A closer look at calculation methods for scope 3 emissions
The focus of this article is on calculation methods that can be used for scope 3 emissions. That said, the calculation methods covered can also be useful to calculate scope 1 and 2 emissions.
What are scope 3 emissions?
These emissions are indirect greenhouse gas emissions from a company's value chain, including both upstream and downstream activities. The Greenhouse Gas Protocol’s Corporate Value Chain (Scope 3) Standard, an internationally accepted method to enable GHG management of companies’ value chains, sets out 15 different categories for scope 3 emissions, including for example purchased goods and services, business travel, and investments.
Figure 1: emission scopes (from: GHG protocol: Technical Guidance for Calculating Scope 3 Emissions (Source)
Scope 3 emissions often constitute the majority of a company’s total carbon footprint and are crucial for comprehensive environmental impact management. Figure 2 below shows estimates of the value chain emissions for various industries, making it clear that scope 1 and 2 emissions (marked in green) often make up a minority of a company’s emissions. Overall, scope 3 category 1: purchased goods and services and scope 3 category 11: use of sold products are for most sectors a significant part of their emissions. For category 1 you can think of companies that sell consumer products such as furniture and assemble them or buy entire products and sell them. For category 11 you can think of companies that sell products that are energy intensive during the use by consumers, such as cars and electronic devices.
Figure 2: Estimated total value chain emissions intensity per scope and category (Source: MSCI: which scope 3 emissions will the SEC deem material)
Calculation methods
Originally three methods were introduced to calculate GHG emissions: spend-based, average-based (inflow), and supplier-specific. Additionally, there are two methods that are the result of practical considerations: the average-based method (outflow) and the hybrid method (see table below for all methods). They are ordered from least complex and accurate to most complex and accurate.
Table 1: GHG calculation methods
Setting up a strong methodology to measure GHG emissions is important for a number of reasons but most importantly to:
- Enable the reporting company to track progress and inform its decision makers
- Ensure transparent and robust methodologies which build trust among stakeholders and investors
- Ensure that the process is audit-proof
- Create a strong methodology that will result in less baseline refiguration's at a later point in time
Spend-based
The spend-based method uses units spent (euros, dollars etc.) on a purchased good or service and multiplies this by an emission factor (1) that represents the average emissions per monetary unit for those goods or services. The data can easily be taken from the expenditure of a company. This makes this method the least complex and thus easy to execute. However, it is also often wildly inaccurate. When a company uses this method, the reported emissions can be influenced by factors such as price shocks in certain markets or inflation.
In addition, the company can only reduce emissions by spending less, which is problematic if a company would like to grow. It is therefore recommended to only use this method for categories or sub-categories that are relatively insignificant in terms of GHG emissions on a company level, or in the first year(s) of reporting when data is lacking. The plan should then be to move to one of the more accurate options.
Average-based (inflow and outflow)
The average-based method uses physical quantities and multiplies this by an average emission factor of the purchased unit. It is more accurate than the spend-based method but also a bit more difficult to implement. The more granular (specific) the data is, the more accurate this method will be. An example of specificity is the emission factor for a chair versus a breakdown of its components (steel, wood, plastic, etc.).
This category has two sub-methods: inflow and outflow. The inflow method quantifies the inflow of materials and multiplies this by an emission factor, while the outflow method quantifies the outflow of products plus the waste from production and multiplies this by an emission factor. The outflow method requires companies to have life cycle assessments (LCAs) for all products (or product reference groups).
Supplier-specific
This method uses supplier data for both the quantities and the emissions. This is the best method if the supplier is able to deliver complete and accurate data. However, in practice, this will often not be the case, at least in the near future. The hybrid method offers a solution when supplier data is not complete.
Hybrid method
Often, suppliers will not be able to provide complete data. In these cases, the hybrid method can be used, which uses the supplier-specific method in combination with another method to fill in the gaps. Note that to calculate scope 3 emissions, or other scopes, multiple methods can be used for different categories as long as you use the best possible method with the available data and justify why you use a certain method.
Conclusion
This is a short introduction to different methods to calculate GHG emission. The calculation methods, especially for scope 3, play an important role in the measurement and hence the management of emissions. Each method comes with differences in complexity and data requirements but also in accuracy. Companies should aim to use the best method with the data available and over the years should aim to move to better methods, for example by working together with suppliers or performing LCAs.
(1) An emission factor is a coefficient that describes the rate at which a given activity releases greenhouse gases (GHGs) into the atmosphere.
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