Carbon Emissions – How They Affect the Environment & How They Affect Your Business
What are Carbon Emissions?
Carbon emissions are the gases that enter the atmosphere when fuels are burned. They are a component of overall Greenhouse Gas Emissions (GHGs) and are a major contributor to climate change. Climate change is noted as the gradual increase in global average temperatures due to these greenhouse gas emissions and other human activities.
Carbon dioxide (CO2) is one of the most common greenhouse gases and it is emitted when fossil fuels like coal, natural gas, and oil are burned for energy. It is also emitted from burning wood or waste materials like garbage.
Carbon emissions are the largest contributors to global warming as they account for 81% of GHG emissions across the world, and they’re also present in other pollutants like ozone (O3) and methane (CH4).
How Do Carbon Emissions Affect the Environment?
Carbon emissions are a prime factor in global warming and climate change. Because of the recent rise in these emissions over the last 50-60 years (Charles Keeling first accurately measured the planet’s carbon emissions in the late 1950s), the Earth’s temperature has been rising at an alarming rate.
There are many things that contribute to carbon emissions, but one of the biggest contributors is the burning of fossil fuels. Fossil fuels are the main sources of energy in today’s society and they are consumed mostly for power/electricity, transportation and home heating. The subsequent combustion releases greenhouse gases and other pollutants into the atmosphere.
CO2 then traps heat in the Earth’s atmosphere, called the “greenhouse effect”. Estimates are that our CO2 emissions from burning fossil fuels has been rising since as early as 1750, and this resulting warming effect has led to an increase in extreme weather events like hurricanes, droughts and floods.
The drive to reduce carbon emissions is gaining popularity, partly because it’s seen as the right thing to do environmentally, also it makes business sense as investors and customers are looking closely at companies and their commitment to carbon reduction.
For businesses, it’s important to know the three classifications of carbon emissions.
What are the Different Types of Carbon Emissions?
Carbon emissions are classified into three categories: Scopes 1, 2 and 3 and they are widely accepted from the definitions from the GHG Protocol.
Scope 1 includes direct emissions from fuel combustion and other industrial processes. Scope 2 includes indirect emissions from the purchase or use of energy sources such as electricity or natural gas. Scope 3 includes indirect emissions from the consumption of products such as manufacturing, shipping and disposal both upstream and downstream. Scope 3 emissions are also further broken down into 15 different categories that have varying levels of impact. For example:
- Scope 1 emissions – are direct greenhouse gas (GHG) emissions from owned or controlled sources.
- Scope 2 emissions – are indirect GHG emissions from purchased electricity or other forms of energy.
- Scope 3 emissions – are indirect emissions occurring in the value chain of the reporting company.
Scope 1 in Detail – Direct Emissions
Scope 1 emissions come from your direct sources, factories, vehicles etc. They can be divided into four neat categories:
- Stationary combustion – those emissions that come directly from your facility, such as gas to heat the building.
- Mobile combustion – those emissions that come from your vehicles – company cars, vans, buses or trucks.
- Fugitive emissions – those emissions that come from leaks from things like AC units or refrigeration equipment.
- Process emissions – those emissions that come from your internal processes and manufacturing, heating and cooling materials, factory fumes and outgassing.
Scope 2 in Detail – Energy Use
Scope 2 emissions are indirect from the generation of your purchased energy (electricity, gas, etc.) For example, you purchase electricity from the local utility company, the scope 2 emissions come from the generation of the power you consumed and was delivered to you.
However, the energy to get the power to you is classified as Scope 3 (for the utility provider), because things like transmission losses are a factor of the utility company’s equipment and not your direct consumption.
Scope 3 in Detail – 15 Categories
Scope 3 Emissions are very different from Scope 1 and 2 emissions, as the first two happen directly within our organizational control. Scope 3 emissions come from external sources. For example, it’s possible for an organization to purchase paper for printing purposes that comes with a high level of scope 3 emissions, because it was made in a way that led to significant resource depletion, high energy use in manufacturing, or extensive transportation methods.
The first two categories are where you might think most of a company’s emissions reside, however research is showing us that most manufacturers’ emissions fall under Scope 3 – as much as 90% of them! According to research firms like McKinsey, Scope 3 emissions can total 5 to 25 times a firm’s Scope 1 and 2 combined! As a result, Scope 3 is also the area that has the most opportunity for companies to lower their emissions.
Scopes 1 & 2 are fairly easy to calculate and in many cases, these factors are part of your financial models already. However, when it comes to Scope 3 emissions, things get much more complicated. Scope 3 emissions are those that occur in your value and supply chains, both upstream and downstream. On top of that, they are broken down into no less than 15 categories!
It’s no wonder that a lot of confusion and frustration pops up as a result of trying to calculate (or even define) Scope 3 emissions. The 15 categories include:
- Business Travel
- Employee Commuting
- Waste Generated
- Transportation Upstream
- Transportation Downstream
- Fuel and Energy
- Capital Goods
- Leased Assets Upstream
- Leased Assets Downstream
- Use of Sold Goods
- End-of-Life Treatment of Sold Products
- Processing of Sold Products
- Purchased Goods and Services
One of the most common upstream activities to track is business travel. This is the travel associated with you and your employees on the road for business. It can include: air travel, trains, buses, taxis and personal vehicles. Just this section alone can be incredibly complex. Do your employees share taxis? Do they travel by public transit when available? Do they each drive a separate rental car while on location?
Employee travel for commuting is another section. Are you in a rural area where everyone drives separately, or an urban location where most employees can walk or take the bus to work? Also, the advent of remote workers who don’t commute at all, will greatly impact your emissions here.
Waste generated also adds to emissions. Any byproduct sent to landfills, any wastewater treated, and any animal waste will produce methane and nitrous oxide. Both are GHGs considered harmful to the environment and must be reported in Scope 3.
