Understanding Scope 1, 2, and 3 Emissions: The Corporate Responsibility of Managing Supply Chain Impact

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As the world grapples with the pressing issue of climate change, understanding the various types of greenhouse gas (GHG) emissions is crucial for both individuals and businesses. Emissions are categorized into three scopes by the Greenhouse Gas Protocol, a widely used international accounting tool. Scope 1, Scope 2, and Scope 3 emissions represent different sources and levels of responsibility for companies. 

Let’s explore the differences between these scopes, their environmental impacts, and the corporate responsibility companies bear to manage their supply chain emissions.

Scope 1 Emissions

Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by a company. These include emissions from combustion in owned or controlled boilers, furnaces, vehicles, and emissions from chemical production in owned or controlled process equipment. Essentially, if a company can directly control the emission source, it falls under Scope 1.

Examples of Scope 1 Emissions

  • Company-owned vehicles burning fuel
  • Emissions from on-site manufacturing processes
  • Fuel combustion in owned buildings and facilities

Environmental Impact of Scope 1 Emissions

Scope 1 emissions are significant because they are direct and often substantial in quantity. Companies have direct control over these emissions and can implement immediate measures to reduce them. However, these emissions contribute directly to the atmospheric GHG concentration, affecting climate patterns, air quality, and public health.

Scope 2 Emissions

Scope 2 emissions are indirect GHG emissions from the consumption of purchased electricity, steam, heating, and cooling. Although these emissions occur at the facility where the electricity or energy is generated, they are accounted for in a company’s GHG inventory because the company is responsible for their consumption.

Examples of Scope 2 Emissions

  • Electricity purchased for office buildings
  • Energy used for heating and cooling facilities
  • Power consumption for manufacturing processes sourced from the grid

Environmental Impact of Scope 2 Emissions

Scope 2 emissions can be substantial, especially for businesses with high energy demands. Transitioning to renewable energy sources, such as wind or solar power, can significantly mitigate these emissions. These emissions contribute to the overall demand for energy, which, if sourced from fossil fuels, leads to more GHG emissions and environmental degradation.

Scope 3 Emissions

Scope 3 emissions are the most extensive and challenging to quantify. These are indirect emissions that occur in a company’s value chain but are not owned or controlled by the company. They include both upstream and downstream emissions, such as those from the production of purchased goods and services, employee commuting, waste disposal, and the use of sold products.

The EPA puts it into perspective nicely: The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization. Scope 3 emissions (also referred to as value chain emissions) often make up the majority of an organization’s total GHG emissions, including downstream supply chain activities. And a 2022 Carbon Disclosure Project report reveals that supply chain emissions are the biggest contributor to GHG emissions, accounting for an average of 11.4x more emissions compared to operational emissions. This equates to approximately 92% of any organization’s total GHG emissions.

Examples of Scope 3 Emissions

  • Emissions from suppliers’ manufacturing processes
  • Supply chain activities (e.g. downstream transportation and distribution across ocean, road, and air freight)
  • Employee travel and commuting
  • Waste generated in operations
  • Waste disposal
  • End-of-life treatment of sold products

Environmental Impact of Scope 3 Emissions

Scope 3 emissions often represent the largest portion of a company’s total GHG emissions. Despite their indirect nature, they significantly impact the environment. Addressing these emissions requires comprehensive strategies, including supplier engagement, sustainable product design, and encouraging responsible consumer behavior.

Corporate Responsibility and Supply Chain Emissions

Companies have a growing responsibility to manage their emissions across all three scopes, particularly Scope 3, due to its complexity and scale. As stakeholders increasingly demand transparency and accountability, businesses must conduct comprehensive assessments of their supply chain emissions, identify the most significant sources, and adopt robust sustainability practices.

Why Corporate Responsibility Matters:

  1. Reputation and Brand Value: Companies that actively manage their GHG emissions and adopt sustainable practices enhance their reputation and brand value. Consumers and investors are more likely to support businesses that demonstrate a commitment to environmental stewardship.
  2. Regulatory Compliance: Governments worldwide are implementing stricter regulations on GHG emissions. Companies that proactively manage their emissions are better positioned to comply with current and future regulations, avoiding potential fines and legal issues.
  3. Risk Management: Climate change poses significant risks to businesses, including supply chain disruptions, resource scarcity, and increased operational costs. By understanding and managing their emissions, companies can mitigate these risks and build resilience.
  4. Investor Expectations: Investors are increasingly considering environmental, social, and governance (ESG) factors in their decision-making processes. Companies with robust GHG management practices are more attractive to investors, potentially leading to better financial performance and access to capital.

Strategies for Managing Supply Chain Emissions

To effectively manage supply chain emissions, companies should consider the following strategies:

  • Supplier Engagement – Collaborate with suppliers to understand and reduce their GHG emissions. This can involve setting emission reduction targets, providing support and resources for sustainable practices, and integrating sustainability criteria into procurement processes.
  • Energy Efficiency – Invest in energy-efficient technologies and practices across operations and supply chains. This includes upgrading equipment, optimizing processes, and implementing energy management systems.
  • Renewable Energy – Transition to renewable energy sources for operations and encourage suppliers to do the same. Power purchase agreements (PPAs) and renewable energy certificates (RECs) can help companies achieve this transition.
  • Product Design – Design products with sustainability in mind. This includes using eco-friendly materials, reducing waste, and considering the product’s life cycle impact.
  • Transparency and Reporting – Regularly measure and report GHG emissions across all scopes. Transparent reporting builds trust with stakeholders and provides a basis for setting and tracking emission reduction targets.

Understanding the differences between Scope 1, Scope 2, and Scope 3 emissions is crucial for companies aiming to reduce their environmental impact. While Scope 1 and Scope 2 emissions are relatively straightforward to manage, Scope 3 emissions present a complex challenge that requires comprehensive strategies and collaboration across the value chain. 

Corporate responsibility extends beyond direct emissions to include the entire supply chain, highlighting the need for businesses to adopt sustainable practices and engage stakeholders in their journey toward a low-carbon future. By taking proactive measures, companies can not only mitigate their environmental impact, but also enhance their reputation, comply with regulations, manage risks, and meet investor expectations.