The Greenhouse Gas Protocol: Measuring Scope 1, 2 and 3 Emissions
The enthusiasm for transparent sustainability reporting often loses steam when teams encounter complex standards like the Greenhouse Gas Protocol. It has hundreds of pages of detailed definitions and guidance, from raw materials sourcing to transportation to manufacturing to distribution and sale — in other words, the entire value chain, including emissions from shops and from customers themselves.
Fortunately, the Protocol is designed to add clarity, not confusion. It has three scopes based on direct emissions from sources that are owned or controlled, purchased electricity that is consumed, and all indirect emissions associated with the value chain. And it has 15 categories of indirect emissions, which can simplify the seemingly endless types of emissions into a list you can get your arms around.
We’ve prepared a visual guide to help you navigate the Protocol. It can help those just getting started by breaking down the most important parts into simple charts, and it can help those who just need an organized reference. Download the guide and share with your teams to help you on our journey.
Our specialists can help you build a plan for assessing and reporting your greenhouse gas emissions and carbon footprint. We can also assist with emissions mitigation strategies and identifying the greatest areas of opportunity for your business. Improved efficiencies, better data for decision-making, readiness for emerging regulations and growing stakeholder expectations, and other benefits, can all come through sustainability and ESG programs.
Currently, the Greenhouse Gas Protocol is going through a review process, with plans to update and modernize the standards for the first time since 2015. While we don’t expect changes to the foundational elements of the Protocol, which have been tested and are now used worldwide, we will track the changes and be ready to guide our clients as soon as any updates are issued.
The Greenhouse Gas Protocol
Below are some of the key terms and acronyms you’ll find in the Greenhouse Gas Protocol and what they mean for emissions reporting.
| Definitions and Acronyms | |
| CO2-e: Carbon Dioxide Equivalent | The universal unit of measurement to indicate the global warming potential (GWP) of each of the six greenhouse gases, expressed in terms of the GWP of one unit of carbon dioxide. It is used to evaluate releasing (or avoiding releasing) different greenhouse gases against a common basis. |
| Consolidation | Combination of GHG emissions data from separate operations that form part of one company or group of companies. |
| Control | The ability of a company to direct the policies of another operation. More specifically, it is defined as either operational control (the organization or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation) or financial control (the organization has the ability to direct the financial and operating policies of the operation with a view to gaining economic benefits from its activities). |
| Emissions | The release of GHG into the atmosphere. |
| GHG: Greenhouse Gases | For the purposes of the GHG protocol, GHGs consist of: carbon dioxide (CO2); methane (CH4); nitrous oxide (N2O); nitrogen trifluoride (NF3); hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulphur hexafluoride (SF6). |
| GWP: Global Warming Potential | A factor describing the radiative forcing impact (degree of harm to the atmosphere) of one unit of a given GHG relative to one unit of CO2. |
| Indirect GHG Emissions | Emissions that are a consequence of the operations of the reporting company but occur at sources owned or controlled by another company. |
| Operational Boundary | The boundaries that determine the direct and indirect emissions associated with operations owned or controlled by the reporting company. |
| Organizational Boundaries | The boundaries that determine the operations owned or controlled by the reporting company, depending on the consolidation approach taken (equity or control approach). |
| Scope 1 Emissions | A reporting organization’s direct GHG emissions. |
| Scope 2 Emissions | A reporting organization’s emissions associated with the generation of electricity, heating/cooling, or steam purchased for own consumption. |
| Scope 3 Emissions | A reporting organization’s indirect emissions other than those covered in Scope 2. |
| Value Chain Emissions | Emissions from the upstream and downstream activities associated with the operations of the reporting company. |
The Greenhouse Gas Protocol follows certain accounting and reporting principles that serve as a guide for sustainability teams, finance professionals, accountants and third parties who help with reporting, as well as those on the other end who will be reading the reports.
| GHG Accounting and Reporting Principles | |
| Relevance | Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users – both internal and external to the company. |
| Completeness | Account for and report on all GHG emission sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions. |
| Consistency | Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods or any other relevant factors in the time series. |
| Transparency | Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used. |
| Accuracy | Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information. |
The Greenhouse Gas Protocol is not a reporting framework in and of itself. Organizations use other existing frameworks for sustainability reporting that include not just greenhouse gas emissions, but many other elements of environmental, social and governance (ESG) performance.
