Scope 1, 2, and 3 Emissions: The Definitive Guide for 2024 and Beyond

Abdullah Choudhry is a trusted expert in carbon data and sustainable finance. As Arbor's Chief Impact Officer and Co-Founder, Abdullah leverages his extensive expertise to transform how businesses measure and manage their carbon footprints, ensuring data quality and fostering transparency in emissions reporting. He strongly advocates for bottom-up and regional value chain-specific emissions quantification to instill confidence in reduction efforts like product design, supplier comparisons, and facility & asset-level hotspots.

Introduction

Abdullah Choudhry has dedicated his career to advancing environmental sustainability through the intelligent use of data. As an authority in carbon data, financed emissions, and sustainable finance, Abdullah combines technical acumen with a commitment to societal impact. His leadership at Arbor underscores his dedication to making carbon management accessible and actionable for businesses worldwide. Born in a manufacturing town in Pakistan, he has first-hand experience of the world's Scope 3 problems, and inaccurate representations of value chain assessment have led him down this path.

Experience

Abdullah Choudhry's professional journey is marked by engineering and research education credentials from the UK, USA and Canada. Abdullah's work has been recognized through various awards, including the Wow Factor Award at the ATB Hackathon, and being named one of the Top 20 Under 25 in Calgary. His career is defined by his ability to harmonize complex supply chains with strategic business insights, making him a pivotal figure in the sustainability and climate tech landscape.

Jul 10

Understanding Scope 1, 2, and 3 emissions is crucial to tackling climate change. The term “Scope 1, 2, and 3 emissions” often comes up in corporate sustainability and carbon management discussions.

These scopes categorize the different sources of emissions a company needs to address to reduce its carbon footprint comprehensively.

However, in this guide, we’ll explain what these terms mean, why they matter, and how companies can effectively measure and manage them.

To start, let’s recap carbon emissions. In other words, carbon emissions refer to the release of greenhouse gases (GHGs) like carbon dioxide (CO₂) and methane (CH4) into the atmosphere. These emissions trap heat and contribute to global warming.

Businesses contribute to carbon emissions in various ways, from burning fossil fuels to power operations (direct emissions) to using electricity generated offsite (indirect emissions).

Consequently, understanding where these emissions come from helps businesses effectively target their reduction efforts.

Now, let’s explore what all three scopes mean, examples, and best practices for your business.

What are Scope 1, 2, and 3 Emissions?

Scopes 1, 2, and 3 emissions are categories defined by the Greenhouse Gas (GHG) Protocol, a widely used international accounting tool. These categories help organizations understand their emissions sources and implement strategies to reduce their carbon footprint.

Scope 1 Emissions: Direct emissions from owned or controlled sources.
Scope 2 Emissions: Indirect emissions from the generation of purchased energy.
Scope 3 Emissions: All other indirect emissions in a company’s value chain.

Why is it Important to Measure Scope 1, 2, and 3 Emissions?

Measuring these emissions is essential for a few reasons:

Regulatory Compliance: Governments impose regulations requiring businesses to report and reduce carbon emissions.
Corporate Responsibility: Consumers and investors are demanding more transparency and action on climate change from companies.
Operational Efficiency: Identifying and reducing emissions can lead to cost savings and improved operational efficiency.
Competitive Advantage: Companies that proactively manage emissions can differentiate themselves and attract eco-conscious customers and investors.

Scope 1, 2, and 3 Emissions Overview Diagram

This visualization helps understand how each scope relates to a company’s direct and indirect environmental impact.

scope-emissions-Image- 1a — **Scope 1, 2, and 3 Emissions Overview Diagram (Arbor.eco)**

Scope 1 Emissions: Definition & Examples

Direct Emissions from Owned Sources

Scope 1 emissions are direct emissions from sources that a company owns or controls. This includes emissions from combustion in owned or controlled boilers, furnaces, and vehicles, and emissions from chemical production in owned or controlled process equipment.

