Guideline For Businesses To Report Scope 1, 2, and 3 Emissions
Jul 11, 2024
Businesses must report Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (other indirect emissions) to contribute positively to society, avoid legal risks, and stay competitive in the global green market.
Emissions reporting not only helps businesses create positive societal values and avoid legal risks, but it also allows them to keep up with the green transition trend and quickly expand their market share as the race for "green suppliers" unfolds globally. To achieve this, understanding how to report emissions according to Scope 1, Scope 2, and Scope 3 as defined by the GHG Protocol is essential.
1. How are the world's top 1,000 businesses going green?
Harvard University professors Michael E. Porter and Forest L. Reinhardt emphasize that:
"If businesses continue to view climate change as something that should be done rather than a mandatory business challenge, they will face the most severe consequences in the future."
According to Accenture (2023), over 50% of the world's top 1,000 businesses have committed to achieving Net Zero by 2050. Data from Net Zero Tracker (2023) shows that major capitalized companies from various sectors such as Walmart, Apple, Amazon, and Volkswagen have joined the Net Zero race (carbon neutrality). Many of these businesses plan to reduce their emissions to net zero by 2025. Their implementation roadmap includes:
Emissions Reporting: The first step in the Net Zero roadmap is to know the current emissions from their buildings or main business activities.
Detailed Emissions Reduction Plan: After identifying the main sources of emissions, businesses need to strategize and act to reduce them. For example, Amazon uses electric vehicles for delivery, replaces plastic labels on packages with paper labels, uses 100% recyclable packaging, and has fulfillment centers powered entirely by solar energy. Apple requires 100% of its component suppliers (including those in Vietnam) to use renewable electricity during production. Automotive companies like Mercedes, BMW, and Volkswagen are shifting to electric or hybrid vehicles and improving gasoline engine technology to reduce CO2 emissions from 200 grams per km to 50g/km to meet EU Taxonomy standards.
Net Zero Year Identification: After forming clear strategies and actions, businesses need to estimate the time they will achieve carbon neutrality.
Purchasing Carbon Credits: For certain industries, achieving carbon neutrality can be challenging. For instance, Exxon Mobil may need to purchase additional carbon credits. If an Exxon Mobil plant emits 160,000 tons of CO2 annually, the company can buy 160,000 carbon credits from 10,000 hectares of mangrove forests at $30 per credit, costing $4.8 million annually.
Scope 3 Reporting: Scope 3 emissions, accounting for over 80% of a company's total emissions, are complex and require high expertise in Climate Change.
2. Understanding the GHG Protocol
The GHG Protocol, developed by the World Business Council for Sustainable Development and the World Resources Institute, provides standards and guidelines for accurately calculating emissions. Emissions are divided into three scopes:
Direct Emissions from Fuel Consumption: Emissions from assets owned by the business, such as a seafood company consuming 1,000,000 liters of gasoline annually.
Indirect Emissions from Purchased Energy: Emissions from energy bought from third parties, such as an agricultural company consuming 5,000 MWh of electricity annually, which includes emissions from electricity generation.
Indirect Emissions from the Supply Chain: This is the most complex and difficult to estimate without experts. For example, a business exporting goods and frequently flying between Vietnam and the US must account for travel-related emissions.
3. How to report Scope 1 emissions
Scope 1 emissions are direct emissions from burning fuel by assets owned or controlled by the company, including:
Fixed Combustion: Emissions from fuel burning in company-owned plants, furnaces, or equipment.
Mobile Combustion: Emissions from company-owned vehicles like cars, trucks, or vans.
Leakage Emissions: Greenhouse gases leaking from devices like air conditioners and refrigerators.
For example, the steel industry, one of the largest greenhouse gas emitters, primarily produces Scope 1 emissions from burning fossil fuels to melt iron ore and produce steel. The greenhouse gases emitted by steel companies include:
Carbon dioxide (CO2): The main greenhouse gas emitted from burning fossil fuels like coal, natural gas, or oil for steel production.
Methane (CH4): A more potent greenhouse gas produced during incomplete combustion of fossil fuels, coke production, and wastewater treatment.
Nitrogen oxides (NOx) / Sulfur dioxide (SO2): Air pollutants contributing to the greenhouse effect, emitted during fossil fuel combustion for steel production.
For a software company, emissions in Scope 1 can be simpler to report by reviewing all business activities, owned or controlled assets, and fuel consumption to estimate total emissions.
4. How to report Scope 2 emissions
Scope 2 emissions are indirect emissions from purchased energy. Unlike direct emissions, Scope 2 emissions do not occur at company-owned assets but are indirectly related. For instance, a real estate company using 2,000 MWh of electricity annually must account for emissions from the power plant generating that electricity.
Electricity consumption is usually the main source in Scope 2, but also includes purchased heating, cooling, and steam. There are two methods to convert electricity (MWh) to CO2 tons:
Market-based: Based on emission factors from the electricity supplier.
Location-based: Based on emission factors for each country or region.
To select the appropriate method accurately, businesses need to understand the regulations of each country where they have offices, headquarters, or factories.
5. How to report Scope 3 emissions
Scope 3 emissions include all other indirect emissions throughout the value chain not owned or controlled by the organization, such as:
Emissions from business travel and commuting: For instance, a textile company with 20,000 workers and managers making 1,500 domestic and international flights annually needs to report emissions from these activities.
Emissions from raw material production, transportation, and procurement: A plastic manufacturing company must report emissions from oil and gas extraction for plastic production and raw material transportation.
Emissions from logistics and distribution: An automotive manufacturer must report emissions from transporting cars to retailers and end consumers.
Emissions from product use and waste treatment: An electronics manufacturer must report emissions from battery use and electronic waste disposal.
Under the scopes defined by the GHG Protocol, Scope 3 has the most complex calculation process but accounts for over 80% of emissions.
According to current regulations in Vietnam and globally, businesses are required to report emissions for Scope 1 and 2. However, leading global companies are now also reporting Scope 3 emissions due to increasing demands from investors and stakeholders. Scope 3 is expected to create intense global competition for green suppliers. In Oracle's latest report (2022), they strive for 100% of their suppliers to report emissions and use green electricity. The seafood industry received a yellow card in the second half of 2023 because several major supermarket chains in Europe began requiring suppliers in Vietnam to have sustainable development certificates.
Thus, emissions reporting not only helps businesses create positive societal values and avoid legal risks but also allows them to keep up with the green transition trend and quickly expand their market share as the global "green supplier" race intensifies.
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