Scope 3 greenhouse gas emissions — those that companies are indirectly responsible for, via supply chain, product disposal, investments, etc. — are an imprecisely measured but significant source of impact. I dig into the history of the concept, its use in regulation, & controversies around it with Laura Draucker of the nonprofit Ceres.
1. Dave made the comment that if you add everyone's scope 1 together then you account for everything. This isn't the case from a corporate reporting perspective because plenty of scope 1 emissions belong to individuals (e.g. if you have a gas-powered furnace, the emissions are your individual scope 1 emissions and the gas utility's scope 3). Of course, the point of corporate accounting is not to account for all national or global emissions - this is why we have separate national and state GHG inventories put together by the EPA and state agencies. The point of corporate inventories (at least under the GHG Protocol) is to measure their individual GHG footprints and track individual progress over time.
2. It was kind of brushed over in the episode that with scope 3 there is inherently a judgement call on allocation of emissions to customers and down the value chain. For example, you can have a single factory producing multiple products. Some of the energy (and thus emissions) servicing the factory will be for common uses across multiple products. How a manufacturer allocates those emissions to their products is a subjective decision. Should it be by production volume? Value? Space in the factory? Similarly, for an airplane, you have a single stream of tailpipe emissions. When companies calculate their scope 3 business travel emissions, the emission factor from the airline needs to allocate this single stream of emissions to individual passengers. Whether this is done by space on the plane (e.g. higher factors for first class than economy) vs. economically or another method is another subjective allocation judgement. Further subjective judgement questions include whether the airline allocates these emissions on the flight ex-ante (based on typical flight occupancy) vs ex-poste (based on actual flight occupancy) and how to allocate emissions to freight vs passengers. This isn't to say that we should throw up our hands and not calculate scope 3. Rather, it's to acknowledge that scope 3 emissions can never be 'exact' but we should still calculate and measure them (while being transparent about assumptions like allocation) in order to manage them.
3. I think a deeper dive into these scope 3 methodologies and assumptions would be interesting on a future pod. For example, on in Laura and Dave's conversation it was referenced that you can't track progress with industry average emission factors. This actually depends what we're talking about in scope 3. Switching from purchasing beef to chicken using industry average emission factors will reflect a real reduction in emissions. It's often assumed in corporate scope 3 accounting that moving to supplier-specific emission factors is inherently more accurate and better for tracking progress. But if a company moves from a product-level industry-average emissions factor (e.g. for beef) to a corporate-level supplier-specific emissions factor (e.g., Tyson Food's overall corporate emissions intensity) then you're actually losing actionable detail because Tyson's overall factor will combine their emissions from poultry, beef and other products. So, while moving to a corporate-level supplier-specific emissions factor may be useful in some instances (e.g., you're still buying the same product but switching to a supplier who has overall better GHG management), in some cases companies are better off with industry-average product-specific factors and then moving (much more slowly) to supplier-specific product-specific factors. The challenge is that producing these individual product factors are more expensive (requiring a full LCA), more time intensive, and require more frequent updates.
4. In the debates about updates to the GHG Protocol, and to some extent around the SEC rule, there is often conflation of attributional accounting (GHG Protocol Corporate Accounting Standard - i.e. calculating an organizational GHG footprint for a given boundary) and consequential accounting (GHG Protocol for Project Based Accounting - i.e. the net impact of decisions like purchases of RECs, even beyond the corporate boundary). These different approaches have different purposes and, in some cases, very different results. Many stakeholders want one protocol to accomplish both, but since they are measuring two different things you need two different standards. There is nothing in the Protocol preventing companies from using both and reporting both an inventory total and an impact (consequential) total.
At scope 3 when you are leveraging industry average values... you aren't talking about material decisions on your business (or shouldn't be). When your corporate decisions are distinct from industry norms it is easier to measure and more directly under your control. Two examples stand out from Microsoft's Scope 3 emissions omissions (to take a large example with a reputation for being climate aware): their new campus remodel and their Data and AI services utilization by companies in the Permian Basin.
The new campus is meant to be net-zero in operations, to much fanfare. But before building it a significant facility that was not at end of life was torn down to make room, the rebuilt campus has significant embodied carbon in the vast quantities of concrete, and a proliferation of underground parking ensuring a long tail of personal emissions from the personal vehicles leveraging that capacity over its lifetime. These emissions don't count anywhere in Scope 1 or 2, obviously, but the central planning for the corporate campus remodel is exactly the point of intervention to influence this 30-year legacy physically embodied in the form of the facility. The same goes for Apple or Amazon or Google's corporate campus remodels. Because the corporate goal is public credit for compliance, rather than emissions control, there is no incentive to go out of one's way to own such decision making, even when such decisions are only ownable by that corporation.
