The Hidden Carbon Footprint of Every Business: Understanding Scope 2 & Scope 3 Emissions

Most companies assume their carbon footprint comes from fuel burned on-site, company-owned vehicles, or industrial processes (known as Scope 1 emissions). While these are important sources of greenhouse gas (GHG) emissions, they often represent only a small part of the overall picture.

For many organisations, the largest share of emissions comes from purchased electricity, suppliers, transportation, business travel, and even how customers use and dispose of products after purchase. These are known as Scope 2 and Scope 3 emissions.

Understanding these emissions is no longer just about sustainability reporting. It helps businesses identify opportunities to reduce costs, improve efficiency, strengthen supply chains, and meet growing customer and regulatory expectations.

But what exactly do Scope 1, Scope 2, and Scope 3 cover? Let’s take a closer look. 

Understanding GHG Scope 1, 2, and 3 

The Greenhouse Gas (GHG) Protocol classifies emissions into three categories, making it easier for organisations to understand where their emissions originate.

• Scope 1 covers direct emissions from sources that the company owns or controls, such as company vehicles, manufacturing equipment, or boilers.

• Scope 2 includes indirect emissions associated with purchased electricity, steam, heating, or cooling used by the organization.

• Scope 3 covers all other indirect emissions across the value chain, from purchased materials to product disposal.

This is a  simple illustration from a bakery to illustrate the difference:

• The emissions from natural gas used in the oven is Scope 1.

• The emissions associated with electricity used to power the lights and mixers are Scope 2.

• The emissions from growing wheat, transporting flour, producing packaging, and disposing of waste are Scope 3.

Although the bakery does not directly produce these emissions, they occur because of its business activities. Now, let’s talk about Scope 2 and 3 in detail. 

Understanding Scope 2: The Carbon Behind Every Kilowatt-Hour

Every organisation depends on energy. Whether running production lines, office computers, lighting, or air-conditioning systems, electricity is essential for daily operations. However, electricity itself does not produce emissions where it is consumed. The emissions occur at the power plant that generates it.

This is why emissions associated with purchased electricity fall under Scope 2.

The GHG Protocol requires organisations to report Scope 2 emissions using two different approaches.

1. Location-Based Method

The location-based method reflects the average emissions of the electricity grid where the facility operates.

For example, an office located in a region dominated by coal-fired power plants will generally have higher Scope 2 emissions than an office operating in a region supplied mainly by renewable energy.

This method reflects the physical characteristics of the electricity grid.

2. Market-Based Method

The market-based method reflects an organisation's purchasing decisions.

If a company purchases renewable electricity through green tariffs, Power Purchase Agreements (PPAs), or Renewable Energy Certificates (RECs), these contractual arrangements can reduce its reported Scope 2 emissions.

In simple terms:

• Location-based asks, "How clean is the electricity grid where I operate?"

• Market-based asks, "What kind of electricity did I choose to purchase?"

Both methods provide valuable information and together offer a more complete picture of an organisation's electricity-related emissions.

Understanding Scope 3 in D: Looking Beyond Your Own Operations

If Scope 1 represents emissions you directly produce, and Scope 2 represents emissions from the energy you purchase, then Scope 3 represents almost everything beyond Scope 1 and 2.

Scope 3 includes emissions generated throughout a product's entire life cycle—from extracting raw materials to manufacturing, transportation, product use, and final disposal.

For many organisations, Scope 3 represents the largest share of their greenhouse gas emissions, accounting for approximately 75% of total emissions on average across industries (OECD, 2023). However, the proportion can vary significantly by sector and business model. This makes Scope 3 an important area for identifying emission reduction opportunities.

The GHG Protocol divides Scope 3 emissions into 15 categories, covering emissions associated with activities across an organization's value chain. The categories include both upstream and downstream activities.

1. Purchased Goods and Services

Emissions from the extraction, production, and transportation of goods and services purchased or acquired by the reporting organization, excluding emissions already accounted for in Categories 2–8.

2. Capital Goods

Emissions from the extraction, production, and transportation of capital goods purchased or acquired by the reporting organization during the reporting year.

3. Fuel- and Energy-Related Activities

Emissions associated with the production and transportation of fuels and energy purchased by the organization that are not already included in Scope 1 or Scope 2.

This includes upstream emissions from purchased fuels and electricity, as well as emissions from

transmission and distribution losses.

4. Upstream Transportation and Distribution

Emissions from the transportation and distribution of products purchased by the reporting organization between suppliers and its operations. It also includes transportation and distribution services purchased by the organization during the reporting year.

5. Waste Generated in Operations

Emissions from the disposal and treatment of waste generated in the organization's operations during the reporting year, when the waste treatment facilities are not owned or controlled by the organization.

