Scope 3 Emissions Explained

Scope 3 emissions can represent over 90% of a company’s carbon footprint. Regulators are zoning in on them, particularly in high-emitting industrial and commodity supply chains — and this will impact many companies’ business models.

With organizations increasingly disclosing their full carbon footprint on the road to net zero, find out more about the importance of Scope 3 emissions, why this data enables companies to better understand their climate impacts, and how to begin this complex reporting process.

What are Scope 3 emissions?

Scope 3 emissions are indirect emissions emitted across an organization’s value chain,  the result of activities which are not directly controlled or owned by the company. The exception is indirect emissions from the purchase or use of electricity generated elsewhere: those emissions are Scope 2, rather than Scope 3.

Categorizing greenhouse gas (GHG) emissions into ‘Scopes’ was first introduced by the GHG Protocol, a leading provider of standards and tools which help organizations quantify their emissions. Scope 3 emissions are complex to measure, and originate from a wide range of sources, which is why the GHG Protocol identifies 15 categories of Scope 3 emissions — to better guide on measurement, identify where companies’ Scope 3 hotspots are, and make cross-company comparisons easier. 

Scope 3 categories

• Category 1: Purchased goods and services

• Category 2: Capital goods

• Category 3: Fuel- and energy-related activities

• Category 4: Upstream transportation and distribution
• Category 5: Waste generated in operations
• Category 6: Business travel
• Category 7: Employee commuting
• Category 8: Upstream leased assets
• Category 9: Downstream transportation and distribution
• Category 10: Processing of sold products
• Category 11: Use of sold products
• Category 12: End-of-life-treatment of sold products
• Category 13: Downstream leased assets
• Category 14: Franchises
• Category 15: Investments

How do Scope 3 emissions differ from Scope 1 and 2 emissions?

Scope 1 covers emissions from sources which a company owns or directly controls. Scope 2 covers emissions which are indirectly caused by companies through the electricity, heating,cooling or steam they purchase and use.

Scope 3 emissions include sources which are not within a company’s Scope 1 and Scope 2 operational boundaries. Examples include emissions from suppliers' facilities that produce a company's purchased goods, transportation of purchased or sold goods, and how products are used once sold.

While Scope 3 emissions represent the largest share of an organization’s GHG emissions — especially for companies creating and trading physical products — these emissions will represent Scope 1 and 2 emissions for other companies in the original organization’s value chain. In short: one company’s Scope 3 emissions are another company’s Scope 1 or Scope 2 emissions.

If all organizations were equally invested in reducing their carbon emissions, Scope 3 emissions would be easier to monitor and manage.

However, the reality is that economies are highly interconnected and organizations have influence on emissions they do not directly produce. Companies can make decisions about which raw and processed materials they buy and where from, who they work with, who they sell to, and how they design their products — which in turn influences emissions elsewhere in the economy.

One of the GHG Protocol’s original goals was to avoid double counting between companies. This is somewhat inevitable, as one company’s Scope 1 and 2 emissions are another company’s Scope 3 emissions. However, by accounting for companies’ direct and indirect emissions in a value chain, this categorization facilitates organizations working in tandem to reduce emissions.

Example of Scope 3 emissions for a manufacturer

Manufacturers’ carbon footprints are likely to have a very high share of Scope 3 emissions.

• Emissions from purchased goods that manufacturers buy as material inputs, falling under Category 1 — purchased goods and services — are likely to be material, depending on how carbon-intensive their products are.
• Category 11 — use of sold products — are also an important hotspot for manufacturers to measure. These will be high if manufacturers sell products such as fuels which need to be combusted or products which require a lot of energy to be used.
• Scope 1 and 2 emissions also have the potential to be substantial for manufacturers, depending on the intensity of their production process and the energy required to power manufacturers’ factories.

Example of Scope 3 emissions for a commodity trader

With carbon prices on the rise, commodity traders should keep an eye on the Scope 3 emissions of high-risk products.

• For example, Category 11 — use of sold products —of Oil and Gas products will represent a large share of their carbon footprint, due to the combustion of fuels sold.
• Traders of metal products should keep an eye on Category 1 emissions — purchased goods and services — as a hotspot. These are likely to be substantial due to the embodied carbon from metal and mining processes.
• Similarly, agricultural product traders will also need to consider Category 1 emissions, whose share is likely to be high due to land use change, although this will depend on purchased goods’ country of origin.

