and incinerators
• Mobile combustion in company owned/operated vehicles, ships, aircraft, and transit
• Chemical reactions and fugitive emissions from refrigerants, methane leaks, and accidental releases

For example, a restaurant's Scope 1 emissions would be the natural gas used for its stoves and ovens. When the restaurant's cooks turn on a gas stove or oven to prepare food, the natural gas is burned on-site, releasing carbon emissions directly into the atmosphere. Because these emissions occur from a source that the restaurant owns and controls on its property, they qualify as Scope 1 emissions.

Scope 2 emissions

Scope 2 encompasses indirect carbon emissions from the company's purchase of electricity, steam, heating, and cooling. Although generated offsite by utility providers, these emissions result from the company's energy consumption.

For example, a major Scope 2 emission for a restaurant would be from the electricity purchased to power the restaurant itself. While the restaurant does not directly emit the greenhouse gases from electricity generation, the restaurant indirectly causes these emissions through its consumption of grid-supplied electricity. The emissions occur at the power plant that generates the electricity, but they are considered Scope 2 for the restaurant because they result from the restaurant’s energy usage.

Scope 3 emissions

Scope 3 represents all other indirect emissions across the company's value chain not covered in Scope 2. This expansive category includes emissions associated with the following:

• Employee business travel and commuting
• Work-from-home utility consumption
• Extraction, production, and transportation of purchased goods and services
• Transportation, distribution, and logistics of company products and materials
• Leased assets, outsourced activities, contract manufacturing, and franchises
• Waste disposal from company operations
• Transportation of products and materials along distribution channels
• Investments
• Use and end-of-life treatment of sold products

On average, Scope 3 emissions typically comprise 70-90% of a company's total emissions.

For example, a major Scope 3 emission source for a restaurant would be food purchases from suppliers. The production, transport, and disposal of the food a restaurant buys generates significant greenhouse gas emissions, but since these activities occur in the supply chain, they qualify as Scope 3 for the restaurant.

Why Understanding Scope 1, 2, and 3 Emissions Matters

Understanding an organization's Scope 1, Scope 2, and Scope 3 emissions is crucial for comprehensively accounting for and reducing its carbon footprint. Properly evaluating Scope 1, 2, and 3 emission sources allows organizations to identify the highest-impact areas to target for emissions reduction and mitigation efforts across their operations and value chains.

Reducing emissions can lead to significant financial savings for a company through improved energy efficiency, lower energy bills, reduced waste management costs, and avoided carbon pricing fees. By pinpointing the highest impact areas across the value chain to focus reduction and abatement efforts, companies can precisely track progress on emissions reduction goals and associated cost savings over time.

Companies comprehensively addressing Scope 1, 2, and 3 emissions demonstrate strategic foresight in mitigating climate-related risks and positioning for low-carbon transition opportunities. With clear scope emissions data, investors can more meaningfully compare companies’ climate strategies and evaluate readiness for a net-zero future.

For investors and other stakeholders, emissions scopes provide vital nuance in assessing a company's climate action progress and decarbonization commitment beyond aggregate totals. Understanding scope emissions also helps inform strategic risk management and new opportunity capture related to climate change. Evaluating scope emissions allows investors to see how companies are managing their climate impact and exposure across both direct operations and wider value chains.

The Business Case for Emissions Reductions

In addition to boosting reputation, tangibly reducing corporate emissions provides numerous operational, financial, and strategic advantages for companies:

• Lower energy consumption, costs, and volatility through efficiency gains and transitioning to renewables.
  • By improving energy efficiency and shifting to renewable power, companies can reduce energy demand, electricity bills, and exposure to fossil fuel price spikes.

• Reduced waste removal and disposal costs.
  • Cutting waste, especially hazardous materials, decreases waste management fees and environmental compliance costs.

• Lessened regulatory compliance obligations, complexities, and costs.
  • Proactively cutting emissions lowers potential regulatory burdens like carbon taxes and caps as policies tighten.

• Decreased exposure to existing and rising carbon pricing mechanisms.
  • Reducing emissions lessens a company's potential carbon tax and potential emissions trading scheme costs as prices increase.

• Enhanced resilience against energy supply instability and commodity price volatility.
  • Improving efficiency and adopting renewables hedge against fuel supply disruptions and price volatility.

• Strengthened social license to operate over the long-term.
  • Leadership in sustainability earns community and social goodwill vital for a company's enduring viability.

• Attraction of green investors by demonstrating climate leadership.
  • Decarbonization draws investor capital increasingly focused on environmental stewardship.

