What are Scope 1, 2, and 3 Emissions?

Scope 1, 2, and 3 emissions are greenhouse gases emitted throughout the full value chain of an organization. Scope 3 emissions are particularly complex, as they include indirect emissions both prior to and following the delivery or consumption of a product.

The importance of Greenhouse Gas Emissions

Greenhouse gases (GHGs) are named for their ability to trap heat in the Earth’s atmosphere, much like the glass walls of a greenhouse. This natural greenhouse effect is essential for life, maintaining the Earth’s average temperature at a habitable level. Without it, global temperatures would plummet to around -18°C (-0.4°F), making life on Earth unsustainable. However, human activities, particularly since the Industrial Revolution, have significantly altered this natural balance. The importance of managing these emissions cannot be overstated. Climate change poses a severe threat to biodiversity, human health, and global economies.

By reducing GHG emissions, we can mitigate these impacts, stabilize the climate, and promote sustainability. Greenhouse gas emissions are classified into three categories or scopes. Organizations divide their emissions into these scopes to help them create effective reduction plans.

Overview of Scope 1, 2, and 3 Emissions

Scope 1 emissions are direct emissions from sources that the company owns or controls. For Instance, for a vehicle company, this is includes emissions from on-site manufacturing processes, such as the operation of assembly plants and the combustion of fuels in company-owned facilities or test vehicles. For instance, emissions from the furnaces used to forge car parts or the fleet of company-owned transport vehicles would be categorized under Scope 1.

Scope 2 emissions involve indirect emissions from the energy the company purchases and uses, such as electricity, steam, or cooling. For a vehicle manufacturer, these emissions arise from the energy required to power production lines, lighting, and other utilities in manufacturing plants. Although these emissions occur at the utility provider’s facilities, they are accounted for by the vehicle company due to its energy consumption.

Scope 3 emissions are the broadest and include all other indirect emissions from the company’s entire value chain, both upstream and downstream. For a vehicle manufacturer, this encompasses a wide array of activities, such as the production of raw materials like steel and aluminum used in car manufacturing, transportation of parts and finished vehicles, and the emissions generated by customers when they drive the vehicles. Even the disposal or recycling of the vehicles at the end of their lifecycle is part of Scope 3.

Scope 1, 2, and 3 emissions according to GHG Protocol

Importance of Scope 3 Emissions

Scope 3 emissions are the most complex and significant category of greenhouse gas (GHG) emissions, often representing the majority of a company’s total carbon footprint. Unlike Scope 1 and 2, which are more straightforward as they involve direct emissions from owned or controlled sources and indirect emissions from purchased energy.

According to McKinsey&Company, Scope 3 emissions can account for up to 90% of a company’s total emissions, depending on the industry. This highlights the critical importance of addressing these emissions to make meaningful progress in overall carbon reduction. Scope 3 covers all other indirect emissions across the entire value chain—both upstream and downstream. This includes emissions from the production of raw materials, transportation, use of sold products, and end-of-life disposal.

For example, in the vehicle manufacturing industry, Scope 3 emissions encompass the GHGs emitted during the extraction and processing of raw materials like steel, the logistics of transporting components, and the emissions from the vehicles when customers use them. Similarly, for an apparel company, the production of textiles, dyeing processes, and the disposal of garments contribute significantly to Scope 3 emissions.

Source: McKinsey analysis based on 2022 data from the Carbon Disclosure Project (CDP).

Effective Strategies for Reducing Scope 3 Emissions

Reducing Scope 3 emissions is challenging but essential, as they often constitute the majority of a company’s carbon footprint. Here are four key strategies companies can adopt to engage their supply chains and customers effectively:

Supplier and Customer Selection: Choosing suppliers with low-carbon practices is critical. Many companies are now adopting dual-mission sourcing—prioritizing both cost efficiency and carbon reduction. Volvo Trucks collaborates with a Swedish steelmaker to produce vehicles using fossil-free steel. Similarly, companies like Komatsu work with customers to develop zero-emissions equipment, showing how downstream collaboration can also drive emissions reductions.

Partnerships: Collaborating with other firms on new technologies can foster innovation in sustainable practices. For instance, Evonik Industries partnered with Unilever to create a low-carbon surfactant for dishwashing detergents, showcasing how partnerships can lead to more sustainable product lines.

Value Chain Integration: Organizations can increase control over emissions by integrating their value chains. This involves influencing emissions both before and after production, creating opportunities for reducing carbon footprints during a product’s lifecycle.

Life Cycle Assessment (LCA): Circular solutions like recycling can reduce emissions tied to a product’s disposal. As part of Patagonia’s Worn Wear Initiative, the company offers product owners the possibility to trade in their used gear or vouchers, while returned items, after repair, are sold directly to new customers.

Key Directives and Frameworks for Managing Emissions

When it comes to tackling greenhouse gas (GHG) emissions, companies can’t just wing it. They need structured approaches to measure, report, and ultimately reduce their carbon footprint. This is where well-established frameworks like the GHG Protocol and the Science Based Targets Initiative (SBTi) come into play, providing clear guidelines to help organizations stay on track with their sustainability goals.

Greenhouse Gas Protocol (GHG Protocol)
Think of the GHG Protocol as the gold standard for understanding and managing emissions. The beauty of the GHG Protocol is that it gives companies a comprehensive framework to account for all these emissions, ensuring no carbon footprint is left unmeasured.

Science Based Targets Initiative (SBTi)
If the GHG Protocol helps you figure out where your emissions are coming from, the SBTi tells you what to do about them. This initiative helps companies set ambitious but achievable targets based on climate science, pushing them to align their efforts with the global goal of limiting warming to 1.5°C. The SBTi isn’t just about setting goals—it’s about setting meaningful ones, especially around those tricky Scope 3 emissions, which often make up the bulk of a company’s footprint.

Future Trends in Emissions Reporting and Sustainability

As the urgency to address climate change grows, businesses are turning to cutting-edge technologies and financial innovations to manage and reduce their emissions more effectively. These emerging trends are not just helping companies meet regulatory requirements but also enabling them to set ambitious sustainability goals, enhance transparency, and drive competitive advantage.

In tandem with real-time monitoring, blockchain technology is revolutionizing the way companies track emissions across their supply chains. By providing a transparent, tamper-proof ledger of carbon footprints, blockchain enhances the integrity of environmental data, fostering greater trust among stakeholders. IKEA has embraced blockchain to monitor the emissions associated with its products from raw material sourcing to delivery. This transparency enables the company to hold its suppliers accountable and communicate its environmental performance more credibly to customers and investors. Financial innovations are also playing a critical role in driving corporate sustainability.

The rise of green finance instruments, such as green bonds and sustainability-linked loans, provides companies with the capital needed to fund their emissions reduction projects. Apple has been at the forefront of this trend, issuing green bonds to finance renewable energy initiatives like solar and wind farms. These projects not only help Apple reduce its reliance on fossil fuels but also align its financial performance with its environmental goals.

These innovations in emissions management reflect a broader shift towards integrated sustainability strategies. Companies are no longer viewing emissions reduction as a compliance exercise but as an opportunity to innovate, build resilience, and create value for all stakeholders. By adopting real-time monitoring, blockchain, AI, and green finance, businesses can navigate the complexities of emissions management while positioning themselves as leaders in the fight against climate change. As these trends continue to evolve, they underscore the growing importance of transparency and accountability.

Stakeholders, including investors, regulators, and consumers, are demanding more detailed disclosures on how companies manage their environmental impact. This push for openness ensures that businesses not only set ambitious targets but also demonstrate tangible progress in reducing their carbon footprints.