Examples of Scope 1 Emissions

On-site Fuel Combustion: Emissions from burning natural gas in a company’s heating systems.
Company Vehicles: Emissions from fuel used in company-owned cars, trucks, and other vehicles.
Industrial Processes: Emissions from chemical reactions during manufacturing processes.

Scope 2 Emissions: Definition, Examples & Strategies

Indirect Emissions from Purchased Energy

Scope 2 emissions are indirect emissions from the generation of purchased energy, such as electricity, steam, heating, and cooling consumed by the reporting company. While these emissions occur at the energy producer’s facility, they are accounted for in the company’s GHG inventory because they result from its energy use.

Examples of Scope 2 Emissions

Purchased Electricity: Emissions generated by power plants produce the electricity a company uses.
Purchased Heating and Cooling: Emissions from external facilities that provide heating or cooling services.

Renewable Energy and Efficiency Improvements

To reduce Scope 2 emissions, companies can invest in renewable energy sources like solar or wind power.

Additionally, implementing energy efficiency measures, such as upgrading to LED lighting or improving insulation, can also significantly reduce the energy required and, thus, the associated emissions.

Furthermore, companies can purchase renewable energy certificates (RECs) or carbon offsets to compensate for their Scope 2 emissions. Alternatively, they can engage in power purchase agreements (PPAs) with renewable energy providers.

Ultimately, a combination of these strategies can help businesses effectively manage and reduce their Scope 2 emissions.

Scope 3 Emissions: Definition, Categories, Examples & Challenges

Scope 3 emissions result from activities from assets not owned or controlled by the reporting organization but that the organization indirectly impacts in its value chain. These emissions often represent the largest portion of a company’s total GHG emissions.

Categories of Scope 3 Emissions

scop-emissions-image-2 — **Scope 1, 2, and 3 Emissions Categories List**

Purchased Goods and Services: Emissions from producing goods and services the company buys, covering all upstream emissions.
Capital Goods: Emissions from producing long-lasting goods like machinery and buildings used by the company.
Fuel and Energy Related Activities: Emissions related to the production of fuel and energy consumed by the company, not included in Scope 1 or 2.
Upstream and Downstream Transportation: Emissions from transporting goods to and from the company using third-party vehicles and facilities.
Waste Generated in Operations: Emissions from the disposal and treatment of waste generated by the company.
Business Travel: Emissions from employee travel for business purposes in third-party vehicles.
Employee Commuting: Emissions from employees traveling between their homes and worksites.
Leased Assets (Upstream): Emissions from operating leased assets not included in Scope 1 or 2.
Transportation and Distribution (Downstream): Emissions from transporting and distributing sold products to the end consumer using third-party vehicles and facilities.
Processing of Sold Products: Emissions from processing intermediate products sold by the company to third parties.
Use of Sold Products: Emissions from the use of goods and services sold by the company.
End-of-Life Treatment of Sold Products: Emissions from disposing and treating products sold by the company at the end of their life cycle.
Leased Assets (Downstream): Emissions from operating assets owned by the company and leased to others.
Franchises: Emissions from operating franchises under the company’s brand not included in Scope 1 or 2.
Investments: Emissions associated with the company’s financial investments.

Examples of Scope 3 Emissions

Supplier Emissions: Emissions from the production of raw materials or components purchased by the company.
Product Use: Emissions are generated when customers use the company’s products, such as gasoline burned in cars.
Waste Disposal: Emissions from the waste generated by the company’s operations, including landfill methane emissions.

Challenges in Measuring Scope 3 Emissions

Scope 3 emissions often constitute up to 75% of a firm’s overall GHG footprint. However, a lack of knowledge about these emissions inhibits cost-effective carbon mitigation strategies.

The complexity of supply chains and the need for data from numerous external sources make accurate measurement challenging. Additionally, variability in standard emission factors can lead to discrepancies in reported emissions, impacting carbon management strategies.

Best Practices for Measuring, Reporting & Reducing Scope 1, 2, and 3 Emissions

1. Collecting Data

The first step in measuring emissions is gathering accurate data. This involves collecting data on fuel use, energy consumption, and emissions from all relevant sources. Primary data should be used primarily when possible, with secondary data sources supplementing for data gaps. Companies should work closely with suppliers and other stakeholders to ensure data accuracy.

