How Do You Solve a Problem
Like Scope 3?

Our last blog explained why using carbon credits against scope 3 targets isn’t the answer, but it left us with the question: how can companies both take responsibility for and tackle their scope 3 emissions?

Why Scope 3 is challenging

Scope 3 emissions, though significant, are not directly produced by the company itself, but are those it is indirectly responsible for through upstream and downstream activities within its value chain. This includes green-house gases (GHGs) produced by direct and indirect suppliers, vendors, customers, and any other intermediaries. Particular challenges include:

• Traceability: Emissions come from various sources making them hard to identify, measure and manage.
• Accessibility: It is difficult to collect Scope 3 emissions data. Companies often lack access to data from all parts of their value chain.
• Scale: Funding a large abatement programme with a supplier from whom a company only buys a small proportion of output can be difficult to justify.
• Deep value chains: Complex value chains with multiple layers of suppliers add difficulty in coordinating and reducing emissions.
• Difficult-to-influence sources of emissions: Emissions from sources like end-users or third-party logistics providers are outside a company’s direct control. 

Categories of Climate Action

Each company’s emissions are unique, so there is no one-size-fits-all approach for tackling scope 3 emissions. Companies should consider their goals, required actions, and appropriate finance mechanisms.

Actions can be grouped into three categories:

1.     Abatement of physical (inventory) emissions: Interventions for which the mitigation outcome can be proven and physically traced within the value chain. These count towards Scope 3 targets as currently expressed.

2.     Abatement of emissions outside of the value chain: Funding interventions that are outside a company’s value chain, for example an aviation firm buying cookstove carbon credits, are a valid form of climate finance able to reach where other finance types can’t. However, these emissions aren’t associated with a company’s footprint and therefore don’t count towards the aviation company’s scope 3 target.

3.     Abatement of value chain ‘associated’ emissions: Actions that could be part of critical value chain decarbonisation in the future, even if not currently provable or physically possible. Consider these examples:

a.     Sustainable aviation fuel is not physically available worldwide, but there is an incentive to increase its availability until it is feasible for a company to source it.

b.     Action with producers in a landscape wherein it can be challenging to meaningfully segregate goods and allocated supply from specific producers.

Whether to include these in scope 3 targets is debated, but with the right guardrails, approaches that reduce these ‘associated’ emissions could unlock greater finance to decarbonise the actual sector where the emissions are happening.

Practical Examples of Emission Reductions

For example an agriculture company might

• Buy proven sustainable commodities. (1 – Abatement of physical emissions)
• Invest in programming to support farmers across a landscape to use more sustainable agricultural production methods. (3 – Abatement of value chain ‘associated’ emissions).
• Support landscape restoration programmes around their suppliers. (2 - Abatement of emissions outside of the value chain)
• Invest in certified sustainable products. (3 – Abatement of value chain ‘associated’ emissions).
• Make factories within their value chain more sustainable. (1 or 3 depending on project tractability). 

Meanwhile an aviation firm is likely to have fewer options available but could:

• Purchase sustainable aviation fuel certificates. (3 – Abatement of value chain ‘associated’ emissions).
• Fund R&D for future solutions, supporting the sector’s journey towards net zero. (3 – Abatement of value chain ‘associated’ emissions).

They could also both fund a range of actions, including purchase high quality carbon credits, R&D to find new solutions, and investing in campaigns to support legislative changes or Beyond Value Chain Mitigation funds, as part of their Beyond Value Chain Mitigation strategy. By doing this this they can take responsibility for residual emissions while they work to decarbonise across all scopes. (2 - Abatement of emissions outside of the value chain).

Meeting the Scope 3 Challenge

To be seen as credible and avoid accusations of greenwashing, companies should:

• Identify and accept responsibility for 100% of scope 3 emissions: Thoroughly reviewing their value chain using tools like the Greenhouse Gas Protocol sector guidance.
• Assess alternative pathways: As new solutions become legitimate, carefully consider when indirect investments can be used balancing against the need to change business practices.
• Report openly and honestly: Distinguish openly between actions in the three categories above when reporting. Use only high quality, credible mechanisms to do so.
• Make genuine changes to address all emissions: Change business models and decarbonise value chains. Companies that decarbonise will be more valuable long-term.
• Go beyond lowest-cost abatement to highest impact: Consider moving beyond a strictly tonne-for-tonne approach for addressing unabated emissions, which inherently seeks the lowest cost solutions, toward a more equitable money-for-tonne approach. 

What Needs to Change?

To support companies trying to do the right thing, accounting and reporting and target-setting standards will need to:

• More clearly define the scope of the inventory: Ironing out the grey areas and misaligned forms of accounting will be important to more clearly defining what is considered in and out of target.
• Increase the scope of responsibility to 100%: Arbitrarily limiting the extent of responsibility, such as the Science Based Target Initiative (SBTI)’s ‘67% of Scope 3 emissions’ target-setting boundary should be replaced by full responsibility with practical tools to enact that responsibility. This will encourage action on sub sectors that are huge sources of global emissions but may not be largest emitting areas for individual companies, such as transport.
• Carefully design emission reduction mechanisms: Ensure mechanisms used lead to real changes in the value chain.
• Guard against conflating different responsibilities: Avoid mixing value chain action and beyond value chain mitigation to maintain credibility. Greater encouragement to and recognition for companies funding climate chain beyond their value chains, via carbon credits or other mechanisms, is critical.

In the coming months standard setters like the Science Based Targets Initiative will publish draft guidance on what can and cannot be counted towards scope 3 targets. We hope to see the inclusion of some elements of flexibility within ‘associated’ value chain mechanisms, with time bound periods to promote companies to work towards being able to physically decarbonise their specific value chains. This should be carefully balanced with the need to genuinely change business practices, avoiding the trap of conveying a message that funding mitigation will resolve to Net Zero.

Even before this guidance is published companies can act to genuinely reduce Scope 3 emissions, contribute to wider sectoral decarbonisation and global Net Zero.

The issue is complex and isn’t going away soon. By accurately accounting and reporting abatement, compensating using Beyond Value Chain Mitigation, and communicating honestly, companies can be confident they are on safe ground.

Scope 3 reductions are hard. Beyond implementing new measures to meet targets we need to shift towards applauding companies that commit to reducing emissions, even if they don’t always hit their targets. What companies should do if they fall short is topic of our next blog.

* CDP Technical Note: Relevance of Scope 3 Categories by Sector