Example of Scope 3 emissions for a trade finance provider

‍Banks looking to reduce their portfolio’s carbon intensity will need to focus on Scope 3 Category 15 emissions — investments — as their primary carbon hotspot.

Why should organizations measure their Scope 3?

Benefit stakeholders

A comprehensive GHG inventory outlining all three Scopes allows organizations to identify and focus efforts on their largest emissions sources. Disclosing Scope 3 emissions allows stakeholders to more easily compare companies’ carbon footprints.

By disclosing Scope 3 emissions, an organization becomes more accountable for the internal and external environmental capital it expends and therefore more accurately reflects the true cost of the financial value the organization generates.

Better analyze environmental impact

Companies are increasingly analyzing their value chains to understand the full impact of their business. Classifying and disclosing different types of emissions provides an indication of the control an organization has over GHG emissions and pinpoint emissions reduction opportunities. 

Scope 3 emissions could be considered as an organization's GHG ‘externalities’, helping provide a fuller picture of a company’s carbon footprint. Therefore, if an organization does not disclose Scope 3 emissions, it underrepresents its true environmental impact. Limiting disclosures to Scope 1 and Scope 2 could also result in inaccurate carbon pricing, and present an incomplete picture of how physical aspects of climate change will impact an organization.

Contribute to global decarbonization aims

Disclosing Scope 3 emissions is also an important step towards reaching global climate goals. Measuring and managing Scope 3 emissions at one larger company has the potential to create a chain reaction whereby that company asks its suppliers and customers to do the same (since those form part of the original company’s Scope 3) — thereby accelerating decarbonization worldwide.

Why does your organization need a Scope 3 strategy?

Scope 1 and Scope 2 emissions reduction can usually be achieved without significant changes to an organization’s operations, e.g. by sourcing renewable energy.

However, reducing Scope 3 emissions will lead to a more fundamental business model transformation — radical changes will likely be required in how a company’s suppliers and customers operate, as well as changes to a company’s products. 

The earlier a company can measure and disclose all Scopes, the easier it will be to adapt to a lower-carbon world.

With regulations requiring companies to disclose Scope 3 emissions ramping up worldwide, it is also important for companies to get ahead of any policy developments which may dramatically impact the way they do business. For example, the EU’s Corporate Sustainability Reporting Directive (EU CSRD), Singapore disclosure rules and the UK’s Streamlined Energy and Carbon Reporting (SECR) legislation.

Disclosing Scope 3 emissions requires time and effort, which is why it is important to create a dedicated strategy to track progress. Considering the complexity of many companies’ supply chains — particularly in metals, energy and manufacturing — it can be difficult to pinpoint where effort should be focused in quantifying Scope 3 emissions.

How to create a Scope 3 strategy

One way to prioritize Scope 3 calculations is to complete a screening of Scope 3 sources. A review of a company’s procurement spend — analyzing spend categories, products or services purchased, and prominent suppliers — is a good place to start.

Once an organization has a procurement spend breakdown, it can use spend-based emission factors for an initial assessment of 'emissions hotspots’ within its value chain. 

Using this initial information, companies can then move towards better quality data and prioritize:

• Where to obtain products’ activity data, by focusing on carbon-intensive products (e.g. metals, fuels, construction materials etc.);
• Which suppliers to request emissions reports from, by focusing on which suppliers are in the highest emitting sectors;
• What categories of spend to source activity data for, e.g. prioritizing flight distance data over spend within business travel.

Organizations can also prioritize different focus areas depending on activities the company has influence over, activities which most impact its critical functions, which stakeholders are deemed most important and which areas identified are most sectorally significant.

Scope 3 and science-based targets

Scope 3 emissions are included in net-zero emissions reduction targets under the Science Based Targets initiative (SBTi).

By the end of 2023, 4,205 companies and financial institutions had SBTI-validated targets. The overwhelming majority, 97%, included Scope 3 emissions in their targets.

