Why are Scope 3 emissions key to decarbonization?

• Scope 3 emissions, or the emissions that companies generate indirectly along their value chains, are the most daunting challenge in the global journey to net zero emissions.
• In highly complex global value chains, scope 3 upstream emissions can account for up to 70% of corporate emissions. Just eight such supply chains account for more than 50% of global emissions.
• Large-scale collaboration can help address these emissions. Multinational corporations should step up and help companies in their value chains reduce their carbon footprint.

There is no doubt that we are in a race against climate change. The latest report from the Intergovernmental Panel on Climate Change (IPCC) confirms that we are not responding fast enough to this crisis and are very likely to breach the critical 1.5°C temperature limit set by the Intergovernmental Panel on Climate Change (IPCC) within the next two decades.

Once this limit is breached, subsequent climate tipping points will arrive much faster. From the melting of carbon-rich permafrost in the polar regions to the melting of almost all alpine glaciers, global warming within 2 degrees Celsius could trigger up to 10 climate tipping points.

In the coming years, we must do everything we can to reduce the social and economic impacts of climate change. We can no longer focus on the 2050 net zero target. What matters now is to achieve the milestones of 2025 and 2030 and work towards deep emissions reductions. Of all the efforts required, tackling Scope 3 emissions is the most challenging, meaningful and rewarding.

What is the emissions scope?

Greenhouse gas emissions from business activities can be divided into three categories or “scopes”.

Scope 1 emissions arise directly from sources and facilities that a company owns and controls, such as emissions from its vehicles or by-products such as carbon dioxide from industrial processes such as cement production.

Scope 2 emissions include indirect emissions from using energy purchased from utility suppliers, with electricity consumption typically being the only source of Scope 2 emissions.

Emissions from these two ranges are relatively easy to monitor and address. Companies can track their electricity usage and take steps to reduce it, or switch to renewable energy sources where feasible, such as replacing old gasoline vehicles with electric vehicles or adopting other innovative low-emission technologies in industrial processes.

In contrast, scope 3 emissions are not subject to such a quick solution. They are generated by suppliers upstream in the value chain and customers downstream, and include emissions from purchased goods and services, from the production of raw materials, components and parts to the transportation and distribution of goods. Scope 3 also includes the carbon footprint of the life cycle of goods when they are used by customers and the carbon footprint of waste generated when they are disposed of after they become obsolete.

Besides being extremely broad and complex, Scope 3 emissions also comprise the majority of emissions for most companies. Upstream emissions alone can account for 70% of a company’s emissions. That’s why it is the focus of the Alliance of CEO Climate Leaders , one of the World Economic Forum’s flagship decarbonization initiatives.

Percentage of industrial emissions that are Scope 1, 2, and 3. Image: Boston Consulting Group

Challenge: Scope 3 upstream emissions

Tackling Scope 3 upstream emissions means working to decarbonize the entire value chain. The Organization for Economic Co-operation and Development (OECD) estimates that about 70% of international trade is currently in global value chains (GVCs), as services, raw materials, parts and components often cross borders multiple times before being made into end products and then shipped around the world in the form of products.

These global value chains are incredibly complex. According to a 2021 study published by the World Economic Forum, emissions from just eight value chains account for 50% of global emissions.

On the other hand, the types of suppliers in the global value chain are very diverse, ranging from family businesses with less than 10 employees providing local transportation services, to companies with more than 100 employees producing parts for large companies' final products, and even large manufacturing companies with operations across multiple continents and time zones.

The current economic situation has compounded this situation. Companies of all sizes, everywhere, have been hit by rising costs due to inflation. These companies often lack the resources and knowledge to calculate their carbon footprint, set specific reduction targets, or implement emission reduction strategies. In some cases, their business partners or regulators will not encourage these actions due to their other priorities.

What is the solution?

If there is any hope of achieving the speed and scale of carbon reduction required, partners across the value chain must work together.

Tackling Scope 3 upstream emissions starts with large multinational companies, as they have the greatest potential to drive and scale up global climate action. Multinational companies can create a “pull” effect to promote change, incentivizing action across their value chains. These large companies have the resources and knowledge, and often have teams dedicated to climate action and sustainability. Now they must step up and take responsibility for their value chains, assisting suppliers and partners with limited resources.

The CEO Climate Leadership Alliance is the world's largest CEO-led community committed to achieving net zero emissions. Its more than 120 multinational members from 26 countries and across 12 industries are working together to address the climate challenge.

One of the Alliance’s top priorities is addressing Scope 3 upstream emissions. These emissions account for 1.3 billion tons of its members’ estimated annual emissions, according to the Alliance’s 2021 annual survey results and data disclosed to CDP, a nonprofit that operates a global disclosure system. To put this into context, this figure is roughly equivalent to the total annual emissions of Japan.

The Alliance is launching an initiative to explore how to support other companies in its value chain to help analyze their emissions and develop strategies to reduce them. This includes the establishment of a dedicated support center to provide actionable assistance to members and suppliers' procurement teams. This is an unprecedented attempt to promote cooperation across the value chain, including workshops, open communication channels, and support and assistance from Alliance members to suppliers of all sizes.

The task remains challenging: some alliance members have thousands of suppliers at different stages of decarbonization. But this is precisely why such a collaborative approach is so important; it is one of the most important ways to achieve the global net zero emissions goal.

With every 1°C increase in global temperatures, our planet faces a series of new climate tipping points, so there is no time to lose. That is why we call on companies around the world to follow the Alliance’s lead. And this should not be limited to corporate executives. Boards, industry associations, governments and international organizations also need to better understand and authorize actions related to Scope 3 emissions.

The actions of the CEO Climate Leaders Alliance show us that if we work together as a community, we can make progress, but we must act now.

Author of this article:

Pim Valdre, Head of Climate Ambition Initiative, World Economic Forum

Jay Hawkins, Head of Communications, Climate and First Mover Alliance, World Economic Forum

This article originally appeared on the World Economic Forum's Agenda blog