• New revenue opportunities in low-emissions products and services.
  • Companies can tap growing demand for carbon-friendly offerings as markets shift.

• Improved risk management posture as climate disruptions intensify.
  • Cutting emissions builds resilience against intensifying physical climate impacts.

• Competitive differentiation as stakeholders demand decarbonization.
  • Leading in climate action distinguishes companies as stakeholders seek sustainability.

Cutting emissions is not just an environmental imperative, but also offers compelling financial and strategic benefits for enterprises. As the above points describe, reducing Scope 1, 2, and 3 emissions can lower costs, risks, and volatility for companies across sectors while creating new revenue opportunities.

While decarbonization can require upfront investment, the significant quantifiable savings and intangible advantages make emissions mitigation critical for both corporate climate leadership and bottom line success. Scope Zero's Carbon Savings Account™ helps by enabling companies to accurately track Scope 3 emissions across their value chain.

Calculating Scope 1 and 2 Emissions

While complex, determining direct Scope 1 and 2 emissions is relatively straightforward, since companies have direct access to Scope 1 and 2 usage data. Here are the key steps to compile Scope 1 and 2 inventories:

1. Set Organizational and Operational Boundaries

When figuring out what parts of your business you need to tally up emissions for, make sure to include everything you have financial or operational control over. This includes your operations, offices, subsidiaries, joint ventures - anything that's part of your financial reporting.

You need full visibility into all your entities if you want your carbon inventory to be comprehensive and accurate. Cast a wide net here, even if it makes your footprint seem bigger. It's better to own all your impacts so you can start shrinking them.

2. Identify All Sources of Scope 1 and Scope 2 Emissions

The next step is to thoroughly identify all sources of Scope 1 and Scope 2 emissions across your company. This involves carefully cataloging any activities that lead to the direct release of greenhouse gasses into the atmosphere. Combustion of fuels from sources like company vehicles, generators, and machinery should be accounted for. Manufacturing or production processes that emit gasses will need to be quantified.

Fugitive emissions from leaks in equipment such as refrigeration and air conditioning systems must also be included. While this assessment calls for comprehensive scrutiny, aim to locate every source of Scope 1 emissions, no matter how small or obscured. Performing due diligence at this stage lays the groundwork for an accurate and substantive emissions inventory.

3. Select Accurate Emissions Calculation Methodologies

Once all direct emissions sources have been identified, the next step is to select appropriate quantification methodologies tailored to each unique source. For industrial stacks and vents, continuous emissions monitoring systems likely provide the most accurate measurements. Mass balance calculations are well-suited for quantifying releases from chemical processes. Vehicle fuel consumption presents a straightforward way to calculate use-phase emissions. Equipment-specific leakage rates can be applied to sources like refrigeration units.

The methodology chosen should allow for precise measurement of emissions from each source based on its characteristics and operation. Applying diligence in quantification is crucial for developing a rigorous and high-quality emissions inventory.

4. Collect Comprehensive Activity Data

To enable precise emissions quantification, comprehensive activity data must be collected for each source. Relevant data points include fuel and energy consumption volumes, inputs and outputs from industrial processes, vehicle miles traveled by fleet automobiles, and usage rates of refrigerants and industrial chemicals. Where feasible, leverage systems already in place to record operational or production data that can serve as critical inputs for calculating emissions.

Identifying potential gaps in current data collection and instituting more robust tracking can strengthen the accuracy of emissions estimates. The completeness and integrity of the underlying activity data directly determines the quality of the overall inventory. Dedicating effort to gathering precise, well-documented data is time well spent.

5. Perform Emissions Calculations

Lastly, combine activity data with emissions factors to convert everything into carbon dioxide equivalent tons (CO2e). Emissions factors translate activity volumes like kilowatt-hours of electricity or gallons of fuel into associated emissions quantities. Make sure to use the most accurate, localized factors you can source.

For example, the emissions from grid electricity vary hugely between regions, so get factors specific to your utilities. Remember that the quality of your quantification relies wholly on the factors applied; dial those in carefully to get a precise picture of your footprint.

6. Assess Calculations for Quality and Uncertainty

Once you compiled your inventory, it's time for some quality control. Take a hard look at all the inputs and number-crunching to spot any weak points in your emissions data. Assess completeness. Are all owned/controlled emissions sources truly accounted for? Check for consistency in calculations across sources and time periods. Is full transparency provided on origins of data and choice of methodologies?

