Legislation and Regulation
Measuring What Matters: The Role of Scope 1, 2, and 3 Emissions in Climate Action

Measuring What Matters: The Role of Scope 1, 2, and 3 Emissions in Climate Action

How the GHG Protocol's guidance on emissions reporting shapes carbon accounting and corporate offsetting practices.

In a previous article, we looked at how energy attribute certificates (EACs) can be used to address an organization’s Scope 2 emissions and compared them to carbon credits, which tend to be used to offset Scope 1 emissions. This article sets out to give a broader introduction to the concept of Scope 1, 2, and 3 emissions, and the role of legislation in shaping their implementation. Finally, it examines how carbon accounting translates into concrete offsetting measures.

History of Emission Accounting Frameworks

In December 1997, the Kyoto Protocol established binding emissions reduction targets for developed countries. The agreement effectively mandated the tracking and reporting of carbon emissions, but standardized accounting frameworks for this data collection did not yet exist. The following year, the World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD) began developing a uniform methodology to support the Kyoto goals. This would become the first version of the Greenhouse Gas (GHG) Protocol, which was released in 2001. The Protocol establishes a comprehensive, global, standardized framework for measuring and managing emissions from private and public sector operations, value chains, products, cities, and policies.

The GHG Protocol is not in itself an official regulatory body but rather a framework resulting from the WRI and WBCSD collaboration. It serves as a platform for developing and promoting standardized methods and tools for accounting and reporting GHG emissions. Although there are other carbon accounting standards (such as PAS2060 and ISO14064), the GHG Protocol is the de facto global standard for GHG accounting and reporting. As such, it forms the basis for nearly every corporate GHG measurement and reporting system, as well as a number of national and regional reporting programs. It has a strong reputation and a high level of credibility and has seen widespread adoption.

The GHG Protocol

The GHG Protocol’s classification of emissions into three distinct scopes is the bedrock of comprehensive carbon accounting. Scope 1 covers direct releases from owned or controlled sources such as fossil fuel combustion. Scope 2 includes indirect emissions from purchased electricity, heating, and steam generation. Scope 3 represents all other indirect value chain emissions—from transportation and distribution through to a company’s investments. They typically represent the majority of a corporation’s carbon footprint – and up to 90% of oil and gas majors’ GHG emissions.

Source: GHG Protocol

To make this more tangible, let’s examine the carbon footprint of an everyday activity: brewing instant coffee at home. Tracking carbon emissions from a gas stove or electric kettle (Scopes 1 and 2), as well as the full lifecycle impacts from crop production, packaging, and waste (Scope 3), helps to illuminate how the GHG Protocol’s three-pronged taxonomy works in practice.

  • Scope 1 emissions (direct): When you turn on your gas stove to heat up water, emissions are released directly into the air through the combustion of natural gas. These would be considered Scope 1 emissions: direct GHG releases from sources you own or control.
  • Scope 2 emissions (indirect): If you instead use an electric kettle powered by grid electricity to boil the water for your coffee, emissions are generated indirectly at the utility provider’s power plant that supplies your purchased electricity. So, while you may not release emissions inside your kitchen, you bear responsibility for the emissions associated with generating the electricity your kettle is consuming. These fall under Scope 2’s indirect emissions.
  • Scope 3 emissions (indirect, supply chain): Beyond your kitchen, the cup of coffee creates supply chain emissions at multiple stages of production. Growing the beans, processing, packaging, and transporting the coffee grounds, even getting the packet into your home from a supermarket or warehouse—all of these actions generate GHGs. Since these operations are not under your control but are traceable to your actions as a consumer, they qualify as Scope 3 emissions. 

In a corporate context, evaluating climate impact also means accounting for all emissions, including the indirect lifecycle emissions. No matter how complex the value chain, the quantitative emissions data resulting from the carbon accounting process must enable informed decision making on climate goals for all stakeholders in the chain. This applies to organizations and governments alike. Robust carbon accounting therefore guides strategic and operational choices for companies while also ensuring regulatory compliance and progress toward climate commitments for policymakers. 

Legislation and Stakeholder Influence

From a compliance lens, many jurisdictions now mandate corporate emissions disclosures and reductions through carbon pricing systems, emissions caps, or Net Zero targets set in legislation. The SEC, for example, voted in favor of adopting rules to enhance and standardize climate-related disclosures for investors in the US in early March 2024.

In this context, comprehensive carbon accounting provides measurable data that is used to evaluate whether policy obligations have been met. Additionally, businesses need emissions data for risk management, cost savings, and long-term adaptation in the context of the energy transition. Quantifying emissions using the standards laid out in the GHG Protocol (or similar standards) helps organizations identify the most impactful abatement opportunities, often with operational efficiency and expense reduction co-benefits, while also proactively mitigating regulatory and supply chain climate risks.

