What Are Scopes 1, 2, and 3 Emissions?

Article Highlights:

• The GHG Protocol was created to develop and publish international standards for calculating (or accounting) and reporting greenhouse gas emissions.
• The GHG Protocol categorized carbon emissions as either scope 1, scope 2, or scope 3. 
• Scope 1 emissions are greenhouse gases a company releases into the atmosphere with its own property and other emissions sources it owns.
• Scope 2 emissions are the emissions caused by the electricity a company purchases from the electric grid. 
• Scope 3 emissions are all the other indirect emissions that are released along the value chain of a company. 
• Nearly 60% of publicly traded companies are now largely voluntarily reporting on scopes 1 and 2 emissions

In 1998, the World Resources Institute (WRI), a U.S.-based environmental nonprofit organization, and the World Business Council for Sustainable Development (WBCSD), a consortium of 170 international corporations focused on addressing and achieving the United Nations’ Sustainable Development Goals, launched the Greenhouse Gas Protocol Initiative. 

The Greenhouse Gas Protocol Initiative (GHG Protocol)

The GHG Protocol, as it would come to be known, sought to develop and publish international standards for calculating (or accounting) and reporting greenhouse gas emissions. The express goal of the GHG Protocol was to create a widely accepted framework that could be adopted by corporations, non-governmental organizations (NGOs), and industry groups to quantify their GHG emissions and report those figures to  regulatory agencies, government bodies, and the public.

The organizations who helmed the initiative also saw it as an opportunity to standardize reporting requirements around the world. As the GHG Protocol’s Corporate Accounting and Reporting Standard explains, “Policy makers and architects of GHG programs can also use relevant parts of this standard as a basis for their own accounting and reporting requirements.” When the GHG Protocol published the first edition of its accounting and reporting standards document in 2001, it introduced a concept that would come to serve as a fundamental framework for how corporations measure their carbon footprint: emissions “scopes.” 

The document categorized carbon emissions as falling into either scope 1, scope 2, or scope 3. The idea of conceptualizing a company’s GHG emissions as part of one of three different possible scopes was completely novel when it was published in the first Corporate Accounting and Reporting Standard in 2001. The idea of conceptualizing a company’s GHG emissions as part of one of three different possible scopes was completely novel when it was published in the first Corporate Accounting and Reporting Standard in 2001.

Fast-forward over two decades to today, however, and it’s a ubiquitous, universally accepted method for measuring carbon emissions in the corporate world. 

What Gases Are Covered Under the GHG Protocol?

The GHG Protocol covers accounting and reporting for the seven major greenhouse gases established by the Kyoto Protocol. These include:

• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
• Hydrofluorocarbons (HFCs)
• Perfluorocarbons (PFCs)
• Sulfur hexafluoride (SF6)
• Nitrogen trifluoride (NF3)

What Are Scope 1 Emissions?

Scope 1 emissions are the most straightforward, easily comprehensible category of emissions established by the GHG Protocol. These are greenhouse gases a company releases into the atmosphere with its own property and other emissions sources it owns. These are sometimes also referred to as “direct emissions.” 

Examples of scope 1 emissions include GHG released from the combustion of fuel in boilers or furnaces used to heat company buildings; the combustion of gasoline used to power vehicles owned by the company; and emissions arising out of chemical manufacturing and production conducted directly by the company. 

The GHG Protocol’s Corporate Accounting and Reporting Standard explains that scope 1 emissions are “principally the result of” the following activities:

• Generation of electricity, heat, or steam.
• Physical or chemical processing.
• Transportation of materials, products, waste, and employees.
• Fugitive emissions. (These are “intentional or unintentional” releases resulting from leakages and other incidental emissions.)

What Are Scope 2 Emissions?

These are the emissions caused by the electricity a company purchases from the electric grid. Because these emissions are not the direct product of activities being performed by the company—and are, in fact, being released by power plants with no operational connection to the organization—they are referred to as “indirect emissions.” 

