By now, pretty much every industry is familiar with some kind of emissions reporting. Heavy industry, public utilities, and manufacturing are often required to file annual emissions reports to environmental regulators, while even customer-facing and institutional organizations are taking action to report greenhouse gas (GHG) emissions through voluntary programs.
But while the methodologies to calculate direct emissions from industrial processes and power generation are well understood, in fact these releases only make up a fraction of the GHG emissions within the supply chain. Direct emissions account for only 50% of total emissions, and leaving those supply chain emissions—also called scope 3 emissions—unaddressed limits the effectiveness of corporate and institutional carbon reduction programs.
What Are Scope 3 Emissions?
If scope 1 emissions are releases from industrial processes and fleet operation, and scope 2 emissions are from sources like comfort heating and materials handling, then scope 3 emissions are all the releases outside an organization’s immediate control. These occur within the supply chain and can be the majority of total emissions attributable to a company. They can also be the most difficult to quantify and control.
According to the US EPA, there are 15 sources of Scope 3 emissions, though not every organization will have to quantify and report all 15. These are divided into upstream and downstream emissions.
- Purchased goods and services
- Capital goods
- Fuel- and energy-related activities not covered by Scopes 1 and 2
- Upstream transportation and distribution
- Waste generated in operations
- Business travel
- Employee commuting
- Upstream leased assets
- Transportation and distribution of sold products
- Processing of sold products
- Use of sold products
- End-of-life treatment of products
- Downstream leased assets
Benefits of Scope 3 Emissions Reporting
Although quantifying and reporting scope 3 emissions can be challenging, it can also pose significant benefits to the success of an organization’s carbon reduction plan and business operations. These include:
- Exponential reduction of climate impact. By reducing carbon emissions up and down the supply chain, corporations can multiply the overall effectiveness of their carbon reduction programs.
- Minimal costs to customers. Rising prices in today’s economy are a legitimate concern, but reducing supply chain carbon emissions is only estimated to increase end-customer costs by 1-4% in the medium term.
- Reduced risk. Gathering Scope 3 emissions data can be an involved process requiring detailed conversations with your supply chain. But this is also an opportunity to better understand their operations and corporate priorities, allowing you to identify any potential red flags or misalignment in organizational or investor priorities, thereby reducing risk to your own business.
- Improved reputation. Showing proactive scope 3 emissions reporting shows a commitment to the future of your organization. This can help you build a solid reputation with investors, regulators, and the community at large.
Barriers to Effective Scope 3 Emissions Calculation
As mentioned already, while calculating and reporting scope 3 emissions can offer benefits and significant room for carbon reduction, they are also the most difficult to understand and change. The reasons for this include:
- System-wide change. Any change is hard, and gathering data on scope 3 emissions often requires initiatives at the industry level, rather than from company to company.
- Voluntary reporting. Aside from heavy industry like mining and power generation, or in specific manufacturing sectors, many organizations face only voluntary programs for carbon emissions calculations, especially for scope 3 emissions.
- Non-standardized methodologies. While many organizations provide guidance on calculating scope 3 emissions, the exact methodologies vary between sectors and from one country to the next. This makes providing a holistic picture of global scope 3 emissions difficult.
Where to Start Calculating Scope 3 Emissions
The first thing to do when calculating scope 3 emissions is to understand the business goals driving the overall program. Carbon calculation and reporting isn’t simply an accounting exercise. In order to best engage with the supply chain, organizations need to clearly understand and document their reasons for quantifying scope 3 emissions. These can include:
- Identifying risks and opportunities related to supply chain emissions. Risk reduction is always a benefit, while carbon reduction can also represent a market opportunity for proactive organizations. Knowing these risks and opportunities will help the organization as a whole make solid investment and procurement decisions.
- Setting clear reduction targets and tracking progress over time. Quantification is only the first step, helping to identify potential carbon emission hot spots. Tracking reduction over time helps document successes in risk management that can be shared with industry organizations and investors.
- Engaging with supply chain partners in GHG reduction. Numbers talk, and while it’s great to have big picture conversations about sustainability with business partners and suppliers, in order to have truly meaningful discussions about reduction, organizations need to bring numbers and quantifiable targets to the table.
- Improving corporate reputation and transparency. If more than half of GHG emissions are scope 3, then being able to document reductions from these sources is an effective way of showing corporate responsibility and standing out among competitors.
Once the business goals are understood, you’ll be more easily able to move onto the next steps. Specifically, these are identifying sources of scope 3 emissions, based on potential upstream and downstream emissions as listed above, and setting your scope 3 emissions boundaries.
One of the challenges in scope 3 emissions calculations is that while it’s important to dig a little and find potentially “hidden” emissions sources in the supply chain, it is also possible to dig forever, since organizations in your supply chain will also have their own scope 3 emissions that could be calculated. At some point, from the perspective of your own carbon reporting program, the potential benefits and control you may have on these wider range emissions is limited.
Minimum Requirements for Scope 3 Emission Boundaries
When defining the boundaries of your scope 3 emissions, the US EPA provides guidance on what the minimum requirements for each of their 15 sources should be. A brief summary of each is provided here. In many cases, what is considered a scope 3 emission for your business’s operations will be scope 1 and 2 emissions for the companies in your supply chain.