In use of services sold when you are providing cloud software services it can be challenging to foresee all ends for a given piece of software. Does the email provided by exchange server have a material impact on ExxonMobile's emissions tail from extracted oil and natural gas? That's a long draw of the bow to make stick. But in some specific and material examples it is very easy - the corporate PR already has done the work. When Microsoft penned deals in the Permian with Chevron and ExxonMobile they announced 50,000 BPD capacity impact for the use of cloud services within the Permian Basin for one of those projects - and oil production is a promise by the market to burn that oil (people aren't collecting it to put on shelves to admire). Those emissions alone would dwarf the Scope 1 and Scope 2 emissions for Microsoft at the time (forward looking, the AI-Data Center boom might start to rival that directly) - and it was the in-house PR department that already worked the numbers. The choice to leave this out of emissions accounting is deliberate and exposes the whole reason Scope 3 accounting must be advocated for by external regulatory bodies - the corporate machine is seeking permission to operate (the positive PR) and not seeking to control their emissions for the sake of controlling their emissions. We've externalized that environmental health in our economic thought, to our own detriment, and until we go full-Deming, where it becomes the responsibility of the Corporation to exist in a system of profound knowledge, this forcing function needs to come from the outside.
FYI - Today the Australian Federal Government Announces New Climate Legislation
The legislation will introduce standardised, internationally-aligned reporting requirements for businesses, to ensure they are making high quality climate-related financial disclosures (Scopes 1-3).
The Australian Federal Government's changes will establish Australia’s climate risk disclosure framework, giving investors and companies the transparency, clarity and certainty they need to invest in new opportunities as part of the net zero transformation.
A rigorous, internationally-aligned and credible climate disclosure regime will support Australia’s reputation as an attractive destination for international capital and incentivise investment in the energy transformation.
Reporting requirements will commence from 1 January 2025 for Australia’s largest listed and unlisted companies and financial institutions and other large businesses will be phased in over time.
Great interviewing (as always)! My take has always been, "If everyone's scope 1 and 2 is accounted for, then what is a scope 3?" It struck me during the conversation about Ford, that individual consumer's 1 & 2 aren't counted. Isn't that a big hole in the whole thing?
reply: Good companies set goals for lots of things; and allocate monies; and require business teams to meet all the goals eg:- profit targets; business strategies; and protection of their employees and the environment. The later a cost of doing business. Of course they could act like coal / oil companies and walk away - leaving the clean up to the taxpayers. and adversely impacting all lifeforms.
interesting but a lot words that could be summarized into: every company must have policies and procedures and metrics in place to practice Product Stewardship of the goods and products that leave the site. All companies larger than say 100 employees MUST understand how their products are used /disposed. and reformulate or help customer manage env emissions including GHgases when customers use. I see the auto companies moving to EVs as product stewardship. Oil/ gas companies do not & have not practiced Product stewardship of their products that are designed to be burned..
Great episode. A few comments and thoughts:
1. Dave made the comment that if you add everyone's scope 1 together then you account for everything. This isn't the case from a corporate reporting perspective because plenty of scope 1 emissions belong to individuals (e.g. if you have a gas-powered furnace, the emissions are your individual scope 1 emissions and the gas utility's scope 3). Of course, the point of corporate accounting is not to account for all national or global emissions - this is why we have separate national and state GHG inventories put together by the EPA and state agencies. The point of corporate inventories (at least under the GHG Protocol) is to measure their individual GHG footprints and track individual progress over time.
2. It was kind of brushed over in the episode that with scope 3 there is inherently a judgement call on allocation of emissions to customers and down the value chain. For example, you can have a single factory producing multiple products. Some of the energy (and thus emissions) servicing the factory will be for common uses across multiple products. How a manufacturer allocates those emissions to their products is a subjective decision. Should it be by production volume? Value? Space in the factory? Similarly, for an airplane, you have a single stream of tailpipe emissions. When companies calculate their scope 3 business travel emissions, the emission factor from the airline needs to allocate this single stream of emissions to individual passengers. Whether this is done by space on the plane (e.g. higher factors for first class than economy) vs. economically or another method is another subjective allocation judgement. Further subjective judgement questions include whether the airline allocates these emissions on the flight ex-ante (based on typical flight occupancy) vs ex-poste (based on actual flight occupancy) and how to allocate emissions to freight vs passengers. This isn't to say that we should throw up our hands and not calculate scope 3. Rather, it's to acknowledge that scope 3 emissions can never be 'exact' but we should still calculate and measure them (while being transparent about assumptions like allocation) in order to manage them.
3. I think a deeper dive into these scope 3 methodologies and assumptions would be interesting on a future pod. For example, on in Laura and Dave's conversation it was referenced that you can't track progress with industry average emission factors. This actually depends what we're talking about in scope 3. Switching from purchasing beef to chicken using industry average emission factors will reflect a real reduction in emissions. It's often assumed in corporate scope 3 accounting that moving to supplier-specific emission factors is inherently more accurate and better for tracking progress. But if a company moves from a product-level industry-average emissions factor (e.g. for beef) to a corporate-level supplier-specific emissions factor (e.g., Tyson Food's overall corporate emissions intensity) then you're actually losing actionable detail because Tyson's overall factor will combine their emissions from poultry, beef and other products. So, while moving to a corporate-level supplier-specific emissions factor may be useful in some instances (e.g., you're still buying the same product but switching to a supplier who has overall better GHG management), in some cases companies are better off with industry-average product-specific factors and then moving (much more slowly) to supplier-specific product-specific factors. The challenge is that producing these individual product factors are more expensive (requiring a full LCA), more time intensive, and require more frequent updates.
