Scope 1/2/3 Emissions
Scope 1, 2, and 3 Emissions are a standardized classification framework developed by the Greenhouse Gas (GHG) Protocol for categorizing a company's carbon emissions by their source and proximity to the reporting entity.
The GHG Protocol Corporate Standard, first published in 2001 and revised in 2004, established this three-scope taxonomy, which has since become the global baseline for corporate climate reporting.
Scope 1 covers direct emissions from sources owned or controlled by the company — fuel combustion in company-operated factories, fleet vehicles, and on-site industrial processes. These are the emissions the company produces directly.
Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heat, or cooling consumed by the company. Although the emissions physically occur at the power plant, they are attributed to the buyer because demand for electricity drives production decisions. Scope 2 can be measured on a location-based basis (using average grid emission factors) or a market-based basis (using the emission factor of the specific electricity contract or renewable energy certificate purchased).
Scope 3 encompasses all other indirect emissions that occur upstream and downstream in the company's value chain. Upstream examples include emissions from purchased goods and services, capital goods, and business travel. Downstream examples include use of the company's products by end customers and disposal of products at end of life. For many companies — particularly consumer goods manufacturers, banks, and oil majors — Scope 3 is by far the largest emissions category, sometimes exceeding Scopes 1 and 2 combined by an order of magnitude.
Scope 3 reporting is technically difficult and involves significant estimation. Double-counting is a known issue because one company's Scope 3 is often another's Scope 1 or 2. Despite these challenges, the SEC's proposed climate disclosure rule (as of early 2024 in partial finalization) would require certain large accelerated filers to disclose material Scope 3 emissions, bringing this category under formal US securities law for the first time.
Investors use scope-disaggregated emissions data to assess transition risk — the financial exposure a company faces as economies shift toward lower-carbon energy systems through carbon pricing, regulation, and changing consumer preferences.