The year 2023 was a record-breaking one, becoming the hottest year in recorded history, according to the World Meteorological Organization (WMO). Efforts have been made in recent years (i.e., the Paris Agreement) to curtail the progress of climate change by reducing carbon and greenhouse gas (GHG) emissions. The Paris Agreement, which entered into force on 4 November 2016, has the overarching goal of holding “the increase in the global average temperature to well below 2°C above pre-industrial levels” and pursuing efforts “to limit the temperature increase to 1.5°C above pre-industrial levels”.

In December 2023, the United Nations Climate Change Conference (most commonly known as COP28) took place in Dubai, United Arab Emirates, where representatives from nearly 200 countries met to discuss actions against climate change. They have agreed to call for a transition away from fossil fuels for the first time.

But how can we start this transition? The Greenhouse Gas Protocol provides businesses and governments with accounting and reporting standards, sector guidance, calculation tools, and training so that they can measure and manage their emissions.

What Are Carbon Emission Scopes?

Carbon emission scopes, as defined by the Greenhouse Gas Protocol, are a way to categorise the different kinds of emissions a company creates in its own operations and in its wider ‘value chain’ (its suppliers and customers).

Carbon emissions are responsible for 81% of all GHG emissions, and corporations are the biggest emitters. Instating a way for them to monitor and report on these emissions is a great way to hold them accountable while effecting positive change.

The GHG Protocol corporate standard classifies a company’s emissions into three different scopes (or types)—the first two being obligatory to report, while the last one is voluntary.  As of 2020, 81% of S&P 500 companies voluntarily reported scope 1 and scope 2 emissions in their corporate social responsibility reports.

To understand each of the scopes and what makes them different from each other, let’s delve deeper into them.

Scope 1: Direct Emissions

This scope covers emissions from sources and activities that a corporation (or organisation) directly owns or controls.

Scope 1 emissions are divided into four categories:

1. Stationary combustion – All fuels and heating sources that produce GHG emissions.
2. Mobile combustion – All fuel-burning vehicles owned or operated by the organisation.
3. Fugitive emissions – Any greenhouse gas leaks from refrigeration, air conditioning units, etc. As a side note, refrigerant gases are exponentially more dangerous than CO2 emissions. This is due to their ability to absorb infrared radiation, which traps heat inside the atmosphere, making them thousands of times more capable of warming the planet than CO2.
4. Process emissions – Any emissions released during on-site manufacturing and other industrial processes.

Scope 2: Indirect Owned Emissions

Scope 2 emissions are all GHG emissions produced by consuming purchased electricity, steam, heat, and cooling from a utility provider. Coming indirectly from the energy bought by a company, they are included in the company’s greenhouse gas inventory because they result from how it uses that energy.

Scope 2 emissions are typically divided into the following categories:

1. Purchased electricity: Emissions from the generation of electricity that is consumed by the organisation.
2. Purchased steam: Emissions from the production of steam used in industrial processes or other activities.
3. Purchased heating and cooling: Emissions from the generation of heating and cooling used in buildings and other activities.

We’ve looked at emissions a company produces directly and indirectly in Scopes 1 and 2. Now, let’s broaden our view to include a bigger picture of how a company affects the environment. This brings us to Scope 3 emissions, also known as Value Chain Emissions. Unlike Scopes 1 and 2, which deal with emissions a company owns directly or indirectly through using energy, Scope 3 digs into emissions not made by the company itself. Let’s explore Scope 3 and see how it involves the environmental impact of activities both before (suppliers) and after (clients) a company’s part in making a product.

Scope 3: Indirect Not-Owned Emissions

Also known as Value Chain Emissions, Scope 3 covers indirect emissions not produced by the company itself. These emissions come from activities upstream of the company’s value chain (suppliers) and downstream (clients).

1. Upstream Emission – Associated with the processes that take place before the manufacturing stage. This includes the extraction, production, and transportation of components, raw materials, and other energy sources needed for the production process.

For example, when a store buys plastic containers for food, the pollution from making and delivering those containers is an “upstream emission” for the store. This is because it happens when the containers are produced before the store gets them.

2. Downstream Emissions – These emissions are caused by the distribution, use, maintenance, and disposal of the product after the initial production phase.

For example, when people buy a car made by a company, the emissions coming from using the car are a “downstream emission” because they occur after the car is first made.

Measuring Carbon Emission Scopes

Measuring Carbon Emission Scopes is a critical part of a company’s sustainability strategy and it involves understanding and quantifying the greenhouse gas emissions that a company creates. This measurement is used to assess the company’s environmental impact and to identify opportunities for reducing its carbon footprint.

Companies have an easier time assessing their Scope 1 and Scope 2 emissions than Scope 3, which are created outside of the company.

Scope 1 emissions happen when a company does certain things that directly release pollutants into the air. These emissions are usually tracked and measured as part of a company’s list of greenhouse gases. This helps the company understand how its actions affect the environment and find ways to reduce these emissions.  The process of measuring Scope 1 emissions typically involves the following steps:

1. Identify Direct Emission Sources: This involves identifying all sources of direct emissions within the organisation’s control or ownership. This could include boilers, furnaces, vehicles, and other equipment that burn fuel.
2. Measure Direct Emissions: This involves measuring the amount of fuel consumed by these sources. For example, if a company has a boiler that burns natural gas, the company would measure the amount of natural gas that the boiler consumes.
3. Apply Emission Factors: The amount of fuel consumed is then multiplied by an emission factor to calculate the amount of GHG emissions. The emission factor represents the amount of GHG emitted per unit of fuel consumed. For example, if the emission factor for natural gas is 0.18 kg CO2/kg natural gas and the boiler consumes 100 kg of natural gas, the boiler would emit 18 kg of CO2.
4. Summarize Emissions: The emissions from all direct emission sources are then summed to give the total Scope 1 emissions.

