Carbon and greenhouse gas emissions (GHGs) are categorized into three scopes by Greenhouse Gas Protocol, the international standard for carbon accounting. In most parts of the world, when a company needs to report its carbon footprint to regulators, ESG investors, or standards organizations it categorizes and shares its emissions data divided into Scope 1, 2, and 3:
- Scope 1 direct emissions count carbon from buildings, facilities, and vehicles the company owns
- Scope 2 indirect emissions include carbon from purchased electricity, heat, steam, and cooling that comes from an electrical utility or municipal source
- Scope 3 indirect emissions are all the other indirect emissions that come from a company's value or supply chain, including things like waste, shipping products, or product usage by customers
The established, global accounting unit for carbon is the greenhouse gas carbon dioxide (CO2), and "carbon equivalents" (CO2e) - the sum of carbon plus other emissions like methane converted into carbon. Carbon equivalents help standardize everything, so when we compare carbon emissions from electricity usage versus driving a car - even though they're different activities - we're measuring them the same way when we categorize them as Scope 1, 2 or 3.
If you're familiar with financial accounting, which adds up income and expenses into a budget using a single currency, carbon accounting works in a similar way. An organization's emissions are its carbon inventory, which can be reduced or netted against emissions reductions and carbon offsets.
Scope 1 + Scope 2 + Scope 3 = Total Emissions
In addition to Greenhouse Gas Protocol, emission "scopes" are also used by the U.S. Environmental Protection Agency (EPA) and ADEME's Bilans GES in France, although ADEME uses a slightly different carbon accounting approach compared to GHG Protocol.
Scope 1 Emissions - Definition & Examples
Scope 1 emissions are defined as "direct" emissions - emissions which result from a company's direct activities. For emissions to be Scope 1, they have to be from a physical asset the company owns, like a building, heating boiler, or vehicle. Examples of Scope 1 emissions include:
- Energy consumption and usage from owned offices and facilities
- Energy generation from any owned, non-renewable sources, like a fossil fuel power plant
- Fuel (gas, diesel) use by owned vehicles
- Other emissions from owned equipment not already accounted for in sites and facilities
If your company owns facilities that generate their own energy and emissions, those are Scope 1
Scope 2 Emissions - Definition & Examples
Scope 2 emissions are generally defined as purchased emissions. Examples of Scope 2 emissions include electricity or natural gas that's purchased from a local power utility to power a building or facility, as well as:
- Energy consumption and usage from rented and leased offices
- Energy generation from any leased, non-renewable sources
- Fuel use by rented, leased, or borrowed vehicles
- Other emissions from rented or leased equipment not already accounted for in sites and facilities
Scope 2 emissions include the power generated by a utility like ConEdison, National Grid, or PG&E purchased by your company
Scope 3 Emissions - Definition & Examples
Scope 3 emissions are all other "indirect" emissions. For many companies - particularly companies with a physical product and supply chain - Scope 3 emission will represent most of the company's carbon footprint. Scope 3 emissions include purchased raw materials ("upstream Scope 3"), as well as distribution, transportation, and shipping of product, and customer usage and end-of-life treatment ("downstream Scope 3"). Scope 3 is usually the most difficult category to accurately and fully measure in carbon accounting.
The full list of potential Scope 3 GHG sources for your company includes:
- Purchased goods and services
- Capital goods
- Fuel- and energy-related activities
- Transportation and distribution
- Waste generated in operations
- Business travel
- Employee commuting
- Leased assets
- Processing of sold products
- Use of sold products
- End of life treatment of sold products
Certain Scope 3 categories, like business travel and employee commuting, are easier to quantify. Data for other Scope 3 categories like purchased goods and services or end-of-life treatment of sold products may require complex modeling, inputs, and assumptions - and can be difficult to calculate. Depending on your industry, business model, and value chain, not all 15 categories will be relevant to your company.
If your company ships products to customers via Amazon, Fedex, UPS, or the USPS, those count as Scope 3 emissions
Why Scope 3 Emissions Measurement Matters
According to CDP and McKinsey, a company’s Scope 3 supply chain emissions are, on average, 5 to 25 times higher than its direct Scope 1 and 2 emissions, making Scope 3 GHG measurement a critical priority (and big challenge) for organizations taking action to reduce their environmental footprint, de-risk their brand, and improve ESG performance.
Despite the potential difficulty measuring Scope 3 emissions, if you don't, you're likely overlooking a major portion of your organization's GHG emissions. We commonly see Scope 3 represent 60-90% of a company's total carbon footprint, particularly in industries like apparel, consumer electronics, CPG, and food products which rely on complex, international supply chains.