Examine the inventory for overall accuracy based on faithfulness to real-world operations and emissions. Consider the precision of measurements and avoidance of overestimates or underestimates. Identifying areas of uncertainty now allows for iterations and improvements to your quantification process. Investing effort to ensure robustness demonstrates commitment to developing a meaningful emissions baseline.

7. Establish a Baseline Emissions Inventory

To set your emissions benchmark, aggregate 3 years of your highest-quality data to create a baseline inventory. Use this baseline as your reference point going forward. Averaging across years smooths out normal fluctuations and gives a representative picture of your historical emissions.

This baseline provides your north star - where you started from before efforts to chart a more sustainable course. It offers a solid foundation for setting emissions goals, modeling decarbonization scenarios, and demonstrating progress over time. Periodically refreshing your inventory with recent data will reveal how much you have lowered your trajectory as your programs ramp up.

Scope 3 Emissions Categories and Calculation Methods

Scope 3 emissions comprise the majority of total corporate greenhouse gas outputs, often 2-5 times greater than Scope 1 and 2 combined.

Despite their indirect nature, comprehensively addressing Scope 3 is essential for companies to achieve science-based, net zero emissions goals and satisfy rising stakeholder expectations. Managing Scope 3 also uncovers operational efficiencies and drives innovation across the value chain.

The Greenhouse Gas Protocol delineates 15 categories of indirect Scope 3 emissions that together provide a complete corporate inventory:

1. Purchased Goods and Services
2. Capital Goods
3. Fuel and Energy-Related Activities
4. Upstream Transportation and Distribution
5. Waste Generated in Operations
6. Business Travel
7. Employee Commuting and Telecommuting (work-from-home)
8. Upstream Leased Assets
9. Downstream Transportation and Distribution
10. Processing of Sold Products
11. Use of Sold Products
12. End-of-Life Treatment of Sold Products
13. Downstream Leased Assets
14. Franchises
15. Investments

There are several types of Scope 3 calculation methodologies:

Average Data Method

• Uses publicly available emissions factors that provide average emissions per unit of activity across an industry or region. For example, applying kgCO2e per kWh electricity factors to estimate emissions from purchased energy.
• Simplest approach but lacks precision without supplier-specific data. Better suited to initial baseline inventories when supplier data is unavailable.

Spend-Based Method

• Leverages a company's procured spend in a category to estimate associated emissions using economic input-output emission factors per dollar spent.
• Provides a top-down approximation of emissions but lacks precision without supplier-specific operational data.

Supplier-Specific Method

• Sources primary emissions data directly from key suppliers through surveys, disclosures, and reporting mandates.
• Provides the most accurate emissions totals but requires supplier engagement and data sharing.

Hybrid Method

• Combines spend-based estimates with all available supplier-specific emissions data. Supplements gaps where supplier data access is incomplete.
• Delivers a robust inventory that leverages the best available data across all suppliers.

Product Life Cycle Assessments

• Models emissions associated with individual products from material extraction, production, transportation, customer use, and end-of-life.
• Requires extensive data collection and complex modeling but provides granular insights to inform product design and circularity.

Employee commuting and work-from-home emissions often represent a major yet overlooked Scope 3 category. Meanwhile, work-from-home emissions from heating, cooling, lighting, and electronics continue rising rapidly with remote and hybrid work setups. Platforms like Scope Zero's Carbon Savings Account enable companies to accurately track, report, and reduce both commuting and WFH emissions through employee engagement, financial incentives, and logistical support.

Mature Scope 3 measurement capability becomes a competitive advantage as stakeholder scrutiny of value chain impacts intensifies. Sophisticated tools now exist to help companies accurately measure Scope 3 emissions across their value chain, including supplier data platforms, hybrid LCA models, and AI-enabled carbon accounting systems.

Reporting Emissions - Best Practices

Structured emissions reporting aligned to disclosure frameworks and best practices enables transparency for stakeholders while demonstrating companies' strategic focus and progress on emissions reductions. Standardizing inventory methodologies, pursuing independent verification, publishing comprehensive yet digestible disclosures, and consistent reporting over time comprise leading disclosure and reporting practices. Rigorous emissions reporting builds stakeholder trust and motivates ongoing improvement.

Major US ESG Disclosure Frameworks

• Task Force on Climate-Related Financial Disclosures (TCFD) - Defines climate risk disclosures pertaining to GHG emissions and mitigation.
• Sustainability Accounting Standards Board (SASB) - Industry-specific metrics including GHG emissions for disclosure to investors.

Emissions Reporting Best Practices

Leading companies present multi-year emissions trends by scope, rather than just the current year, to demonstrate performance progress over time. Comparing emissions against science-based targets and net zero goals also provides context on how inventory improvements align to climate science.

