2023 guide to corporate scope 1 2 3 emissions reporting

Above: Permutable’s Corporate Emissions Analytics Dashboard. Combination of Scope 1 2 3 emissions of the banking sector.

Scope 1 Emissions:

Scope 1 emissions are produced directly by a company’s operations, such as emissions from on-site combustion of fossil fuels, mobile equipment, and company-owned vehicles.

Scope 2 Emissions:

Scope 2 emissions are generated indirectly by a company’s operations, specifically emissions from the production of electricity, heat, or steam that the company purchases from a utility or supplier. Companies can measure these emissions using two methods: location-based and market-based.

Location-based method

The location-based method entails that an organisation’s Scope 2 emissions are based on the amount of energy consumed at the location where the energy is used. This approach takes into account the energy mix of the specific grid where the energy is consumed and the emissions that are generated from that energy mix. This approach is useful for organisations that have a direct energy connection to the grid and consume a significant amount of energy.

MarkeT-based method

The market-based approach in turn calculates an organisation’s Scope 2 emissions based on the emissions that are generated from the energy mix of a specific region or country. This approach uses a standardised emissions factor to represent the emissions intensity of the energy mix in the relevant region or country. This approach is useful for organisations that purchase energy from a utility company and don’t have direct access to the grid.

The market-based approach tends to result in lower emissions than the location-based approach because the emissions factor used is typically lower than the average emissions intensity of the local grid.

Scope 3 Emissions:

Scope 3 emissions are all indirect emissions that are not included in scope 2. These emissions are generated by activities that are outside of a company’s direct control but are a result of a company’s operations, such as emissions from the production of purchased goods, services, and transportation. The Greenhouse Gas Protocol defines 15 categories of scope 3 emissions, including:

Different Approaches for Calculating Emissions

Defining the organisational boundary is a key step in corporate GHG accounting. This step determines which operations are included in the company’s organisational boundary and how emissions from each operation are consolidated by the reporting company. As detailed in the GHG Protocol Corporate Standard, a company has three options for defining its organisational boundaries. Companies should use a consistent consolidation approach across the scope 1, scope 2, and scope 3 inventories. The selection of an approach affects which activities in the company’s value chain are categorised as scope 1, 2 or, 3 emissions. When calculating emissions, companies can use three different approaches: operational control, financial control, or equity share.

Operational Control Approach

The operational control approach allocates emissions based on the company’s operational control over a facility or asset. For example, if a company has operational control over a coal-fired power plant, it would allocate all of the emissions from the plant to its own scope 1 emissions inventory, even if it does not own the plant.

Financial Control Approach

The financial control allocates emissions based on the company’s financial control over a facility or asset. A company accounts for 100% of the emissions over which it has financial control. It does not account for GHG emissions from operations in which it owns an interest but does not have financial control.

Equity Share Approach

The equity share approach allocates emissions based on the company’s ownership share of a facility or asset. For example, if a company owns 50% of a coal-fired power plant, it would allocate 50% of the emissions from the plant to its own scope 1 emissions inventory.

If a company selects the equity share approach, emissions from any asset the company partially or wholly owns are included in its scope 1 emissions, but emissions from any asset the company controls but does not partially or wholly own (e.g., a leased asset) are excluded from its direct emissions and should be included in its scope 3.

Emissions Exclusions 

When reporting GHG emissions, many of the standards such as the GHG Protocol allow for justified exclusions when disclosing emissions. This is most frequently seen during scope 3 emission reporting. Some of these examples of disclosing & justifying exclusions can be considered controversial and have been contested by scientists. 

One of these exclusions that have been subject to intense scrutiny is the GHG Protocol: Corporate Standard that requires that direct CO₂ emissions from the combustion of biomass be included in the public report, but reported separately from the scopes, rather than included in scope 1. The separate reporting requirement also applies to scope 3. 

This exclusion can thus encourage companies to move to biomass combustion practices which can add pressure on the earth’s forests and force the world into a “carbon debt”. A carbon debt refers to how long it will take to sequester the GHG emitted from the burning of biomass (e.g. trees). The regrowing of trees used for biomass takes time to sequester the CO₂ emissions and this is time the world does not have to solve climate change. Numerous studies have also shown that this burning of wood will increase warming for decades to centuries.

Challenges of Scope 1 2 3 Emissions Reporting

The reporting of scope 1 2 3 emissions have increased dramatically in the past 5 years, but it is still subject to several pitfalls that can be exploited by companies in the form of greenwashing and do more environmental harm than it appears.   

Exclusions

As mentioned above, biomass combustion emissions are excluded from scope 1 emissions reporting because they are considered to be carbon neutral, as the carbon released from burning biomass is assumed to have come from recently absorbed atmospheric carbon through photosynthesis. However, this does not negate the fact that the combustion of biomass still produces as much or even more carbon emissions than the combustion of fossil fuels.

Lack of standardisation

There are currently several different reporting standards and methodologies used for reporting emissions, which makes it difficult to compare emissions between companies. The lack of consistent reporting standards can further make it challenging for stakeholders to understand and interpret the data being reported.

Lack of verification

There is further a lack of verification of companies’ emissions reporting. The absence of independent verification and assurance can limit the credibility and reliability of the data being reported. Regulation has increased and the TCFD has made it mandatory for more than 1,300 of the UK’s top companies to report their scope 1 and 2 emissions. Scope 3 emissions reporting is however only encouraged and not enforced. The failure to include scope 3 emissions means that companies can set their boundaries for reporting emissions reporting in such a way that it minimises their scope 1 and 2 emissions. 

Voluntary disclosure

As the reporting of scope 3 emissions is not mandatory it also faces less scrutiny and companies can portray a greener image by only reporting some 1 or 2 of their scope 3 emissions categories. When stakeholders then assess the company’s emissions reporting it would seem that their scope 3 emissions are quite low. When implementing tricks like these, companies can make false claims about their emission reductions and route to net zero.