What is GHG Protocol? How should Scope 1, 2, and 3 be understood?

When companies start to conduct greenhouse gas inventories, they often encounter terms such as Scope 1, Scope 2 and Scope 3. These classifications look like three different pieces of data, but they actually answer the same question: Which emissions caused by a company’s operations occur directly in the equipment and activities it controls, which occur in purchased energy, and which exist in the upstream and downstream value chains?

GHG Protocol provides a widely used greenhouse gas inventory and reporting framework to help companies establish consistent organizational boundaries, emission classifications and calculation methods. It is not just a calculation formula, but more importantly, it allows enterprises to know how to divide the scope of the investigation, where the data is obtained, how to compare different years, and what calculation basis should be disclosed when disclosing to the outside world.

What problems is GHG Protocol mainly used to solve?

A company may own offices, factories, warehouses, fleets, and overseas locations at the same time. It may also purchase electricity from outside, entrust logistics transportation, or purchase large quantities of raw materials. Without consistent classification principles, it is easy for various departments to understand “the company’s carbon emissions” in different ways, and the final figures are difficult to compare.

The role of the GHG Protocol is to divide these emissions into three categories based on the relationship between the company and the emission source:

These three categories are not ranked according to the size of emissions, nor is Scope 1 necessarily more important than Scope 3. They are simply used to distinguish where emissions occur and the extent to which a company controls or influences the source of the emissions.

Scope 1: Emissions directly controlled by enterprises

Scope 1 is direct emissions from emission sources owned or controlled by the company. Common sources include stationary combustion, mobile combustion, process emissions and fugitive emissions.

Fixed burning

For example, emissions from factory boilers, heating furnaces, generators or other equipment burning natural gas, diesel, and fuel oil. During the inventory, it is usually necessary to collect fuel type, usage amount, unit of measurement and period of use.

MOBILE BURNING

For example, fuel used by cars, trucks, forklifts and other transportation vehicles owned or controlled by the company. If the vehicle belongs to an external logistics company, it is usually not directly classified into the enterprise’s Scope 1, but whether it belongs to Scope 3 must be determined based on the actual service and value chain relationship.

Process emissions

Some industries directly produce greenhouse gases during chemical reactions or manufacturing processes, such as cement, steel, chemicals, semiconductors, and refrigeration and air-conditioning related processes. These emissions don’t necessarily come from burning energy, so you can’t just look at electricity and fuel bills.

Fugitive emissions

Common examples are the replenishment or leakage of refrigerants and gases used in air conditioners, ice-water hosts, refrigeration equipment or fire-fighting equipment. If companies only take inventory of energy, they often miss this type of emission source.

Scope 2: Indirect emissions from purchased energy

Scope 2 mainly covers electricity, steam, heating and cooling purchased or obtained by enterprises. Emissions do not occur in the company’s own equipment, but at the external energy production end. However, because the company uses these energies, it needs to be included in the inventory.

For most offices, service industries, electronic manufacturing and data centers, purchased electricity is often a significant source of emissions. The basic calculation uses electricity consumption multiplied by the applicable electricity emission coefficient. However, if the company purchases renewable energy, green power or energy attribute certificates, it needs to further confirm the contract instrument, data quality and applicable calculation method.

GHG Protocol’s Scope 2 Guidance distinguishes between two methods:

• Location-based method: Reflects the average emission intensity of the regional power grid where the enterprise is located.
• Market-based method: Reflects the power products or supply sources selected by enterprises through qualified contract instruments.

In markets with product- or supplier-specific information and contractual instruments, companies may need to disclose the results of both approaches simultaneously. This is not a double calculation, but a separate presentation of the local power grid conditions and the differences brought about by the company’s energy procurement choices.

Enterprises should not just fill in Scope 2 with zero when they see “renewable energy”. Whether a specific emission coefficient can be used still requires confirmation of the certificate’s ownership, coverage period, usage area, whether it is repeatedly claimed and related quality conditions.

Scope 3: Other indirect emissions in the upstream and downstream value chains

Scope 3 covers other indirect emissions in the corporate value chain. These emissions occur at suppliers, logistics providers, employee activities, customers using products or at the end of the product life cycle, but are related to the company’s purchasing, sales and operational decisions.

GHG Protocol’s Corporate Value Chain (Scope 3) Standard divides Scope 3 into 15 categories, covering upstream and downstream activities. Common projects for enterprises include:

• Purchased goods and services.
• Capital equipment.
• Fuel and energy related activities.
• Upstream and downstream transportation and distribution.
• Waste generated from operations. -Business travel and employee commuting.
• Processing, use and final disposal of sold products.
• Lease assets, franchises and investments.

Companies don’t necessarily have to obtain first-hand data from all suppliers in the first year. A more pragmatic approach is to first conduct preliminary screening to identify categories that may have larger emissions, higher risks, or that customers are particularly concerned about, and then gradually improve data coverage and quality.

The most difficult part of Scope 3 is usually not the formula, but obtaining supply chain data. The same purchased product may lack weight, origin or supplier emission data; different departments may also use different product names and classifications. Without first sorting out purchasing, logistics, financial and supplier information, it will be difficult to maintain a single inventory list for a long time.