Identify Emission Sources: Start by identifying all possible sources of emissions within your organization. This includes direct emissions from company-owned facilities and vehicles (Scope 1), indirect emissions from purchased electricity, steam, heating, and cooling (Scope 2), and all other indirect emissions in the value chain (Scope 3).
Engage Stakeholders: Collaborate with internal departments (operations, procurement, and logistics) and external stakeholders (suppliers and service providers) to gather comprehensive data.
Data Management Systems: Implement robust data management systems to capture and store emission data. These systems should be capable of handling large volumes of data and ensuring data integrity.
Quality Control: Establish processes for regular data quality checks and validation to ensure the accuracy and reliability of the collected data.

2. Measuring Scope 1, 2, and 3 Emissions

Companies can use the collected data to calculate their emissions using standardized methods such as those provided by the GHG Protocol. One common pitfall in carbon accounting is relying on global averages rather than employing the bottom-up approach.

The bottom-up approach is a detailed and precise method that measures carbon footprint emissions from individual sources within your organization. Unlike the global average method, which provides a general estimate, the bottom-up approach offers specificity, accuracy, and control over your data.

This method typically focuses on direct emissions, such as those from burning fossil fuels, and involves data collection, analysis, and reporting. Carbon accounting software like Arbor can measure emissions with a bottom-up approach.

It’s often used by organizations that need high accuracy and are typically required to report their emissions to regulatory bodies, such as government agencies.

a. Measuring Scope 1

Scope 1 Emissions (Direct Emissions): These are emissions from sources owned or controlled by the company, such as emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.
Calculation Method: Use direct measurement methods (like continuous emission monitoring systems) or calculate emissions based on activity data and emission factors. For example, CO₂ emissions from fuel combustion can be calculated as:
CO₂ Emissions = Fuel Consumption × Emission Factor

b. Measuring Scope 2

Scope 2 Emissions (Indirect Energy Emissions): These are emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company.
Calculation Method: Calculate based on the amount of energy consumed and the emission factors associated with the energy production. For instance, emissions from electricity use can be calculated as:
CO₂ Emissions = Electricity Consumption × Grid Emission Factor

c. Measuring Scope 3

Scope 3 Emissions (Other Indirect Emissions): These include all other indirect emissions in a company’s value chain. This scope is often the largest and most complex to measure.
Categories: Scope 3 emissions are divided into 15 categories; each calculation requires greater detail; however, the basic formula is shown below.
Calculation Methods: Use primary data from suppliers or secondary data from industry averages and databases. Advanced technologies like machine learning can enhance the accuracy of these estimates. For example, emissions from purchased goods can be calculated as: CO₂ Emissions = ∑ (Amount of Purchased Good × Emission Factor of the Good)

3. Reporting to Stakeholders

Transparent reporting is crucial. Companies should communicate their emissions data to stakeholders through sustainability reports, regulatory filings, and other channels. This builds trust and demonstrates a commitment to reducing emissions.

Sustainability Reports: Regularly publish detailed sustainability reports that outline the company’s emissions across all scopes, the methodologies used for measurement, and the progress towards emission reduction targets.
Regulatory Filings: Submit required emission data and reports to relevant authorities to ensure compliance with local and international regulations.
Stakeholder Engagement: Maintain open communication with stakeholders, including investors, customers, employees, and the community, to provide updates on emission metrics and sustainability initiatives.
Third-Party Verification: Consider having emission reports verified by third-party auditors to enhance credibility and transparency.

