What are Scope 3 Emissions and Why Must Large Enterprises Measure Them Accurately?
Scope 3 emissions are a significant contributor to the total carbon footprint of an enterprise in Australia, accounting for over 85% of an organisation’s greenhouse gas (GHG) emissions. To reduce their carbon footprint significantly, enterprises must understand the role of Scope 3 emissions.
The GHG Protocol has categorised carbon emissions into three main types - Scope 1, 2, and 3 emissions. This carbon accounting system, first introduced in 2001, is now the basis for mandatory GHG reporting.
Scope 1 covers a company’s direct emissions, such as those from boilers and vehicles. Scope 2 covers indirect emissions such as purchased electricity.
Scope 3, the largest and most complex category, includes emissions caused by a company’s suppliers and customers.
Comparing Scope 1, 2, and 3 emissions
|Direct emissions from sources that are owned or controlled by the organisation
|Fuel combustion in boilers or vehicles owned by the company
|Indirect emissions from the generation of purchased electricity, steam, heating, and cooling
|Emissions from power plants supplying electricity to the company
|Other indirect emissions from across an organisation’s value chain, including those by suppliers, partners, and employees
|Emissions from the production of purchased materials, transportation of goods in vehicles not owned by the organisation, waste disposal, and commuting by employees
(Reference: GHG Protocol)
Scope 3 emission categories in Australia
Scope 3 emissions account for the bulk of many companies' GHG emissions, depending on the industry, typically over 85% of their overall emissions.
The GHG protocol specifies 15 Scope 3 emissions categories, including upstream activities such as:
- Purchased goods and services: Emissions caused by the production of goods or services purchased by a company
- Capital goods: Emissions caused by the production of capital goods purchased by a company
- Fuel and energy-related activities: Emissions from the production of fuels and energy consumed by a company
- Transportation and distribution: Emissions caused by the transportation and distribution of products purchased by a company
- Waste from operations: Emissions from third-party disposal and treatment of waste generated by a company’s operations
- Business travel: Transportation of employees for business activities in third-party owned vehicles
- Employee commuting: Emissions from employees’ transportation to and from their workplace
- Leased assets: Emissions from the operation of assets leased by a company
The following downstream activities are also included in Scope 3 emissions:
- Transportation and distribution: Emissions from the distribution and transportation of products sold by the company
- Processing of sold products: Emissions from the processing of products by downstream parties before their eventual sale to customers
- Use of sold products: Emissions from the use of products sold by the company
- End-of-life treatment of sold products: Emissions from waste disposal and end-of-life treatment of products sold by a company
- Leased assets: Emission from the operation of assets owned by a company but leased out to other parties
- Franchises: Emissions from the operations of franchises of a reporting company
- Investments: Emissions associated with the investments of a reporting company
The GHG Protocol helps enterprises understand which emission categories are relevant for them and how to estimate emissions for each category.
Why should Australian companies measure their Scope 3 emissions?
Cutting emissions across all scopes, especially Scope 3, has significant benefits as regulators, investors, and consumers push towards a net zero economy. This is why Scope 3 emissions are important in Australia.
- Comply with regulations: Many countries have set limits and targets for greenhouse gas emissions, including Scope 3 emissions. The Australian Government is committed to introduce a new climate-related financial reporting system, obliging companies to reveal their Scope 1, 2, and 3 greenhouse gas emissions following the International Sustainability Standards Board (ISSB) guidelines.
- Gain consumer trust: Consumers are gravitating towards enterprises that are mindful of their carbon footprint. Companies that invest in sustainability, including in measuring and reducing scope 3 emissions, can improve their brand image among consumers, vendors they sell to, and other stakeholders.
- Build investor confidence: As consumers make more sustainable purchases, businesses that have a lower carbon footprint will gain a competitive advantage. Investors increasingly scrutinise a a company’s sustainability metrics when evaluating investments.
- Optimise future costs: Organisations can potentially achieve cost savings through changes in their supply chain. A Deloitte survey has shown that 38% of CFOs cite cost reduction as their primary motivation to decarbonise. (Source: https://www2.deloitte.com)
- Manage the largest source of emissions: Scope 3 often contributes ~85% of an enterprise’s overall emissions* and offers the biggest opportunity to reduce carbon footprint.
- Future-proof supply chains: Decarbonisation is a multi-year journey and reducing Scope 3 emissions is an important part of it. Enterprises that track their Scope 3 emissions will move ahead of the curve and gain an early mover advantage when businesses inevitably pivot to a low-carbon economy.
- Reduce carbon tax liability: Tax on carbon emissions may get more prevalent as countries commit to decarbonisation targets. Enterprises can lower their carbon risk by reducing their Scope 3 emissions.
Research from the Boston Consulting Group (BCG) shows that over 90% of companies cannot accurately measure their emissions. Furthermore, most companies exclude Scope 3 emissions because of the lack of confidence in available data. In fact, almost 40% of companies experience a 30-40% error rate in establishing emission baselines.
How can Terrascope help?
Terrascope enables organisations to track and measure emissions across their value chain and all GHG categories. The SaaS-based platform helps large enterprises make data-driven decisions, set ambitious and realistic reduction goals, and start the journey to net zero with confidence.
Book a demo with our emissions measurement expert now!
* Data is based on Terrascope's work and experience with clients