Before starting the calculation, the organizational boundaries should be confirmed

Before classifying Scope 1, 2, or 3, the enterprise must first confirm which companies, subsidiaries, factories, or operating locations should be included in the inventory.

GHG Protocol Corporate Standard provides ways to think about organizational boundaries such as equity ratios and control methods. Choosing different methods may affect the attribution of emissions from joint ventures, subsidiaries and controlled operating sites.

Once boundaries are determined, they must be consistent from year to year. If an organization undergoes a merger, sale, outsourcing of operations, or significant structural changes, it should be assessed whether the base year needs to be adjusted, otherwise annual emissions increases or decreases may simply represent organizational-wide changes rather than true reductions.

Basic process for enterprises to conduct GHG Protocol inspections

1. Confirm the purpose of the inquiry

First clarify whether the audit is for internal reduction, customer questionnaire, continuous disclosure, goal setting or external verification. Different purposes will affect the scope of inventory, data quality and reporting depth.

2. Set the inventory year and organizational boundaries

Confirm the reporting period, base year, included companies and locations, and which organizational boundary method is used, and leave the basis for judgment.

3. Establish an inventory of emission sources

Let the sustainability, environmental, safety and health, factory affairs, general affairs, procurement, logistics, finance and information departments jointly confirm the emission sources. Do not just use the previous year’s table without re-examining operational changes.

4. Collect activity data and evidence

Activity data may come from electricity bills, fuel purchase records, equipment ledgers, refrigerant replenishment orders, mileage, weight, amounts, or supplier questionnaires. Each piece of information should record the source, period, unit, person in charge and attachments.

5. Select emission coefficient and calculation method

Emission coefficients should be consistent with the region, year, fuel type and unit of activity data. If estimates or alternative data are used, assumptions, sources, and limitations should be documented, not just final results.

6. Conduct internal audits

Check whether the information is complete, whether the units are consistent, whether there are double calculations, whether annual differences are reasonable, and whether the emission coefficient version is correct. Outliers are not necessarily errors, but they must explain why.

7. Compile results and plan improvements

After the inventory is completed, emission hot spots should be analyzed according to scope, location, emission source and month, in order to further set goals, arrange reduction projects and track results.

What information do different departments usually need to provide?

What really needs to be managed is not a single number, but the sources, periods, coefficients, assumptions, attachments and audit records behind the numbers. This is also the data base that companies need to sort out most when moving from a spreadsheet to institutionalized carbon management.

Four common misunderstandings

Misunderstanding 1: Only Scope 1 counts as a company’s emissions

Scope 1 is indeed the direct emissions of enterprises, but outsourced energy and value chain activities may account for a higher proportion. If you only look at Scope 1, it is easy to overlook the significant impact of energy procurement, raw materials and product use stages.

Misunderstanding 2: Scope 3 is all the responsibility of the supplier

Although Scope 3 occurs outside the control of the enterprise, it will be affected by procurement specifications, product design, logistics methods and customer usage scenarios. Enterprises may not have direct control, but they usually have varying degrees of influence.

Misunderstanding 3: Once the emissions are calculated, the inventory will be completed

If data sources, coefficient versions, estimation methods and audit records are not retained, the results will be difficult to pass internal review or external verification, and will not be continuously used in the next year.

Misunderstanding 4: Lower inventory results mean successful carbon reduction

Emissions declines could result from changes in production volumes, locations, product mix or calculation boundaries. Companies need to combine operating data, emission intensity and base year recalculation policies to judge whether there is real improvement.

Which businesses is GHG Protocol suitable for?

• Enterprises that need to establish an organizational greenhouse gas inventory system.
• Manufacturers who have received questionnaires on carbon emissions from brand customers or supply chains.
• Enterprises preparing to disclose IFRS S2, CDP or other sustainable information.
• Organizations that need to set SBTi or corporate carbon reduction targets.
• A group that has multiple companies, bases or overseas operating units and needs to conduct unified inspections.
• Companies that want to further manage Scope 3 and supply chain emissions.

GHG Protocol is being updated, what should companies do now?

GHG Protocol is currently updating corporate standards and related guidelines. For enterprises that are establishing an inventory system, they do not need to stop inventory because of this. Instead, they should implement it in accordance with the current officially released standards and guidelines, while retaining activity data, coefficient versions, calculation methods, and adjustment records.

As long as the data source is clear and the calculation process is traceable, when the rules are updated later, the affected items can be identified and adjusted without having to re-search all the original data.

From completing inventory to continuous management

The GHG Protocol provides a common language that allows companies to understand direct emissions, purchased energy and value chain emissions in a consistent manner. But the real value of the inventory lies not in completing an annual emissions table, but in establishing a management process that can be continuously updated, compared and tracked.

If companies can centrally manage emission sources, activity data, emission coefficients, supporting documents and audit records, they can reduce the burden of re-collecting and comparing data every year, and make it easier to respond to customer, disclosure and verification requests. When data is accumulated to a certain extent, companies can further identify emission hotspots and invest limited carbon reduction resources into truly impactful projects.

Related services and modules

• ISO 14064-1／GHG Protocol consulting services
• Organizational Greenhouse Gas Inventory Management Module

References

• GHG Protocol：Corporate Standard Frequently Asked Questions
• GHG Protocol：Scope 2 Guidance
• GHG Protocol：Scope 3 Frequently Asked Questions