September 26, 2022 Megan Baker
What are Scope 1, 2 and 3 carbon emissions?
Businesses generate plenty of greenhouse gases, especially methane (CH4), a high-powered yet short-lived greenhouse gas, and nitrous oxide (N2O), which is mostly used as a fertiliser. Where that is the case, businesses ‘translate’ such emissions into a CO2 equivalent.
For the purposes of estimating a business’ emissions, they come in three grades: Scope 1, 2 and 3. This is a widely-used format devised by the Greenhouse Gas Protocol.
Scope 1 comprises the emissions a business generates itself, mostly through burning its own carbon-based fuel – say, diesel to run its fleet of vehicles, or coking coal to power its furnaces. This may be a little or a lot. Office-based companies, for example, produce little Scope 1 emissions; ditto retailers or healthcare providers. Companies that, in effect, make a living by shoving greenhouse gas into the atmosphere produce a lot; think of power generators or bus operators.
Scope 2 emissions are those that a business buys in, mostly through its purchase of electricity from a supplier. By and large, the size of a business’ Scope 2 emissions will be in inverse proportion to its Scope 1 variety. For retailers, Scope 2 will be substantial; for energy generators it will be minimal.
However, Scope 2 emissions come in two flavours, which business bosses are tempted to exploit to flatter their business’ environmental performance. First are location-based Scope 2 emissions, which comprise the CO2 by-product of the power supplied to a business via the local grids it uses at its various sites. Then there are market-based emissions, calculated via the source of electricity that a business buys from its suppliers. Much as personal consumers vote on the source of electricity they want their supplier to provide, companies use contracts that specify the source of power they buy (almost inevitably it will be for renewables). Then, if need be, it is up to the supplier to buy tradable certificates to ensure the electricity it has supplied has green credentials.
The Greenhouse Gas Protocol recommends that companies report both their location-based and their market-based Scope 2 emissions. Many London-listed companies do just that, making the source quite clear. Yet there is a bias towards the market-based variety, which almost always makes for a faster fall in CO2 emissions, often markedly so. For some companies – and through no fault of their own – distinguishing between location-based and market-based emissions is not much more than sophisticated guesswork, especially for those operating in the developing world. And some simply don’t make clear on which criterion their Scope 2 figures are based.
Scope 3 is the biggest and vaguest category of emissions. It comprises all the other indirect emissions for which a business is arguably responsible. To get an idea, the Scope 3 source most often used as an example is travel done on behalf of a business other than in business-owned vehicles (think of salespeople jetting off to see overseas customers). Yet there are 15 categories of Scope 3 emissions. These range from upstream activities, such as the CO2 emitted in making the capital goods a business uses, to the downstream sort, where customers generate emissions from using a business’ products.
Clearly, much guesswork goes into calculating Scope 3 emissions. It helps provide a living for the consultants who thrive on the climate-change industry and runs the risk of much double counting. Currently, UK companies are under no obligation to report their Scope-3 emissions.