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Scope 3 emissions categories

Author

Shel

Introduction

The GHG protocol divides scope 3 emissions into upstream and downstream emissions.

  • Upstream emissions are indirect GHG emissions related to purchased or acquired goods and services. They occur upto the point of receipt by the reporting company.

  • Downstream emissions are indirect emissions related to sold goods and services. They occur once goods and services are sold to another entity e.g. customers.

There are 15 scope 3 categories, 8 related to upstream activities and 7 related to downstream activities.

Upstream categories


1. Purchased goods and services

This category includes all upstream ‘cradle-to-gate’ emissions from the production of products purchased or acquired by a reporting company. Products include both goods (tangible products) and services (intangible products).

Cradle-to-gate emissions include all emissions that occur in the life cycle of a purchased product, from the extraction of raw materials (the ‘cradle’) upto the point where the product leaves the factory gate, ready for distribution. The assessment ends at the “gate,” before the product is transported to retailers or consumers.

This phase includes:

  • Harvesting or extracting natural resources.

  • Refining and processing raw materials into usable forms (material processing).

  • Transforming processed materials into the final product (manufacturing).

  • Preparing the product for distribution (packaging).

It doesn’t include the product’s use, transportation, or disposal.

Emissions in this category are different from the emissions from the use of products once they reach the reporting company. These emissions are accounted for in scope 1 and/or scope 2.

2. Capital goods

This category includes all upstream (i.e cradle-to-gate) emissions from the production of capital goods purchased or acquired by a reporting company.

Capital goods are final products that are not immediately consumed or further processed by the reporting company, but are instead used in their current form by the company to manufacture a product, provide a service, or sell, store, and deliver merchandise. Examples of capital goods include equipment, machinery, buildings, facilities and vehicles. Capital goods are treated as fixed assets or as plant, property and equipment (PP&E).

3. Fuel- and energy-related emissions not included in scope 1 and 2

This category includes emissions related to the production of fuels and energy purchased and consumed by the reporting company, that are not included in scope 1 or 2.

This category includes emissions from four distinct activities:

  1. Upstream emissions of purchased fuels. This includes the extraction, production, and transportation of fuels consumed by the reporting company. Examples include mining of coal, refining of gasoline, transmission and distribution of natural gas, production of biofuels, etc.

  2. Upstream emissions of purchased electricity. This includes the extraction, production, and transportation of fuels consumed in the generation of electricity, steam, heating, and cooling that is consumed by the reporting company. Examples include mining of coal, refining of fuels, extraction of natural gas, etc.

  3. Transmission and Distribution (T&D) losses. This includes the generation of electricity, steam, heating, and cooling that is lost in a T&D system, reported by the end user.

  4. Generation of purchased electricity that is sold to end users. This includes the generation of electricity, steam, heating, and cooling that is purchased by a utility reporting company or energy retailer and sold to end users. This activity is relevant for utility companies that purchase wholesale electricity supplied by independent power producers for resale to their customers.

Category 3 excludes emissions from the combustion of fuels or electricity consumed by the reporting company, since they are included in scope 1 and 2.

  • Scope 1 includes emissions from the combustion of fuels by sources owned by or controlled by the reporting company.

  • Scope 2 includes emissions from the combustion of fuels to generate electricity, steam, heating , and cooling purchased by the reporting company.

4. Upstream transportation and distribution

This category includes emissions from the transportation and distribution of products (excluding fuel and energy products) purchased or acquired by a reporting company, as well as other transportation and distribution services purchased by the reporting company (including both inbound and outbound logistics).

Emissions in this category may arise from air transport, rail transport, road transport, marine transport and storage of purchased products in warehouses, distribution centers, and retail facilities.

Activities in this category include:

  • Transportation and distribution services purchased by a reporting company, between the reporting company’s tier 1 suppliers and its own operations, in vehicles and facilities not owned or controlled by the reporting company.

  • Transportation and distribution services purchased by the reporting company, either directly or through an intermediary, including inbound logistics, outbound logistics, and transportation and distribution between a reporting company’s own facilities in vehicles and facilities not owned or controlled by the reporting company. Outbound logistics services purchased by the reporting company are categorized as upstream because they are a purchased service.

This category excludes:

  • Transportation and distribution in vehicles and facilities owned or controlled by the reporting company. These emissions fall in scope 1 (for fuel use) and scope 2 (for electricity use).

  • Transportation and distribution in vehicles and facilities leased by and operated by the reporting company (and not already included in scope 1 or 2).These emissions fall in category 8 of scope 3 (Upstream leased assets).

  • Transportation and distribution of purchased products, upstream of the reporting company’s tier 1 suppliers (e.g. transportation between a reporting company’s tier 2 and tier 1 suppliers). These emissions fall in category 1 (purchased goods and services) since emissions from transportation are already included in the cradle-to-gate emissions of purchased products.