In their disclosures, companies should include both absolute total emissions and normalized intensity metrics like tonnes CO2e per unit of production. Granular breakdowns by country, business unit, and value chain category offer transparency, instead of just aggregating everything.

Strategic initiative descriptions demonstrate actions undertaken across operations and the value chain to manage, mitigate, and reduce emissions. Obtaining independent external verification of reported emissions annually also builds credibility.

Other best practices include:

• Publishing disclosures regularly in sustainability reports and financial filings
• Adhering to major ESG disclosure framework standards
• Pursuing consistency in inventory methodologies year-over-year

In summary, robust emissions reporting requires contextual performance trends, granular breakdowns, strategic initiative explanations, third-party verification, and consistent disclosure in sustainability publications. These practices enhance stakeholder trust in data quality and corporate reductions programs.

Strategies for Reducing Emissions Across All Scopes

With accurate baselines established, developing science-based reduction plans comes next. Holistic initiatives across operations, supply chain, and employees deliver maximum impact.

Scope 1 and 2 Targeted Reduction Strategies

• Pursue comprehensive energy efficiency through equipment upgrades, IoT sensors, building automation, streamlined processes, and vigilant management to lower Scope 1 and 2.
• Procure 100% renewable electricity through PPAs, RECs, and direct investments like onsite solar to dramatically cut Scope 2 emissions.
• Electrify vehicles, heating processes, appliances, and equipment through purchasing programs and incentives to slash Scope 1 emissions.
• Install additional onsite renewable energy generation like wind turbines, solar PV, and geothermal where feasible to reduce Scope 1.
• Implement carbon capture mechanisms on unavoidable process emissions.

Scope 3 Focused Reduction Strategies

• Provide sustainable employee benefits like the Carbon Savings Account™ to reduce WFH and commute emissions. Engaging employees in corporate sustainability efforts accelerates company-wide efforts in reducing corporate emissions.
• Engage suppliers through emissions reporting mandates, low-carbon procurement standards, and financial incentives.
• Redesign products and services applying circular economy principles to reduce emissions-intensive materials and enhance customer energy efficiency.
• Optimize logistics networks through increasing route efficiencies, shifting to rail/barge, eliminating empty backhauls, increasing load factors, and more.
• Incorporate carbon reduction criteria into investment decisions and actively vote for climate-friendly shareholder proposals.

Emissions Regulations in the United States

Greenhouse gas emissions in the United States are regulated at both the federal and state levels. At the federal level, the Environmental Protection Agency administers a number of policies and programs aimed at reducing emissions from major sources like power plants, refineries, and vehicles. Key nationwide emissions regulations include the Clean Air Act, fuel economy standards for cars and trucks, and the EPA's mandatory reporting program for major emitters.

Meanwhile, states like California and those in the Northeast have enacted their own laws capping emissions from electricity, transportation, buildings, and industry. State programs often complement or exceed federal efforts. The diverse array of emissions regulations across jurisdictions creates a complex landscape for regulated entities to navigate.

At the federal level, the SEC's forthcoming disclosure requirements will significantly expand public insight into corporate emissions footprints. By requiring Scope 1, 2, and 3 emissions reporting, investors and stakeholders will gain a comprehensive view of companies' total climate impacts across operations and value chains. These disclosure rules are poised to drive strategic emissions reductions as firms will need to closely track and benchmark their carbon inventories.

Meanwhile, pioneering programs in states like California and New York are already achieving localized emissions declines. California's economy-wide cap-and-trade regulation has helped the state consistently reach its reduction targets. In New York City, the stringent emissions limits mandated by Local Law 97 are projected to cumulatively eliminate over 50 million metric tons of emissions by 2030.

Various other regional, national, and local emissions limits and reporting programs exist worldwide. The regulatory environment will only expand, underscoring the need for comprehensive corporate tracking and reductions.

Summary

As climate change continues accelerating, managing corporate greenhouse gas emissions is no longer just an environmental concern, but a strategic business imperative. Comprehensively measuring and reducing emissions across Scope 1, 2, and 3 allows companies to lower costs, risks, and volatility while demonstrating climate leadership to stakeholders.

By leveraging emissions quantification best practices, implementing robust tracking processes, actively engaging suppliers, and instituting reduction initiatives across operations and value chains, companies can make sustained progress toward ambitious and necessary climate targets. While the emissions reduction journey requires vision and commitment, the many benefits for profitability, reputation, and the planet make it not just the right course, but the wise course for the future.