Transportation includes both up and downstream. The shipping of your finished goods to customers and components to your suppliers. These emissions also include any warehousing-related effects of these goods.
Fuel and energy emissions for Scope 3 are essentially any energy use beyond what it reported in Scopes 1 & 2. They are rarer, but say you make ethanol for use in your farm equipment. That’s considered Scope 3, because you didn’t purchase the fuel directly from a supplier.
Capital goods are items related to your company infrastructure. Your buildings, machinery, delivery vehicles, etc. When looking at the typical accounting for Capex, the items are depreciated in value over a term, usually in years. However, for Scope 3 emissions, the reporting requires total emissions (over the life of the unit) in the year purchased or acquired. So, if you built a new warehouse, the emissions associated from that structure are calculated for the estimated full life, and then reported in the year the warehouse went “online”.
Investment reporting is typically reserved for banks and other lenders. For example, if you invest in a project that produces a high amount of emissions (coal mining), then you must report their emissions as a result of your financing the project. Investments include equity, debt, project finance, and managed or client services.
Franchises are calculated like any separate entity. However, since they operate under a “parent” company, all emissions must report up through the franchisor, this includes their Scope 1 and 2 emissions.
Leased assets refer to both upstream (under control of the business) or downstream, assets residing outside company locations.
Use of sold goods and end-of-life treatment refers to the use of your products once ownership has transferred to your customer(s). Think about it this way, an oil company refines a product (gasoline) and sells it to you. They not only report the emissions from production, but the emissions from your use, e.g. – fueling your car by burning gasoline.
End of life works the same way as the Use of Goods. Do your customers dispose of your products or recycle them? The outcome greatly affects your overall emissions here.
Processing of sold products includes any further emissions resulting from additional processing of your product. For example, you sell a component to an auto manufacturer that they modify that part to be installed into one of their vehicles. The emissions resulting from their processing need to be reported.
Purchased goods and services may be the most daunting of all the Scope 3 emissions to get our arms around. This includes all products, components, sub-assemblies, and raw materials you purchase in your manufacturing and operations processes. It includes harvest, production, packaging, warehousing, shipping, etc. all along the supply chain.
We know of a manufacturer in the U.S. that sends components overseas to be assembled, then that assembly is shipped back to the U.S. for incorporation into a system, then that final system is shipped to customers both domestically and abroad. To complicate matters even further, sometimes those customers deploy the systems back overseas! Meaning some components travel back and forth across continents and oceans many times before they reach their final destination. Tracking emissions for this type of process would make anyone’s head spin!
What is Carbon Accounting/Reporting?
Carbon reporting is a newer process in the accounting world and it’s a way of quantifying and managing one’s carbon footprint. This system is structured much like accounting, which helps those who are unfamiliar with the process to easily understand it. In essence, the carbon that your company is responsible for releasing into the atmosphere are your carbon “debits”. They include all three scopes of emissions.
On the other hand, carbon that you either eliminate, reduce, or sequester in some way, become your carbon “credits”. The reconciliation of debits and offsetting credits is considered your overall carbon footprint. Also, carbon credits have value and may be sold or purchased like any other asset.
The most agreed upon measurement is in cubic tonnes (metric tons) of carbon dioxide gas. Many parts of the world are now putting a price (tax) on carbon, but a harmonious value has yet to be reached. However, that will change in the near future as emissions (and offset credits) will be more universally reported and standardized, due to mandates such as the SEC’s proposal for carbon emissions.
Reporting Today vs. Reporting Tomorrow
Scope 1 & 2 emissions have been more consistently reported up until now, simply because they are easier to define and measure. Scope 3 emissions are more elusive, as they are indirect emissions based on the upstream and downstream value chains. They require more cooperation within the supply chain participants to accurately be measured (and not double counted for example).
Today, most companies are versed in reporting Scopes 1 & 2, with good reason as the SEC has announced that proposal to make reporting on them mandatory. The plan is to require Scope 1 and 2 to be reported on a company’s 10k in 2023, followed by Scope 3 reporting in 2024.
Scope 3 reporting will obviously pose the biggest challenge for businesses as most of these emissions are “buried” in their supply chains and the collection of that data will require unprecedented cooperation from all partners up and down the chain. However, the greatest challenges will also lead to the largest opportunities when it comes to reducing those emissions.
Managing scope 3 emissions is about finding ways to reduce their impact on the environment through simple steps like buying responsibly sourced materials, converting onsite employees to remote, or generally reducing waste products. All of these reduce the amount of carbon in the cycle.
The Future of Carbon Emission Reduction
Carbon emission reduction is not just about efficiency by cutting down on fossil fuels, or about renewable energy, but also the manufacturing and sourcing protocols we observe. Since most of our carbon emissions are indirect in nature (Scope 3), we need to look outside the four walls of our factories to find ways to reduce them (materials, packaging, shipping, etc.).
As we see in the Scope 3 examples above, there is a huge opportunity to shift from materials that harm the environment, to materials (such as biomaterials) that actually are good for the planet.
The future of carbon emission reduction is in the hands of governments, corporations, and individuals alike. These emissions are best combated with international efforts that limit carbon production to a certain level, create a levelized carbon value/tax, and/or invest in methods to sequester the carbon back into our soil.
Governments will have to take a more proactive approach to carbon emissions. Corporations will be forced to do their part in reducing emissions by setting targets and standards for themselves. Individuals will also have to play their part by reducing their own carbon footprint and making a conscious effort towards taking care of the environment.
It will take a concerted effort to reverse the damage that carbon emissions are taking on the planet, but the first step in solving that problem is to identify and measure those emissions. Fortunately, businesses are starting down the path of quantifying emissions and in turn, taking effective measures to reduce them.
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