However, the SBTi has identified some limitations in its latest Scope 3 Discussion Paper: for example, the current minimum target boundary (that is, the proportion of emissions to include in the Scope 3 target) is 67%. For a heavy-emitting industry like automakers and steel, this risks leaving critical sources of emissions out of the industry's target-setting (see Figure 15, p.70: Science Based Targets initiative (SBTi). (2024). Aligning corporate value chains to global climate goals. SBTi Research: Scope 3 Discussion Paper). This could also result in misleading claims associated with Scope 3 emissions reductions.

Different ways to measure Scope 3 emissions

Once a reporting period is established, activity data (data from activities which generate GHG emissions) and emissions data should be collected across all emission sources. Over time, it is important to improve data quality to avoid relying on estimates.

Screening Scope 3 sources can help companies decide how to prioritize suppliers’ data. There is a ‘best practice’ data collection hierarchy we recommend following:

1. Give precedence to primary activity data from your organization’s operations and collect supplier-specific data where it is proportional to emissions;
2. Model activity data to represent emission sources;
3. Evaluate activity data using industry benchmarks.

💡On CarbonChain’s platform, companies can automatically calculate their Scope 3 emissions with granular accuracy.

There are two main approaches an organization can take to measure its Scope 3 emissions:

Direct measurement

GHG emissions are quantified using direct monitoring, mass balance or stoichiometry, such as a flue gas meter.

Calculation based

The most common method used by companies, this approach quantifies GHG emissions by multiplying activity data by an emission factor (the rate at which a given activity releases GHG emissions into the atmosphere).

Different calculation approaches include:

Supplier-specific method

• Collects product-level, cradle-to-gate GHG inventory data from goods or services suppliers.

Hybrid method

Uses a combination of supplier-specific data (where available) and secondary data to fill in the gaps, by:

• Collecting allocated Scope 1 and Scope 2 emission data directly from suppliers;
• Calculating upstream emissions of goods and services from suppliers’ activity data on the amount of materials, fuel, electricity, used, distance transported - as well as waste generated from the production of goods and services - and applying appropriate emission factors;
• Using secondary data to calculate upstream emissions (whenever supplier-specific data is unavailable).

Average-data method

• Estimates emissions for goods and services by collecting data on the mass or quantity of purchased products, and multiplying by relevant secondary emission factors (e.g. average emissions per unit of good or service).

Spend-based method

• Linking emissions with financial expenditure, this method estimates emissions for goods and services by collecting data on the financial value of goods and services purchased, and multiplying it by relevant secondary emission factors (e.g. average emissions per product’s monetary value)

Which emissions factors do you need to consider for Scope 3?

There are several different types of emission factors (EFs) which can be used to calculate Scope 3 emissions:

• Embodied EFs (also known as cradle-to-gate EFs) — these include GHG emissions from the production of a certain material, product, or energy. All upstream attributable GHG emission sources from cradle-to-gate for the production of the material, product, or energy are included.
  Such EFs are usually used for purchased goods and services and examples include lime, diesel, electricity grid and fertilizer

• Direct EFs — these include GHG emissions from combustion only, excluding any upstream production or embodied carbon.
  Examples include emissions from combustion of fuels, emissions from application of fertilizers and emissions occurring from landfill decomposition

• Life cycle EFs — these include the GHG emissions throughout the entire life cycle of a product, from raw material extraction to its end-of-life treatment.
  Examples include fuels in transport (including both production and combustion)
• ‍Partial EFs — similar to the above-mentioned embodied EFs, except that some upstream GHG emissions are excluded deliberately. This exclusion allows for the intentional separation of GHG emissions into life cycle stages or enables explicit modeling of an upstream input from a known asset or source. Examples include steel mills (excluding iron ore mining) and refined fuels (excluding crude oil production)

Calculating Scope 3 emissions with CarbonChain

Leading manufacturers and commodity traders use CarbonChain’s products to access accurate and efficiently-calculated data when analyzing their carbon footprint. 

We use a validated methodology to provide corporate footprint information broken down into Scope 3 emissions — across all 15 categories — alongside Scope 1 and Scope 2 emissions. This data can be easily imported into key sustainability reporting frameworks.

CarbonChain also helps organizations define their reporting boundaries, e.g. identifying the companies and relevant emissions sources, outlining justifications for exclusion, helping them report accurately and transparently.

Take control of your Scope 3 with CarbonChain