To figure out Scope 2 emissions, we usually look at how much electricity a company buys from the power grid or other places. We use something called emission factors, which show how much greenhouse gas is released for each unit of energy used.  The process of measuring Scope 2 emissions typically involves the following steps:

1. Identify Energy Purchase Sources: This involves identifying all sources of purchased energy within the organization’s control. This could include electricity, steam, heat, or cooling purchased from utility providers.
2. Measure Energy Consumption: This involves measuring the amount of energy consumed from these sources. For example, if a company purchases electricity from a utility provider, the company would measure the amount of electricity consumed.
3. Apply Emission Factors: The amount of energy consumed is then multiplied by an emission factor to calculate the amount of GHG emissions. The emission factor represents the amount of GHG emitted per unit of energy consumed. For example, if the emission factor for electricity is 0.5 kg CO2/kWh, and the company consumes 1000 kWh of electricity, it would emit 500 kg of CO2.
4. Summarise Emissions: The emissions from all energy purchase sources are then summed to give the total Scope 2 emissions.

As discussed above, Scope 3 emissions relate to a company’s supply chain—both upstream and downstream—and they more often than not involve suppliers and consumers from all around the world.  Measuring and reporting Scope 3 emissions can be complex due to data availability and methodological challenges.

The process of measuring Scope 3 emissions typically involves the following steps:

1. Identify Relevant Scope 3 Activities: This involves identifying all relevant Scope 3 activities within the organisation’s value chain. This could include purchased goods and services, transportation and distribution, and use the of sold products.
2. Measure Scope 3 Activities: This involves measuring the amount of energy consumed or goods and services purchased or sold. For example, if a company purchases goods from a supplier, the company would measure the amount of goods purchased.
3. Apply Emission Factors: The amount of energy consumed or goods and services purchased or sold is then multiplied by an emission factor to calculate the amount of GHG emissions. The emission factor represents the amount of GHG emitted per unit of energy consumed, goods and services purchased or sold.
4. Summarise Emissions: The emissions from all relevant Scope 3 activities are then summed to give the total Scope 3 emissions.

Integration of Carbon Emission Scopes into the EU-CSRD

The EU’s Corporate Sustainability Reporting Directive (CSRD) is significant when it comes to companies being transparent and accountable about their impact on the environment. One important part of this is making companies include details about their carbon emissions in their reports. This means they have to thoroughly check and disclose how much greenhouse gas they produce.

• Disclosure Requirements: Companies in the EU have to share information about the greenhouse gases they produce. This includes what they directly emit (Scope 1), what they indirectly cause through purchased energy (Scope 2), and a qualitative assessment of other emissions associated with their activities (Scope 3). The EU-CSRD makes it mandatory for big EU-based public companies and certain large private organisations to report all these emissions, along with details about how they handle climate risks and their strategies for dealing with climate change. This rule also applies to around 10,000 non-EU companies that do significant business in the EU. The information about emissions, climate risk, and climate policies must be a part of their yearly reports, just like their financial details, and it will be checked by auditors.
• Double Materiality: The CSRD emphasises “double materiality,” meaning companies must assess both the impact of their operations on sustainability issues and the influence of sustainability issues on their business. This might lead to mandatory Scope 3 disclosure for companies significantly impacted by climate change or with substantial Scope 3 emissions.
• Phased Approach: The full Scope 3 disclosure requirement will be phased in, starting with larger companies in 2024 and smaller companies with under 250 employees and foreign companies in 2028. This allows companies time to adjust and develop robust data collection and reporting systems.

Large companies that are already following the rules of the Non-Financial Reporting Directive (NFRD) need to start following the Corporate Sustainability Reporting Directive (CSRD) from January 1, 2024. They have to include CSRD’s measurements and reporting rules in their annual reports for the year 2024. The first report following these new rules should be published in 2025. For large companies not currently following the NFRD, they should start following the CSRD from January 1, 2025. They’ll have to include CSRD’s measurements and reporting rules in their annual reports for the year 2025, and the first report under these new rules needs to be published in 2026.

By 2029, over 60,000 companies within and outside of the European Union will be obligated to report their emissions. In 2028, the CSRD takes effect for non-EU parent companies with EUR 150 million annual revenues in the EU and at least one subsidiary or branch in the EU that conducts significant business. They must file their first report using 2028 emissions data at a consolidated group level (including non-EU activity) in 2029.

Companies, undoubtedly, will face some hurdles in order to adjust to the new EU-CSRD regulations. Having to pore over massive amounts of data to identify and quantify their Scope 1, 2, and 3 emissions will be an additional expense.

Conclusion

In response to the urgent need for environmental accountability, the EU-CSRD emerges as a pivotal force. The three-tiered classification system—Scopes 1, 2, and phased-in Scope 3—mandates transparency and accountability for companies in reporting their carbon emissions. While challenges exist, the phased implementation allows for adaptation. By prioritising “double materiality,” the CSRD integrates sustainability issues into business assessments, setting a new standard for corporate responsibility.