Applicability of the GHG Protocol
The GHG Protocol is recommended or required to be applied under numerous reporting frameworks. The Corporate Accounting and Reporting Standard provides the accounting platform for some commonly used corporate GHG reporting programs around the world. These include, but are not limited to:
- Carbon Disclosure Project (CDP) Climate Change
- Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting & Reporting Standard
- Global Reporting Initiative (GRI)
- Science Based Targets initiative (SBTi)
- Sustainability Accounting Standards Board (SASB)
- Task Force on Climate-related Financial Disclosures (TCFD)
Many standard setters and jurisdictions currently developing sustainability reporting requirements are also expected to refer to the GHG Protocol, including International financial Reporting Standards Foundation (IFRS) Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB) and climate reporting rules being considered by the U.S. Securities and Exchange Commission (SEC). A requirement to consider the principles and requirements of the GHG Protocol is also included in the first batch of draft European Sustainability Reporting Standards (ESRS) which was delivered to the European Commission by the European Financial Reporting Advisory Group (EFRAG) in November 2022.
There are boundary considerations in the Greenhouse Gas Protocol, both for the organization as a whole and for operations. Within organizational boundaries, there are two approaches to choose from. And within operational boundaries, there are two considerations for how emissions are accounted for. Also below is an important note on double counting.
Boundary of GHG Accounting
Setting Organizational Boundary
To consolidate GHG emissions, two approaches are permitted for operations that are not wholly-owned. All entities within the group must follow the same approach. The choice of approach used may change the reported emissions. The approaches are:
Equity Share Approach
- GHG emissions from operations are included based on the share of the equity in the operation.
- Example: Entity A owns 70% of Entity B and controls B via voting rights, with the remaining 30% being owned by an unrelated third party. Entity A would account for 70% of the emissions of Entity B in its inventory boundary.
- The share of equity is typically aligned with the entity’s percentage ownership; however, economic substance must be considered and may override legal ownership.
Control Approach
- 100% GHG emissions from operations are included for operations controlled by the entity. Control can be defined in financial or operational terms.
- Emissions are not accounted for if the entity does not control the operation.
- Example: Entity X owns 60% of Entity Z and controls Z via voting rights, with the remaining 30% being owned by an unrelated third party. Entity X also has a 30% interest in Entity Y, but does not control Y. Entity X accounts for 100% of the emissions of Z because it controls its operations. Entity X does not account for any of Y’s emissions as X does not control Y.
- Economic substance of relationships takes precedence over legal form, therefore, control may exist despite an entity owning a <50% interest.
Setting Operational Boundaries
After the organizational boundary has been determined, operational boundaries are set as part of the process of identifying emissions associated with operations. This assessment allows a company to establish which operations and sources cause direct and indirect emissions, and to decide on the scope of accounting and reporting for its indirect emissions.
Direct Emissions
- GHG emissions from sources that are owned and controlled by the entity.
- Direct emissions comprise Scope 1 emissions.
- Example: Entity G owns a manufacturing plant. GHG emissions from the manufacturing plant form part of Entity G’s direct emissions.
Indirect Emissions
- Emissions that are a consequence of the operations of the reporting company, but occur at sources owned or controlled by another company.
- Indirect emissions comprise Scope 2 and Scope 3 emissions.
- Example: Continuing from the example in ‘direct emissions’, Entity G purchases electricity to power the plant from the local utility. It also purchases raw materials as inputs into manufacturing its inventories. Emissions from purchased electricity and the supply of raw materials form part of Entity G’s indirect emissions.
Double Counting
The GHG Protocol is designed to prevent double counting of Scope 1 and 2 emissions by two different companies. The Scope 1 emissions of Entity G (see previous example) will not be included in the Scope 1 emissions of any other entities.
Scope 3 emissions may result in ‘double counting’. For example, Entity G would account for the effect of its purchased raw materials to manufacture goods. A customer of G that purchases those products as an input into their own business would also account for the associated emissions as they form part of the customer’s operational boundary.