6. Business Travel

Emissions from the transportation of employees for business-related activities during the reporting year using vehicles that are not owned or operated by the organization.

7. Employee Commuting

Emissions from the transportation of employees between their homes and workplaces during the reporting year using vehicles that are not owned or operated by the organization.

8. Upstream Leased Assets

Emissions from the operation of assets leased by the reporting organization during the reporting year that are not already included in Scope 1 or Scope 2.

9. Downstream Transportation and Distribution

Emissions from the transportation and distribution of products sold by the reporting organization between its operations and the end consumer, where transportation is not paid for by the reporting organization.

10. Processing of Sold Products

Emissions from the processing of intermediate products sold by the reporting organization by downstream companies, such as manufacturers.

11. Use of Sold Products

Emissions generated from the use of goods and services sold by the reporting organization during their expected lifetime.

This category includes direct use-phase emissions, such as fuel consumption, as well as indirect use-phase emissions, such as electricity consumption during product use.

12. End-of-Life Treatment of Sold Products

Emissions associated with the disposal and treatment of products sold by the reporting organization at the end of their useful life, including recycling, incineration, and landfilling.

13. Downstream Leased Assets

Emissions from the operation of assets owned by the reporting organization and leased to other entities during the reporting year, where these emissions are not already included in Scope 1 or Scope 2.

14. Franchises

Emissions from the operation of franchises during the reporting year that are not already included in the reporting organization's Scope 1 or Scope 2 inventory.

15. Investments

Emissions associated with investments made by the reporting organization during the reporting year, including investments and project finance activities that are not already included in Scope 1 or Scope 2.

Not Every Category Applies to Every Organization

The 15 categories provide a standardized framework for identifying Scope 3 emissions, but not every category will be relevant or material for every organization.

Their relevance depends on factors such as the organization's business activities, value chain, operating model, and relationships with suppliers, customers, and other stakeholders.

The objective is therefore not simply to calculate all 15 categories, but to determine which categories are relevant, material, and appropriate to include within the organization's Scope 3 inventory boundary.

A Practical Example: The Journey of a Loaf of Bread

Imagine a bakery that produces and sells packaged bread. At first glance, the bakery's emissions may seem to come mainly from its ovens, delivery vehicles, and electricity consumption.

These are important sources, but they are only part of the picture.

The ingredients used to make the bread—such as wheat flour, sugar, yeast, and other ingredients—have their own emissions from agriculture, processing, and transportation. Packaging materials such as plastic bags and cardboard also require energy and resources to produce.

Once the bread leaves the bakery, it may be transported to supermarkets or customers. At the end of its life, leftover bread and packaging may also generate emissions through waste treatment.

From the bakery's perspective, these emissions occur outside its own operations but are still connected to the products it sells. They are therefore generally accounted for as Scope 3 emissions.

What Does This Mean for the Bakery?

Consider two bakeries.

Bakery A focuses mainly on reducing electricity and fuel consumption at its facility. It upgrades its ovens, improves energy efficiency, and switches to renewable electricity.

Bakery B takes a broader approach. In addition to improving its own operations, it works with suppliers to source lower-carbon ingredients, reduces packaging materials, optimises transportation, and reduces food waste.

Both approaches can reduce emissions. However, Bakery B is addressing emissions across a much larger part of its value chain.

This is why GHG accounting is not simply about measuring what happens inside a company's facilities. Understanding Scope 3 emissions can reveal emission hotspots that may otherwise remain outside the organisation's immediate focus—and help identify opportunities for reduction across the value chain.

Why Measuring Scope 2 and Scope 3 Matters

Understanding Scope 2 and Scope 3 emissions provides more than compliance with sustainability reporting requirements.

It helps organisations:

• Identify the largest sources of greenhouse gas emissions.

• Improve operational efficiency and reduce energy costs.

• Engage suppliers in carbon reduction initiatives.

• Design products with lower environmental impacts.

• Prepare for customer requirements and emerging regulations.

• Build more resilient and sustainable supply chains.

Rather than viewing carbon accounting as a reporting exercise, organisations can use it as a decision-making tool that supports long-term business performance.

Final Thoughts

Reducing greenhouse gas emissions begins with understanding where they occur.

While Scope 1 emissions are usually the easiest to identify, Scope 2 and Scope 3 reveal the much larger network of emissions hidden across electricity consumption, supply chains, transportation, and product use.

For many businesses, these indirect emissions represent the greatest opportunity to improve sustainability, reduce costs, and create long-term value.

By measuring Scope 2 and Scope 3 accurately, organisations gain the insights needed to make better decisions—not only for climate action but also for building more efficient, resilient, and competitive businesses.

The information presented in this article is accurate as of the publication date, based on publicly available data. LCI may periodically update this article to reflect evolving standards and regulations. If there are any inquiries, please contact admin@lifecycleindoensia.com.