Scope 1, 2, 3 Emissions Measurement in Practice
Carbon accounting involves defining which Scopes to account for, collecting, organizing, and reviewing your emissions and environmental data, then performing carbon calculations to convert everything into CO2e.
Here are some important steps we recommend if your organization is newer to carbon accounting:
- Prioritize material sources - Use materiality assessment analysis to identify your organization's largest Scope 1, 2, and 3 emissions categories and sources
- Keep track of your utility bills and meter readings - Whether you use a purpose-built tool like Brightest or a standard document management system like Box or Dropbox, make sure you have one place to collect, save, and ideally automate your monthly utility bills to maintain accurate Scope 2 data. In a larger organization, appoint leaders in different regions or sites to help you pull together all the data you need. If you can't get bills or meter readings directly, use a model or tool like Brightest to apply an emissions factor against utility spend data if you have financial information in your ERP or accounting system
- Engage your vendors and suppliers - For Scope 3 categories like purchased goods and services and capital goods, use purchase data. Work directly with your vendors, IT, and other stakeholders to collect data you can easily integrate into your carbon accounting tools, rather than paper or document invoices and order forms that require manual input
- Set up scheduled surveys - Whether you need to collect supplier data, or information from employees on their commuting habits, it helps to set up and automate scheduled sustainability surveys with a tool like Brightest that directly integrates with the rest of your carbon accounting data
- Look for smart data integration wins - Are you able to integrate or export a record of all your employee travel from your travel or expense reporting software? Does your financial accounting system collect vendor payments for Scope 3-related metrics? Try to find easy wins in your existing data sources that can be inputs into your carbon calculations
Setting Baseline Emissions Targets
Another common practice in carbon accounting is establishing a baseline year, then setting emissions reduction targets to reduce emissions compared baseline. For example, let's say our company generated 1,000 tons of CO2e in 2021, we've accounted for all those emissions, and 50% are Scope 3. Our CEO, CFO, and Chief Sustainability Officer (CSO) set a goal to reduce our carbon footprint by 50% by 2025, using 2021 as the baseline year. Since we know our carbon inventory in 2021, we now need to reduce our emissions and decarbonize to 500 tons of CO2e in our goal year (50% times our 1,000 ton baseline) across Scope 1, 2, and 3.
In fact, we recommend setting separate emissions targets for Scope 1, 2, and 3, since the process and steps for measuring and reducing each one will be different.
Once your company's set its Scope 1, 2, and 3 targets, we need to carry out all the projects, initiatives, data collection, and investments to reduce our footprint. Again, if your organization sells and/or manufactures a physical product, one of your biggest levers for Scope 3 emissions reduction is improving your supply chain sustainability, as well as adopting practices like recycling, upcycling, and product re-use to limit end-of-life emissions.
If and when your company can't do enough directly to reduce its carbon footprint, then it's worth looking into purchasing high-quality carbon offsets - credits from verified projects like carbon capture or tree planting that are proven to sequester carbon elsewhere.
In a simple example, if we emit one ton of Scope 3 CO2 and then purchase carbon credits equal to the same amount of carbon, we've achieved "Net Zero." We still generated pollution (not ideal), but we've balanced the scales between the amount of greenhouse gas we produced and the amount we removed from the atmosphere.
Carbon Accounting at Your Organization
In 2022, thousands of companies, including Amazon, Apple, Google, Levi's, Netflix, Nike, Target, Unilever, Walmart, and many more use carbon accounting and sustainability measurement programs focused on Scope 1, 2, and 3 emissions. Moreover, in addition to setting and achieve their own SBTs, leading companies are also working with their suppliers and vendors to help them understand and reduce their emissions.
Whether you and your company's new to carbon accounting or have been doing it for years, we recognize this is difficult, time-consuming work, particularly when it comes to gathering and fully understanding Scope 3 value chain emissions. Working with sustainability experts at hundreds of organizations, we've spent years developing flexible, comprehensive, audit-ready, and easy-to-use carbon accounting software, tools, and methods to help sustainability teams collect data easier, engage stakeholders, do more with less, and understand their full emissions picture across Scope 1, 2, and 3.
We wish you all the best as you continue your sustainability journey. If we can be helpful at all (at any step in your process), please get in touch. A central part of our mission and work here at Brightest is enabling better data-driven decision-making (and actions) that lead to a better future for us all.