Purchased Goods And Services
Organizations should consider all upstream emissions, sometimes called cradle-to-gate, of purchased goods and services.
Similar to purchased goods and services, here too organizations need to quantify all upstream emissions of purchased capital goods.
Fuel- And Energy-Related Activities Not Covered By Scopes 1 And 2
The important consideration for these sources is to make sure quantification stops at the point of combustion within the reporting organization’s operations, since these are considered to be scope 1 or 2 emissions.
Upstream Transportation And Distribution
These quantifications will be considered scope 1 and 2 emissions for your suppliers, but since they are outside your organization’s control, they are considered scope 3.
Waste Generated In Operations
Similar to the above, scope 3 emissions quantified here will be the scope 1 and 2 waste emissions from suppliers.
These are the emissions generated by other transportation providers while your employees travel for business purposes.
These emissions are separated from other business travel and are defined as the emissions generated by employee vehicles or transportation providers during daily travel to and from home and the worksite.
Upstream Leased Assets
For organizations who lease property, these scope 3 emissions are the scope 1 and 2 emissions reported by the lessor, whether as part of business operations, vehicle operation, or comfort heating.
Transportation And Distribution Of Sold Products
Here, the reporting organization quantifies vehicle emissions that result from the transportation of goods after they are sold. This could include transportation to and from storage facilities, retailers and the final customer.
Processing Of Sold Products
For those organizations selling intermediate products, these will be the scope 1 and 2 emissions from the companies that purchase and further process these products.
Use Of Sold Products
This category applies to organizations who sell products that will generate emissions while in use. Typically these will be the scope 1 and 2 emissions of those products quantified by the purchasing companies.
End-Of-Life Treatment Of Products
These are the scope 1 and 2 emissions reported by companies involved in treatment and waste disposal of your products at the end of their life cycle.
Downstream Leased Assets
If your organization leases assets, then these will be the scope 1 and 2 emissions for the facility as reported by the lessee. Typically this includes emissions like comfort heating, but doesn’t include the lessee’s business operations, such as industrial process emissions if you are the lessor of an industrial space.
For corporate offices with franchises, these would be the franchisees’ scope 1 and 2 emissions, provided these are not already included in your own scope 1 and 2 emission reporting.
Financed emissions have gained more visibility in the last few years, and can have a significant impact on understanding risk for both public and private financial institutions.
Data Collection for Scope 3 Emissions
As you can probably tell from the list above, collecting data for scope 3 emissions calculations can be a labor-intensive undertaking. You’ll be requesting information from parties who may already have comprehensive carbon reporting programs in place, as well as those who have never even attempted to do their own carbon accounting before.
Engaging with supply chain stakeholders is a critical part of this step. They need to understand the value of the undertaking and what the expectations are in terms of the information they need to provide. Without a standardized methodology for defining the scope and completing calculations, the final report will be prone to incomplete data sets and poor data quality.
If you’ve properly identified potential sources of scope 3 emissions, you’ll have a good idea of where the most significant releases are coming from. Most organizations will prioritize data collection from these sources over smaller emitters.
One of the biggest challenges in data collection for calculating scope 3 emissions is receiving the same information from different sources in varying units. This is especially true where these emissions haven’t already been calculated as part of scope 1 or 2 reporting. For example, natural gas consumption could be provided in imperial units from some parties, and metric in others, creating an extra step.
Many reporting organizations are enlisting the use of software tools to streamline data gathering. Cloud-based platforms like FigBytes allow companies to automate scope 3 data capture in a variety of units, leaving the software to do the necessary conversions before completing emissions calculations, reducing the opportunities for error.
How to Calculate Scope 3 Emissions
The methodologies for calculating for scope 3 emissions will obviously vary based on your industry sector and supply chain, which emission sources need to be quantified, and what data can be collected. While accuracy is important, sometimes estimates are the best available option.
In general, typical methodologies include:
- Supplier-specific or industry-specific methodologies. As annual carbon reporting has become more prevalent, many suppliers and industry groups have developed their own methodologies. This ensures consistency, and generally provides higher data quality than using older publicly available approaches like US EPA emission factors.
- Hybrid method. While supplier-specific data may be available, it can be necessary to adjust it for your own needs. Your supplier may have an operation-wide scope 1 emission number, but if you’re not their only customer, you’ll have to use best-available information to estimate what proportion of that will constitute your own organization’s scope 3 emissions.
- Average data method. This is used largely for estimating scope 3 emissions from purchased goods and services. Estimates are made using the average weight or other metric of a product, and an industry standard emission factor per mass of product.
- Spend-based method. Where mass of a product isn’t available, or when estimating scope 3 emissions from a purchased service, the best available information might be the annual spend, multiplied by a standard emission factor.
Knowing which methodology to use will depend on what data you can obtain from suppliers and customers, and the availability of published emission factors. Additional resources may be available through industry associations and government agencies.
Start On the Right Foot
If you’re just starting to understand how to quantify scope 3 emissions for your operation, why not begin on the right foot? And if you’ve already attempted it, maybe it’s time to upgrade your efforts and move away from the tangle of spreadsheets and repeated email requests to suppliers for information.
FigBytes can streamline your scope 3 emissions data collection and calculate and organize your report to comply with carbon accounting frameworks. If you’re ready to build your report, or even if you don’t know where to start, reach out to one of our experts to schedule a conversation.