GHG emissions are expressed in CO2-e. This is necessary because the six gases included in the Protocol do not have equal global warming potential (GWP). For example, one ton of methane has 25 times the GWP of an equivalent amount of carbon dioxide. Calculating GHG emissions will generally require estimation techniques, many of which rely on published emissions factors. The use of cross-sector and sector-specific tools may also be appropriate.
Of note, there are two methods for allocating Scope 2 emissions. The location-based is calculated based on the average emissions intensity of local grids. The market-based method reflects emissions from electricity that companies have purposefully chosen and is based on contracts for the sale and purchase of energy.
Estimation Example
To illustrate estimation techniques, Entity J operates an airline. In estimating its Scope 1, 2 and 3 emissions, it may consider that use of the following types of estimation techniques is appropriate:
| SCOPE 1 |
Fuel consumed by aircrafts |
Purchased quantity of fuel: published emission factor for type of fuel
| SCOPE 2 |
Purchased electricity for office building |
Metered electricity consumption: published emissions factor applicable to each jurisdiction, considering the source of the electricity (e.g. coal burning power plant vs. hydroelectric dam)
| SCOPE 3 |
Employee commuting to airports and offices |
Number of employees stratified by work location, estimated commuting distance: emissions factor by group based on estimated commute distance
Below is an example of defining the scope of greenhouse gas emissions based on an automobile company.
Scope of Emissions and Illustrative Example
Example
- Entity M builds automobiles and other heavy equipment and sells them to individuals and businesses.
- M owns several factories where automobiles are assembled with parts purchased from over 50 different vendors (e.g. windscreens, airbags, tires, etc.).
- M owns 25% of Entity N and has significant influence over the investee. Entity N produces airbags and sells them to M and other auto manufacturers. All other entities in the structure are wholly-owned subsidiaries.
- M purchases 60% of its electricity from local utilities with the remaining 40% generated from its own facilities.
- M has a financial subsidiary that provides loans to customers to purchase finished goods from M. The financial subsidiary also offers lease finance to customers and invests surplus capital in equity and debt instruments of unrelated companies.
- M franchises its operations in several jurisdictions in exchange for royalties based on sales plus an up-front fee.
- M’s organizational boundary is set based on the equity share approach. M determines that its equity share of N is 25%, and therefore, includes 25% of N’s emissions in its GHG accounting.
- M’s operational boundary includes all of its direct and indirect emissions – Scopes 1, 2 and 3, including the 15 categories that comprise Scope 3 emissions.
| Scope 1 | Scope 2 | Scope 3 | |
| Explanation | A reporting organization’s direct GHG emissions. Scope 1 emissions results from sources owned or controlled by the entity. | A reporting organization’s emissions associated with the generation of electricity, heating/cooling, or steam purchased for own consumption. | A reporting organization’s indirect emissions other than those covered in Scope 2. |
Examples of Entity M’s GHG Emissions |
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Scope of Emissions and Illustrative Example
- Purchased Goods and Services
- Emissions from goods and services purchased or acquired in the supply chain not otherwise included in categories 2-8.
- Example: Emissions related to purchased components for automobiles from the ‘cradle-to-gate’, purchased office supplies, products used to maintain equipment.
- Capital Goods
- Cradle-to-gate’ emissions relating to used equipment other than those accounted for in Scope 1 or 2 (e.g. emissions from burned fuel in a furnace are included in Scope 1).
- Example: Emissions relating to the production of equipment, such as the manufacturing of a boiler.
- Fuel and Energy-Related Activities
- Emissions from the production of fuels and energy purchased and consumed by the entity, and purchased energy sold to end users, that are not included in Scope 1 or Scope 2.
- Example: Emissions relating to the extraction, production and transportation of fuels consumed in the entity’s heating systems. Emissions relating to the burning of natural gas for heat are included in Scope 2.
- Upstream Transportation & Distribution
- Emissions from transportation and distribution activities purchased, but not owned, by the entity (e.g. outsourced inbound and outbound logistics).
- Example: Emissions from rail transportation of major components to manufacturing facilities.
- Waste Generated in Operations
- Emissions from third-party disposal and treatment of waste that is generated in the entity’s owned or controlled operations. Emissions from owned waste treatment facilities are included in Scope 1 and 2.
- Example: Disposal of non-recyclable packaging in landfills, incineration of rubbish, emissions relating to composting, wastewater treatment.