4. Reducing Scope 1, 2, and 3 Emissions

Developing and implementing strategies to reduce emissions across all scopes is crucial for a comprehensive approach to sustainability. Here are actionable ways for your company to reduce emissions across Scopes 1, 2, and 3:

Energy Efficiency and Renewable Energy: Implement energy-saving measures such as upgrading to energy-efficient equipment, optimizing production processes, and improving building insulation. Transition to renewable energy sources like solar, wind, or hydropower. Utilize Power Purchase Agreements (PPAs) and Renewable Energy Certificates (RECs) to support this transition, especially if your local grid relies heavily on carbon-intensive energy sources.
Supplier Engagement: Work closely with suppliers to enhance their sustainability practices. Evaluate suppliers based on a cost-to-CO₂e ratio to reduce financial risk and CO₂e where feasible. Engage them in sustainability initiatives, providing training and encouraging the adoption of low-carbon technologies and processes.
Purchased Goods: Compare suppliers and choose those who offer the best balance of cost and CO₂e emissions. Opt for materials and products with lower CO₂e footprints, ensuring purchasing decisions align with your sustainability goals.
Product Design and Durability: Consider the entire life cycle of your product by focusing on design, material selection, and durability. Designing products that last longer and use sustainable materials can significantly reduce the emissions associated with manufacturing and end-of-life disposal.
Scope 1 — Fuel-Related Emissions: Reduce fuel-related emissions by electrifying gas furnaces, diesel generators, and other equipment. Where possible, replace these with renewable energy sources to ensure a lower carbon footprint.
Innovation and Technology: Invest in innovative technologies and practices, such as carbon capture and storage, electric vehicles, and circular economy models. These can be critical in reducing emissions and advancing your company’s sustainability objectives.

The Future of Scope 1, 2, and 3 Emissions

Regulatory bodies worldwide are intensifying their focus on emissions reporting and reduction, ushering in stricter requirements for corporate transparency.

In the United States, the SEC’s new Climate Disclosure Rules mandate detailed reporting of greenhouse gas emissions (Scope 1, 2, and sometimes, Scope 3) for publicly traded companies. Moreover, larger firms must integrate these disclosures into annual reports starting in 2026, with full compliance expected by 2030.

Additionally, these rules emphasize consistency using the TCFD framework, aiming to standardize reporting across industries.

In contrast, in the European Union, the Corporate Sustainability Reporting Directive (CSRD) imposes rigorous emissions reporting standards on large companies and listed SMEs. Similarly, aligned with European Sustainability Reporting Standards (ESRS), the CSRD requires comprehensive disclosures on Scope 1, 2, and 3 emissions.

Furthermore, this directive aims to enhance corporate transparency and accountability, compelling businesses to proactively improve their sustainability practices.

As a result, these regulations will require companies to collect data and measure all three scopes of emissions. Consequently, businesses must develop detailed GHG emissions inventories to comply with the regulations. Ultimately, these regulatory changes underscore the growing importance of comprehensive emissions reporting and the need for companies to prioritize sustainability in their operations.

Future-Proofing Your Climate Strategy

Companies should continuously evolve their climate strategies to stay ahead of regulatory changes and stakeholder expectations. This includes setting ambitious emissions reduction targets and investing in innovative technologies to track and reduce emissions.

Under an ambitious carbon mitigation scenario for 2035, global upstream Scope 3 emission intensities need to be reduced by an additional 54% compared to baseline scenarios. This translates to 58-67% sectoral reductions for energy, transport, and materials.

Summary

Understanding and managing Scope 1, 2, and 3 emissions is critical for any business committed to sustainability.

Measuring and managing these emissions is vital for regulatory compliance, corporate responsibility, operational efficiency, and competitive advantage.

Companies should adopt best practices for collecting data, measuring emissions, reporting to stakeholders, and reducing emissions. Future-proofing your climate strategy will help ensure your company remains compliant and competitive in a rapidly changing regulatory landscape.

The significance of Scope 3 emissions cannot be overstated. Between 1995 and 2015, global emissions saw a dramatic increase, with Scope 1 emissions growing by 47%, Scope 2 by 78%, and Scope 3 by an astonishing 84%.

The industrial sector should pay close attention to Scope 2 and 3 emissions. In fact, a recent study found that Scope 3 emissions from buildings were twice as high as direct emissions, emphasizing the critical importance of implementing comprehensive carbon management strategies across the entire value chain.