Scope 1, 2, and 3 Emissions

Last Updated:
February 14, 2024
Scope 1, 2, and 3 Emissions Explained
The transition to a low carbon economy is on every CEO's agenda nowadays. The impacts of climate change and responses to it will transform every business sector in the coming decades. Although Climate change will affect a majority of companies, all will be expected to contribute to its solution.
Nevertheless, it is challenging for most companies to devise and implement a credible decarbonisation strategy. The transition requires new ways of doing business, including new ways of displaying capabilities and resources and new ways of thinking. But despite the challenges, companies around the world are scaling up their decarbonisation commitments.
We can see this trend with the number of companies committing to reducing emissions. More than 2000 companies have confirmed emissions reduction targets under the Science Based Target initiative (SBTi). Additionally, more than 370 have committed to The Climate Pledge, pledging to achieve net zero emissions by mid-century or sooner.
For most companies and investors, carbon credits play a crucial role in their Net-Zero strategy. They allow companies to make earlier and more ambitious commitments. Credits allow companies to reduce their current emissions through offsets, while taking cost-effective steps to reduce future emissions through asset rotation and business model development. In the long term, credits can play an essential role in offsetting difficult-to-avoid emissions from products for which no low- or zero-emission options exist.
The growing interest in recent years is also reflected in the Voluntary Carbon Market (VCM), which organises the pledging and trading of carbon credits. In 2022, the demand for carbon credits is at its peak. Prices have increased by more than 140% since 2021 and forecasts assume that demand for credits will increase 15-fold by 2030, to $50 billion per year.
But the voluntary carbon market has a problem. It cannot cope with demand. Access, which plays a crucial role in the global effort to combat climate change, is often limited to large organisations and is characterised by opaque pricing and market inefficiencies. Furthermore, due to a lack of transparency and credibility, it has faced a number of problems in recent years.
This report examines the key role for on-chain carbon credits as part of net zero strategies and the VCM. It was prepared by senken to help business decision makers identify and understand the best use of credits for their business.

What are Scope 1, 2, and 3 Emissions?

Scope 1, 2, and 3 emissions are defined by the Greenhouse Gas Protocol to help organisations understand and categorise their carbon footprint. These scopes are essential for businesses to comprehensively assess their impact and identify areas for decarbonisation.

Scope 1: Direct Emissions

Scope 1 emissions are direct emissions from sources directly owned or controlled by the company/organisation. These include emissions from combustion in boilers, furnaces, and vehicles, as well as emissions from chemical production in owned or controlled process equipment.

Scope 2: Indirect Emissions from Purchased Energy

Scope 2 covers indirect emissions from the generation of electricity, steam, heating, and cooling that is purchased and consumed by the reporting company. Despite not being emitted directly by the company, these emissions result from the company's energy use and operation.

Scope 3: Indirect Value Chain Emissions

Scope 3 emissions include all indirect emissions not included in Scope 1 or 2 that occur within the value chain of the reporting company, including both upstream and downstream emissions. These are the result of activities from assets not owned or controlled by the company, but are related to the company's operations. For example, supply chains and distribution channels will be included in Scope 3 emissions.

How Scope 1, 2, and 3 Emissions Work Together

Understanding and managing Scope 1, 2, and 3 emissions is crucial for comprehensive climate action. Scope 1 and 2 emissions are often more straightforward to calculate and manage, while Scope 3 emissions tend to be more complex due to their extensive value chain involvement.

Challenges with Reporting on Scope 3 Emissions

Scope 3 emissions typically make up the largest portion of a company’s emissions and are the most complex to work out. Even a large portion of companies in the DAX-40 face challenges with reporting on their Scope 3 emissions, meaning that those who manage to do this successfully can set themselves up to be true sustainability leaders in their respective industries.