External stakeholders such as investors, consumers, and sustainability advocates are also demanding emissions data. As BlackRock CEO Larry Fink succinctly noted, "Climate risk is investment risk.” Emissions performance has therefore become indelibly linked to core issues like capital allocation decisions, purchasing preferences, and overall corporate social responsibility reputations. This is a trend that we believe will accelerate throughout this decade and beyond.

Carbon Accounting as an Emerging Market

Unsurprisingly, given the complexities of accurate carbon accounting and the acute pressure to fulfill disclosure expectations and meet climate commitments, a large market has emerged to meet these needs. In 2022, the global carbon accounting software market was valued at USD 12.73 billion. However, it is projected to reach USD 64.39 billion by 2030, which would entail a sizable 22.8% compound annual growth rate during the rest of this decade.

Source: Intelligent Insights Journal, Global Carbon Accounting Software Market

Carbon accounting software exists to aid the creation of carbon accounting reports, which contain a standardized set of key components. Companies like Watershed enable businesses to accurately measure, report, and reduce their greenhouse gas emissions efficiently, providing granular, audit-ready sustainability data. Their offerings are designed to close the loop between climate data and actionable climate strategies. Watershed’s services include a database for detailed emissions measurement, software tools for sustainability reporting and supply chain engagement, and a marketplace for carbon removal and clean power projects. They thus offer an end-to-end solution for corporates who’re looking to account for, and act on, their climate footprint.

The resulting emission reports that form the basis for corporate climate action are very granular. For example, the University of Oxford's Emissions Accounting Report 2019/20 examines key emission sources along Scope 1, 2, and 3 while acknowledging data collection challenges and uncertainties. Despite these, it provides a transparent approach to overcoming data gaps, like varying reliability across databases for emission factors. The report not only details current emissions but also sets forth a roadmap for future decarbonization efforts, targeting a 73% reduction in Scope 1 and 2 emissions by 2035 through initiatives like enhancing energy efficiency, renewable energy investment, and fleet electrification. By providing this level of detail, the report offers a transparent roadmap for the University's decarbonization efforts that is based on the findings of the comprehensive accounting treatment that preceded it. 

It is clear, then, that carbon accounting allows entities to measure what matters, giving them the essential data needed to chart a course for their climate mitigation strategies. Without such data, organizations would be unclear on what actions are required. As Apple states in its most recent Environmental Progress Report, "We use the results of our detailed carbon accounting to adjust our 2030 Climate Roadmap, which lays out our plan to become carbon neutral." In short, robust emissions measurement is a necessary precursor to meaningful decarbonization efforts.

From Carbon Accounting to Emission Reductions

Once the accounting is done, the work of reducing emissions starts. Offsetting or funding sustainable behavior via environmental assets must supplement emissions reductions rather than replace them, it will continue to be a necessity well into the twenty-first century—as discussed in our article on the necessity of carbon markets.

Different offsetting instruments can be used to address different scopes. For example, carbon credits can be retired to offset Scope 1 emissions from sources that are hard to directly abate. The key is to ensure these credits represent real, additional, permanent, and verified emission reductions or removals. Similarly, EACs such as renewable energy certificates or power purchase agreements can be employed by entities seeking to offset their Scope 2 emissions. These instruments convey the environmental attributes of renewable energy generation and allow companies to claim the associated emissions reductions.

Offsetting Scope 3 emissions can be more challenging due to their diverse and often less controllable nature, as they occur across a company's value chain. While carbon credits can be used to address Scope 3 emissions, some organizations are choosing to focus instead on insetting. Insetting credits provide a more direct way to tackle Scope 3 emissions at source, complementing offsets from external projects. As emissions accounting practices mature, the market assets transacted will likely become more specialized so as to serve the specific needs of each scope.

Underpinning these carbon market developments is a wave of new policies mandating emissions disclosure. Frameworks like the GHG Protocol that were once voluntary are now becoming enshrined into regulations like the SEC’s ‘Enhancement and Standardization of Climate-Related Disclosures for Investors’, the UK's ‘Streamlined Energy and Carbon Reporting Policy’, and the EU's ‘Corporate Sustainability Reporting Directive’. These policies often stipulate which emissions scopes must be reported, in turn shaping demand for different carbon assets. Voluntary carbon markets are also becoming increasingly aligned with regulated markets, which should enable seamless integration in the future. The convergence of robust accounting frameworks, high-integrity assets, and disclosure mandates will accelerate the growth of transparent and accountable environmental asset markets needed to drive climate action at scale.

Neutral is committed to building the necessary financial market infrastructure for asset solutions for all scopes. Our work with Toucan Protocol on biochar pools, documented in our recent post, is just the start.

About Neutral

Neutral is an exchange for environmental assets. We combine tokenized carbon credits, renewable energy credits, and carbon forwards with specialized market infrastructure to deliver efficiency, transparency, and trust in these markets.

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