- Business Travel
- Emissions from transportation of employees for business-related activities in vehicles not owned by the entity. Emissions from owned vehicles are included in Scope 1 (fuel use) and Scope 2 (electricity use).
- Example: Air travel to attend automotive conference, rental cars, car-sharing.
- Employee Commuting
- Emissions from the transportation of employees between their homes and their worksites.
- Example: Company shuttle from car park to the office, subway travel to corporate head office, fuel consumed to drive employee-owned vehicles to manufacturing facility.
- Upstream Leased Assets
- Emissions from the operation of assets that are leased by the reporting company not included in Scope 1 or 2 (i.e. the entity as a lessee). Emissions from leased assets may be included in Scope 1 or 2 depending on lease classification and whether the entity applies the equity share or control approach.
- Example: Fuel consumed for heating at a leased office building, assuming the lease is operating type and the equity share approach is used.
- Downstream Transportation & Distribution
- Emissions from third party transportation and distribution of products sold by the entity between the entity’s operations and the end consumer (if not paid for by the entity), in vehicles and facilities not owned or controlled by the entity.
- Example: Rail transportation of automobiles to consumers, emissions from customers visiting showrooms to view vehicles prior to purchase.
- Processing Of Sold Products
- Emissions from processing of sold intermediate products by third parties (e.g. manufacturers) subsequent to sale by the entity.
- Example: Entity M selling excess steel produced to third parties for use in construction. Emissions resulting from processing/treating the steel for the customer’s use are included in category 10.
- Use of Sold Products
- Emissions from the direct use of goods and services sold by the entity (Scope 1 and 2 emissions).
- Example: Scope 1 emissions of Entity M’s customers from driving purchased automobiles over the life of the vehicles.
- End of Life Treatment of Sold Products
- Emissions from the waste disposal and treatment of products sold at the end of their life.
- Example: Scope 1 and 2 emissions of waste management companies from recycling and/or scrapping automobiles once they are no longer in use.
- Downstream Leased Assets
- Emissions from the operation of assets that are owned by the entity (acting as lessor) and leased to other entities that are not already included in Scope 1 or Scope 2. Emissions may be included in Scope 1 or 2 depending on lease classification and whether the entity applies the equity share or control approach.
- Example: Fuel consumed by vehicles leased by Entity M to customers, assuming the leases are finance type. If the leases are finance type, Entity M does not control the vehicles, therefore, they are not included in M’s Scope 1 emissions.
- Franchises
- Emissions from the operation of franchises not included in Scope 1 or Scope 2.
- Example: Scope 1 and 2 emissions of Entity M’s franchisees (e.g. emissions from heating facilities included in Scope 2 emissions of the franchisee are included in Scope 3 emissions – Category 14 of the franchisor).
- Investments
- Applies to investors and companies (primarily commercial banks) that provide financial services.
- Emissions associated with the entity’s investments, not already included in Scope 1 or Scope 2. If the entity uses the equity share approach, its proportionate share of investee’s emissions may be included in the investor’s Scope 1 and 2 emissions. Investments include equity investments, debt instruments, project finance and managed investments and client services. The calculation of Scope 3 emission resulting from investments is complex and depends on the type of investment, the entity’s organizational boundary and estimation techniques selected.
- Example 1: Entity M’s proportionate share of Scope 1 and 2 emissions of investees where M has made an equity investment (e.g. 1% of Scope 1 and 2 emissions if M owns 1% of the equity of the investee). If Entity M has elected the equity share approach, these emissions would be included in M’s Scope 1 and 2 emissions.
- Example 2: Entity M lends 5% of the required capital to construct a natural gas power plant. Entity M would include in Scope 3 its proportionate share of Scope 1 and 2 emission arising from the construction and operation of the gas power plant each year.
- Example 3: If Entity M elected to use the control approach, it would not include Scope 1 and 2 emissions from an investee over which it has significant influence because M does not control the investee’s operations. Therefore, Entity M’s proportionate share of the investee’s Scope 1 and 2 emissions would be included in M’s Scope 3 emissions.
To learn more or engage with a BDO professional on the Greenhouse Gas Protocol, sustainability reporting or carbon mitigation strategies, visit our ESG Center of Excellence. You can also subscribe to our Sustainability & ESG Insights below.
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