Though scope 2 emissions are considered indirect emissions, the GHG Protocol singles the category out because of both the sheer amount of electricity companies purchase from the grid and the proportion of these emissions that could be reduced by incorporating alternative energy and more efficient technologies. “For many companies, purchased electricity represents one of the largest sources of GHG emissions and the most significant opportunity to reduce these emissions,” a GHG Protocol reporting document states. 

What Are Scope 3 Emissions?

Scope 3 emissions represent all the other indirect emissions that are released along the value chain of a company. (A value chain consists of all the upstream and downstream activities that trace back to the company’s operations.) Scope 3 is the largest, most amorphous category of emissions established by the GHG Protocol. According to the World Resources Institute, the U.S. NGO responsible for co-founding the initiative, scope 3 emissions constitute on average 75% of a company’s total GHG emissions. Because of the size and breadth of the classification, scope 3 is also typically the most difficult to definitively pinpoint and calculate. 

These emissions include a myriad of activities upstream from the company, including the extraction of raw materials, related manufacturing, and transportation and distribution of those materials. Scope 3 also encompasses downstream events, such as the emissions released during use of the company’s products and services and those triggered by the goods’ waste disposal and end-of-life management. Finally, the scope covers other indirect emissions that aren’t included in scopes 1 or 2, like employee commuting. 

Categories of Scope 3 Emissions

The GHG Protocol’s Corporate Accounting and Reporting Standard outlines a slew of categories and subcategories that should be included when calculating and reporting scope 3 emissions:

• Extraction and manufacturing of materials, components, and fuels purchased by the company.
• Transportation activities, including those connected to upstream purchased materials, employee commuting and business travel, and downstream distribution.
• GHG emissions created by extraction, production, and transportation of fuels used in purchased electricity (activities that are not included in scope 2).
• Carbon emissions caused by the end-use of products and services.
• End-of-life activities, including disposal of waste generated during operations and manufacturing and disposal of the product after use. 
• Under some circumstances, emissions related to leased assets, franchises, and outsourced activities. 

What Are “Organizational Boundaries” in GHG Emissions?

The GHG Protocol and the NGOs behind it recognized that one of the potential stumbling blocks to accurately calculating and reporting carbon emissions would be defining the parameters of a given company’s facilities and operations. To preemptively resolve this issue, the initiative introduced the concept of “organizational boundaries.” These are the boundaries that determine the facilities and operations that fall under the ownership and control of a given company, and therefore should be included in emissions accounting. The GHG Protocol introduces two methods for determining organizational boundaries:

• Using the equity share approach, a company calculates its GHG emissions based on the firm’s share of equity in a given facility or operation. This is typically expressed as a percentage of ownership.
• In the control approach, a company is responsible for 100 percent of the GHG emissions resulting from facilities or operations in which it has control. (Facilities or operations in which it owns a noncontrolling interest, conversely, do not count toward its emissions at all.) When using this method, control can be defined as either financial or operational control, with corresponding criteria outlined in the protocol’s Corporate Accounting and Reporting Standard. 

What Are “Operational Boundaries” in GHG Emissions?

Once a company has established its organizational boundaries, it needs to delineate its operational boundaries. Setting operational boundaries first requires a company to determine the GHG emissions produced by or associated with its operations. After these emissions have been identified, the company goes through the process of categorizing these emissions into one of the GHG Protocol’s three scopes. 

Because scope 3 is often such a vast, sprawling category, some companies also use operational boundaries to decide which subcategories within scope 3 to include in their emissions accounting and reporting. Many of the government agencies and regulatory bodies that mandate GHG emissions reporting do not currently require companies to report scope 3 emissions. According to the EPA, however, “To fully meet GHG Protocol standards, an organization must report emissions from all relevant scope 3 categories.”

What Regulatory Agencies Currently Require Businesses to Report on Emissions Scopes?