4. In the debates about updates to the GHG Protocol, and to some extent around the SEC rule, there is often conflation of attributional accounting (GHG Protocol Corporate Accounting Standard - i.e. calculating an organizational GHG footprint for a given boundary) and consequential accounting (GHG Protocol for Project Based Accounting - i.e. the net impact of decisions like purchases of RECs, even beyond the corporate boundary). These different approaches have different purposes and, in some cases, very different results. Many stakeholders want one protocol to accomplish both, but since they are measuring two different things you need two different standards. There is nothing in the Protocol preventing companies from using both and reporting both an inventory total and an impact (consequential) total.
At scope 3 when you are leveraging industry average values... you aren't talking about material decisions on your business (or shouldn't be). When your corporate decisions are distinct from industry norms it is easier to measure and more directly under your control. Two examples stand out from Microsoft's Scope 3 emissions omissions (to take a large example with a reputation for being climate aware): their new campus remodel and their Data and AI services utilization by companies in the Permian Basin.
The new campus is meant to be net-zero in operations, to much fanfare. But before building it a significant facility that was not at end of life was torn down to make room, the rebuilt campus has significant embodied carbon in the vast quantities of concrete, and a proliferation of underground parking ensuring a long tail of personal emissions from the personal vehicles leveraging that capacity over its lifetime. These emissions don't count anywhere in Scope 1 or 2, obviously, but the central planning for the corporate campus remodel is exactly the point of intervention to influence this 30-year legacy physically embodied in the form of the facility. The same goes for Apple or Amazon or Google's corporate campus remodels. Because the corporate goal is public credit for compliance, rather than emissions control, there is no incentive to go out of one's way to own such decision making, even when such decisions are only ownable by that corporation.
In use of services sold when you are providing cloud software services it can be challenging to foresee all ends for a given piece of software. Does the email provided by exchange server have a material impact on ExxonMobile's emissions tail from extracted oil and natural gas? That's a long draw of the bow to make stick. But in some specific and material examples it is very easy - the corporate PR already has done the work. When Microsoft penned deals in the Permian with Chevron and ExxonMobile they announced 50,000 BPD capacity impact for the use of cloud services within the Permian Basin for one of those projects - and oil production is a promise by the market to burn that oil (people aren't collecting it to put on shelves to admire). Those emissions alone would dwarf the Scope 1 and Scope 2 emissions for Microsoft at the time (forward looking, the AI-Data Center boom might start to rival that directly) - and it was the in-house PR department that already worked the numbers. The choice to leave this out of emissions accounting is deliberate and exposes the whole reason Scope 3 accounting must be advocated for by external regulatory bodies - the corporate machine is seeking permission to operate (the positive PR) and not seeking to control their emissions for the sake of controlling their emissions. We've externalized that environmental health in our economic thought, to our own detriment, and until we go full-Deming, where it becomes the responsibility of the Corporation to exist in a system of profound knowledge, this forcing function needs to come from the outside.
Another great Ep of the Volts pod....
FYI - Today the Australian Federal Government Announces New Climate Legislation
The legislation will introduce standardised, internationally-aligned reporting requirements for businesses, to ensure they are making high quality climate-related financial disclosures (Scopes 1-3).
The Australian Federal Government's changes will establish Australia’s climate risk disclosure framework, giving investors and companies the transparency, clarity and certainty they need to invest in new opportunities as part of the net zero transformation.
A rigorous, internationally-aligned and credible climate disclosure regime will support Australia’s reputation as an attractive destination for international capital and incentivise investment in the energy transformation.
Reporting requirements will commence from 1 January 2025 for Australia’s largest listed and unlisted companies and financial institutions and other large businesses will be phased in over time.
More info - https://treasury.gov.au/consultation/c2024-466491
Great interviewing (as always)! My take has always been, "If everyone's scope 1 and 2 is accounted for, then what is a scope 3?" It struck me during the conversation about Ford, that individual consumer's 1 & 2 aren't counted. Isn't that a big hole in the whole thing?
reply: Good companies set goals for lots of things; and allocate monies; and require business teams to meet all the goals eg:- profit targets; business strategies; and protection of their employees and the environment. The later a cost of doing business. Of course they could act like coal / oil companies and walk away - leaving the clean up to the taxpayers. and adversely impacting all lifeforms.
interesting but a lot words that could be summarized into: every company must have policies and procedures and metrics in place to practice Product Stewardship of the goods and products that leave the site. All companies larger than say 100 employees MUST understand how their products are used /disposed. and reformulate or help customer manage env emissions including GHgases when customers use. I see the auto companies moving to EVs as product stewardship. Oil/ gas companies do not & have not practiced Product stewardship of their products that are designed to be burned..
William, how do you pay for all this, and why?