  • Production of vehicles e.g. ships, trucks, planes purchased or acquired by the reporting company. These emissions fall in category 2 (capital goods) since they account for the upstream emissions associated with manufacturing vehicles.

  • Transportation of fuels and energy consumed by the reporting company. These fall in category 3 (Fuel- and energy-related emissions not included in scope 1 or scope 2).

  • Transportation and distribution of products sold by the reporting company between the reporting company’s operations and the end consumer (if not paid for by the reporting company), including retail and storage in vehicles and facilities not owned or controlled by the reporting company. These are included in category 9 (Downstream transportation and distribution)

A reporting company’s scope 3 emissions from upstream transportation and distribution include scope 1 and scope 2 emissions of third-party transportation companies.

5. Waste generated in operations

This category includes emissions from third-party disposal and treatment of waste that is generated in a reporting company’s operations. This category includes emissions from disposal of both solid waste and waste water. It may also include emissions from transportation of waste.

Waste treatment activities may include disposal in a land fill, disposal in a land fill-gas-to-energy facility i.e. combustion of landfill gas to generate electricity, recovery for recycling, incineration, composting, combustion of municipal waste to generate electricity and waste water treatment.

Only waste treatment in facilities owned or controlled by third parties is included in scope 3. This is because the reporting company purchases waste management services. Waste treatment at facilities owned or controlled by the reporting company is accounted for in scope 1 and scope 2.

A reporting company’s scope 3 emissions from waste generated in operations include the scope 1 and scope 2 emissions of solid waste and waste water management companies.

6. Business travel

This category includes emissions from the transportation of employees for business-related activities in vehicles owned or operated by third-parties, such as aircrafts, trains, buses, and passenger cars.

Emissions from business travel may arise from air travel, rail travel, bus travel, automobile travel (e.g business travel in rental cars or employee-owned vehicles other than employee commuting to and from work) and other modes of travel.

This category excludes:

  • Emissions from transportation in vehicles owned or controlled by the reporting company. These emissions are accounted for in either scope 1 (for fuel use) or scope 2 (for electricity use).

  • Emissions from leased vehicles operated by the reporting company not included in scope 1 or 2 are accounted for in category 8 (Upstream leased assets).

  • Emissions from transportation of employees to and from work are accounted for in category 7 (Employee computing).

A reporting company’s scope 3 emissions from business travel include scope 1 and scope 2 emissions from transportation companies (e.g. airlines).

7. Employee commuting

This category includes emissions from the transportation of employees between their homes and their work sites.

Emissions from employees commuting may arise from automobile travel, bus travel, rail travel, air travel or other modes of transportation.

Employee commuting is categorised as an upstream scope 3 category because it is a service that enables company operations, similar to purchased or acquired goods or services.

A reporting company’s scope 3 emissions from employee commuting include the scope 1 and scope 2 emissions of employees and third party transportation providers.

8. Upstream leased assets

This category includes emissions from the operation of assets that are leased by the reporting company in the reporting year and not already included in scope 1 and scope 2 inventories. This category is only applicable to companies that operate leased assets.

A reporting company’s scope 3 emissions from upstream leased assets include scope 1 and scope 2 emissions of the lessors.

Downstream categories


9. Downstream transportation and distribution

This category includes emissions from transportation and distribution of products sold by the reporting company, between the reporting company’s operations and the end consumer (if not paid for by the reporting company) in vehicles and facilities not owned or controlled by the reporting company.

It includes emissions from retail and storage, and transportation and distribution related emissions that occur after the reporting company pays to produce and distribute its products. It also includes emissions from customers traveling to retail stores, which can be significant for companies that own or operate retail facilities.

Emissions from downstream transportation and distribution can arise from storage of sold products in warehouses and distribution centers, storage of sold products in retail facilities, air transport, rail transport, road transport and marine transport.

It excludes outbound transportation and distribution services that are purchased by the reporting company. These emissions are included in category 4 (Upstream transportation and distribution) because the reporting company purchases the service.

A reporting company’s scope 3 emissions includes scope 1 and scope 2 emissions of transport companies, distribution companies, retailers and customers (optionally).

10. Processing of sold products

This category includes emissions from intermediate products that are sold by the reporting company to other third parties e.g manufacturers for further processing before they are sold to the final consumer. These intermediate products require further processing, transformation, or inclusion in other products before use by the end consumer.

A reporting company’s scope 3 emissions from processing of sold intermediate products include scope 1 and scope 2 emissions of downstream value chain partners (e.g., manufacturers).

11. Use of sold products

This category includes emissions from the use of goods and services sold by the reporting company.