While the first edition of the GHG Protocol’s Corporate Accounting and Reporting Standard was widely embraced in 2001 as a crucial standardizing mechanism for calculating carbon emissions, it did not immediately spur major governments to establish reporting requirements. It would take another two decades for regulatory bodies to begin adopting the GHG Protocol and implementing its emissions reporting scopes into mandatory directives and other environmental regulations. 

Even now, in 2024, few governments or agencies require businesses to report on their carbon emissions in accordance with the GHG Protocol. (Although it’s worth noting that, according to a recent report by U.S. financial firm MSCI, nearly 60% of publicly traded companies are now largely voluntarily reporting on scopes 1 and 2 emissions.)

Even now, in 2024, few governments or agencies require businesses to report on their carbon emissions in accordance with the GHG Protocol.

• Corporate Sustainability Reporting Directive: The CSRD, as it is commonly known, was introduced by the European Union as a more comprehensive successor to the EU’s Non-Financial Reporting Directive (NFRD). The CSRD uses the European Sustainability Reporting Standards (ESRS) to require covered businesses to report on 12 different categories (or standards). These categories include climate change—referred to in official documentation as ESRS E1—which mandates reporting on scopes 1, 2, and 3 emissions.

• Corporate Sustainability Due Diligence Directive: The CSDDD, which was officially adopted by the EU this past May, obligates certain EU businesses to implement specific due diligence measures intended to identify and mitigate adverse environmental and social impacts. In addition, the CSDDD requires companies to develop a climate transition plan that includes targets for reducing scopes 1, 2, and 3 emissions between now and 2050. Fortunately for businesses, reporting requirements for the CSDDD’s climate transition plans are aligned with CSRD requirements—meaning that companies operating in the EU and within the scope of both directives will not have to engage in double reporting. 

• International Sustainability Standards Board: Established by the International Financial Reporting Standards Foundation (IFRS) in 2021, the ISSB is an independent, private-sector body tasked with setting standards for sustainability reporting. The ISSB imposes climate-related disclosure requirements that are aligned with the GHG Protocol’s Corporate Accounting and Reporting Standard (including scopes 1, 2, and 3 emissions). As of 2024, a raft of countries are set to adopt emissions reporting requirements based on the ISSB. These include the UK, Brazil, Mexico, Canada, Singapore, Japan, and Hong Kong. 

• The Security and Exchange Commission’s Climate Disclosure Requirements: This past March, the SEC issued a final rule that would impose climate-disclosure obligations on companies registered with the agency. The requirements were set to be implemented through a phased approach that would have seen large accelerated filers start reporting on scopes 1 and 2 GHG emissions beginning with SEC filings for 2025 (with the caveat that reporting is only required if these scopes are “material to the registrant”). These climate disclosure requirements may be in jeopardy, however: on April 4, the agency issued an order staying its final rule on the new requirements. 

• Climate Corporate Data Accountability Act: Also known as California SB 253, the state legislation is seeking to require companies with annual revenue exceeding $1 billion that operate in California to disclose their scopes 1, 2, and 3 emissions in adherence with the GHG Protocol. In-scope businesses will be required to report on scopes 1 and 2 emissions starting in 2026, and scope 3 emissions beginning the following year. 

Assessing the Threat of Carbon Emissions Reporting Requirements 

When considering adopting the GHG Protocol and calculating and reporting carbon emissions, companies are faced with an interesting tension. While few countries, agencies, or international governing bodies currently require businesses to report on their GHG emissions, the growing acceptance of the criticality of sustainability reporting means that the majority of public companies are still moving forward with scopes 1 and 2 emissions assessments. Worldwide regulators may very well continue to move with methodical, deliberative slowness in implementing emissions reporting requirements—but the swelling public consensus favoring such accountability is making the GHG Protocol’s standards feel increasingly obligatory anyway. 

While few countries, agencies, or international governing bodies currently require businesses to report on their GHG emissions, the growing acceptance of the criticality of sustainability reporting means that the majority of public companies are still moving forward with scopes 1 and 2 emissions assessments.