Emissions from the use of sold products are of two types:

  • Direct use-phase emissions : These are emissions from;

    1. Products that directly consume energy (fuel or electricity) during use. Examples include automobiles, aircrafts, engines, motors, power plants, buildings, appliances, electronics, lighting, data centers, and web-based software.

    2. Fuels and feedstocks e.g. petroleum products, natural gas, coal, biofuels, and crude oil.

    3. Greenhouse gases and products that contain or form greenhouse gases that are emitted during use. Examples include CO2, CH4, N2O, HFCs, PFCs, SF6, refrigiration and air conditioning equipment, industrial gases, fire extinguishers,and fertilizers.

  • Indirect use-phase emissions : These are emissions from products that indirectly consume energy (fuels or electricity) during use. Examples include apparel (which require washing and drying), food (which requires cooking and refrigeration), pots and pans (which require heating), and soaps and detergents (which require heated water).

This category includes the total expected lifetime emissions from all relevant products sold in the reporting year across the company’s product portfolio. This way, the scope 3 inventory accounts for a company’s total GHG emissions associated with its activities in the reporting year.

Companies may optionally include emissions associated with maintenance of sold products during use.

A reporting company’s scope 3 emissions from the use of sold products include scope 1 and scope 2 emissions of end users. End users include both consumers and business customers that use final products.

12. End of life treatment of sold products

This category includes emissions from the waste disposal and treatment of products sold by the reporting company, in the reporting year, at the end of their life. It includes the total expected end-of-life emissions from all products sold in the reporting year.

End-of-life treatment methods include disposal in a land fill, disposal in a land fill-gas-to-energy i.e. combustion of landfill gas to generate electricity, recovery for recycling, incineration, composting, and combustion of municipal waste to generate electricity.

A reporting company’s scope 3 emissions from end-of-life treatment of sold products includes the scope 1 and scope 2 emissions of waste management companies.

13. Downstream leased assets

This category applies to reporting companies that own and lease assets to other entities. It includes emissions from the operation of these assets, that are not already included in scope 1 and scope 2.

Leased assets may be included in a company’s scope 1 and scope 2 inventory depending on the type of lease and the consolidation approach used by the company to define organizational boundaries .

If the reporting company leases an asset for only part of the reporting year, the company should account for emissions from the portion of the year that the asset was leased.

Companies may account for products leased to consumers the same way the company accounts for products sold, i.e., by accounting for the total expected lifetime emissions from all relevant products leased to other entities in the reporting year. In this case, companies should report emissions from leased products in category 11 (Use of sold products), rather than in this category, to avoid double counting between categories.

A reporting company’s scope 3 emissions from downstream leased assets include the scope 1 and scope 2 emissions of the lessees, depending on the lessee’s consolidation approach.

14. Franchises

This category includes emissions from the operation of franchises not included in scope 1 and scope 2.

A franchise is a business operating under a license to sell or distribute another company’s goods or services within a certain location.

A franchisor is a company that grants licenses to other entities to sell or distribute its goods or services in return for payments, such as royalties for the use of trademarks and other services.

A franchisee is a company that operates franchises and pays fees to a franchisor.

This category is applicable to franchisors. They should account for scope 1 and scope 2 emissions that occur from the operation of franchises.

Franchisees can either:

  1. include emissions from operations under their control in this category if they have not included those emissions in scope 1 and scope 2, or

  2. report upstream scope 3 emissions associated with the franchisor’s operations (scope 1 and scope 2) in category 1 (Purchased goods and services).

15. Investments

This category is applicable to companies that provide financial services and companies that make an investment with the objective of making a profit (investors). It is designed primarily for private financial institutions (e.g., commercial banks), but it is also relevant to public financial institutions (e.g., multilateral development banks, export credit agencies, etc.) and other entities.

Category 15 includes scope 3 emissions associated with the reporting company’s investments in the reporting year, that are not included in scope 1 and scope 2.

Investments are categorised as a downstream scope 3 category because the provision of capital or financing is a service provided by the reporting company.

Investments may be included in a company’s scope 1 or scope 2 inventory depending on how the company defines its organisational boundaries .

For example, companies that use the equity share approach include emissions from equity investments in scope 1 and scope 2. Companies that use a control approach account only for those equity investments that are under their control in scope 1 and scope 2. Investments not included in the company’s scope 1 or scope 2 emissions are included in this category.

A reporting company’s scope 3 emissions from investments are the scope 1 and scope 2 emissions of investees.

Scope 1 emissions are direct emissions of the investee or project. Scope 2 emissions are the indirect emissions from the generation of electricity consumed by the investee or project. Scope 3 emissions are the indirect emissions from the investee’s downstream activities. For example, if a financial institution provides equity or debt financing to a light bulb company manufacturer, the financial institution is required to account for the direct emissions during manufacturing (scope 1) and indirect emissions from electricity consumed during manufacturing (scope 2). The financial institution should also account for scope 3 emissions of the light bulb producer, such as emissions from consumer use of light bulbs sold by the manufacturer, when the scope 3 emissions are significant compared to other sources of emissions, or if they are relevant.

Projects considered here are those in GHG-intensive sectors such as power generation, that exceed a specified emissions threshold, or projects that meet other criteria developed by the company or industry sector.

Emissions from investments should be allocated to the reporting company based on the company’s proportional share of investment in the investee.

There are four types of financial investments considered in this category:

  1. Equity investments

    When a reporting company makes an equity investment in a company, they become a partial owner of that entity, and their financial returns depend on its performance.

    These investments can either be in:

    1. subsidiaries, where the reporting company has financial control, typically more than 50% ownership,

    2. associate companies, where the reporting company has significant influence but not financial control, and typically has 20-50% ownership,

    3. joint ventures where partners have joint financial control, and

    4. companies where the reporting company has neither financial contol nor significant influence over the entity, and typically has less than 20% ownership.

    In general, companies in the financial services sector should account for emissions from equity investments in scope 1 and scope 2 by using the equity share consolidation approach to obtain representative scope 1 and scope 2 inventories.

    If emissions from equity investments are not included in scope 1 or scope 2, either because the reporting company uses the operational control or financial control consolidation and does not have control over the investee, the reporting company should account for proportional scope 1 or scope 2 emissions of equity investments that occur in the reporting year in this category.

    Proportional emissions from equity investments should be allocated to the investor based on the investor’s proportional share of equity in the investee.

  2. Debt investments (with known proceeds)

    These are corporate debt holdings held in the reporting company’s portfolio, including corporate debt instruments such as bonds or convertible bonds prior to conversion, or commercial loans where the use of proceeds is identified as going to a particular project such as to build a specific power plant.

    For each year during the term of the investment, companies should account for proportional scope 1 and 2 emissions of relevant projects that occur in the reporting year in this category.

  3. Debt investments (without known proceeds)

    These are general corporate purpose debt holdings such as bonds or loans, held in the reporting company’s portfolio where the use of proceeds is not specified. Companies may account for scope 1 and 2 emissions of the investee that occur in the reporting year, in this category.

  4. Project finance

    This is the long-term financing of projects (e.g., infrastructure and industrial projects) by the reporting company as either an equity investor (sponsor) or debt investor (financier).

    For each year during the term of the investment, companies should account for proportional scope 1 and 2 emissions of relevant projects that occur in the reporting year in this category. If the reporting company is an initial sponsor or lender of a project, the reporting company should also account for the total projected lifetime scope 1 and scope 2 emissions of relevant projects financed during the reporting year, and report those emissions separately from scope 3.

    Proportional emissions from project finance and debt investments with known use of proceeds should be allocated to the investor based on the investor’s proportional share of total project costs (total equity plus debt).

  5. Managed investments and client services

    These are investments managed by the reporting company on behalf of clients using clients’ capital or services provided by the reporting company company to clients, including:

    1. investments and asset management (equity or fixed income funds managed on behalf of clients, using clients’ capital),

    2. corporate underwriting and issuance for clients seeking assistance with mergers, and

    3. financial advisory services for clients seeking assistance with mergers and acquisations or requesting other advisory services.

    Reporting companies may account for emissions from managed investments and client services in this category.

  6. Other investments or financial services

    This includes other investments, financial contracts or services not included above such as pension funds, retirement accounts, securitized products, insurance contracts, credit guarantees, financial guarantees, export credit insurance, credit default swaps, etc.

    Reporting companies may account for emissions from these investments in this category.

Next: Organisational boundaries

Footnotes

  1. In simple terms, anything that the reporting company pays for is upstream while anything they sell / provide is downstream. For example, investments are categorised as a downstream scope 3 category because the provision of capital or financing is a service provided by the reporting company. Upstream leased assets are assets leased by the reporting company i.e the company acts as a lessee and pays the lessor for their use. Downstream leased assets are assets that are owned and operated by the reporting company and leased to other entities. The company here acts as the lessor.↩︎

  2. Tier 1 suppliers are companies that provide goods or services directly to a business that produces the final product.↩︎

  3. Inbound logistics bring supplies or materials into a business.↩︎

  4. Outbound logistics deal with moving goods and products out to customers.↩︎

  5. Tier 2 suppliers are a reporting company’s suppliers’ suppliers or companies that subcontract to a reporting company’s tier 1 suppliers.↩︎

  6. See Organisational boundaries.↩︎

  7. Companies that operate leased assets↩︎

  8. See Organisational boundaries.↩︎