Untangling the Supply Chain: A Deep Dive into Scope 3, Category 2 Emissions

In today's environmentally conscious landscape, businesses are increasingly scrutinized for their carbon footprint. While many prioritize direct emissions (Scope 1) and purchased electricity (Scope 2), a hidden giant lurks in the shadows: Scope 3, Category 2 emissions. These emissions, arising from the production of purchased capital goods, represent a significant chunk of an organization's total carbon footprint, often exceeding direct emissions. So, what are these elusive Category 2 emissions, and why should you care?

What are Scope 3, Category 2 Emissions?

As defined by the GHG Protocol, Scope 3, Category 2 includes all upstream (i.e., cradle-to-gate) emissions from the production of capital goods purchased or acquired by the reporting company in the reporting year. Emissions from the use of capital goods by the reporting company are accounted for in either scope 1 (e.g., for fuel use) or scope 2 (e.g., for electricity use), rather than in scope 3.

Imagine a factory churning out machinery you buy for your own production line. While your Scope 1 emissions account for the fuel used within your factory and Scope 2 covers the electricity powering it, the emissions generated during the production of that machinery fall under Scope 3, Category 2. This includes:

• Raw material extraction and processing: Mining, refining, and shaping metals, plastics, and other materials used in the capital good.
• Manufacturing processes: The energy consumed and emissions released during fabrication, assembly, and finishing.
• Transportation: Emissions from shipping the capital good to your doorstep.

Essentially, Category 2 captures the upstream carbon footprint embedded within your purchased equipment, highlighting the hidden environmental cost of doing business.

Why Does Accounting for Scope 3, Category 2 Emissions Matter?

For many businesses, Category 2 emissions can be a significant contributor to their overall carbon footprint. Measuring and understanding Category 2 emissions empowers you to:

• Transparency and accountability: Investors, customers, and regulators increasingly demand transparency in greenhouse gas (GHG) emissions. Accounting for Category 2 demonstrates a comprehensive understanding of your environmental impact, fostering trust and credibility.
• Gain a competitive edge: Proactively addressing Category 2 emissions positions your company as a sustainability leader, attracting environmentally conscious consumers and investors.
• Cost savings: By identifying emission hotspots within your supply chain, you can collaborate with suppliers to optimize production processes and reduce costs.
• Risk mitigation: Addressing Category 2 helps future-proof your business against stricter regulations 

Measuring Category 2 Emissions

The GHG Protocol highlights 4 different ways of calculating and measuring Scope 3 Category 2 emissions, which are the same as the methods for calculating Scope 3, Category 1 emissions: 

1. Supplier-specific method: involves collecting product-level cradle-to-gate GHG inventory data from goods suppliers 

2. Hybrid method: involves a combination of supplier-specific activity data (as and where available) and using secondary data to fill the gaps. This method involves:

• Collecting allocated scope 1 and scope 2 emissions from suppliers
• Calculating upstream emissions of goods by collecting available data from suppliers on the amount of materials, fuel, electricity used, distance transported, and waste generated from the production of goods and applying appropriate emission factors 
• Using secondary data to calculate upstream emissions wherever supplier-specific data is not available.

3. Average-product method: involves estimating emissions for goods by collecting data on the mass or other relevant units of goods purchased and multiplying by relevant secondary (e.g., industry average) emission factors (e.g., average emissions per unit of good)

4. Average spend-based method: involves estimating emissions for goods by collecting data on the economic value of goods purchased and multiplying by relevant secondary (e.g., industry average) emission factors (e.g., average emissions per monetary value of goods).

For guidance on calculating emissions from Scope 3 Category 2 Emissions, we recommend referring to the Technical Guidance for Calculating Scope 3 Emissions Document 

Analyze and Set Targets: Charting Your Course

Once you have your Category 2 emissions calculated, it's time to analyze and set reduction targets:

• Identify hotspots: Analyze your data to pinpoint the capital goods with the highest emissions. This helps you focus your reduction efforts where they matter most.
• Set ambitious but achievable targets: Align your targets with science-based goals and industry best practices, demonstrating your commitment to progress.
• Develop a reduction strategy: Explore strategies like collaborating with suppliers to adopt cleaner production processes, investing in energy-efficient equipment, or designing for disassembly and remanufacturing.

Toolbox for Reduction: Taming the Category 2 Beast

The fight against Category 2 emissions requires a multi-pronged approach. Here are some tools in your arsenal:

• Supplier engagement: Collaborate with suppliers to implement emission reduction initiatives in their production processes. Offer incentives, knowledge sharing, and joint research and development opportunities.
• Design for sustainability: Integrate sustainability principles into your product design, considering factors like material sourcing, energy efficiency during use, and end-of-life options.
• Circular economy principles: Explore opportunities to extend the lifespan of your capital goods through maintenance, repair, remanufacturing, or leasing models.
• Invest in innovation: Support the development and adoption of new technologies that can reduce emissions throughout the supply chain.
• Advocacy and policy engagement: Partner with industry bodies and policymakers to advocate for sustainable practices and supportive policies.

StepChange: Your Sustainability Partner 

Navigating the complexities of Scope 3, Category 2 emissions can be overwhelming and that's where StepChange comes in. Our ESG software offers a comprehensive solution to help you measure, analyze, and reduce your emissions throughout your supply chain.

The platform streamlines data collection through seamless integrations with various sources, including supplier portals and enterprise softwares. With powerful analytics dashboards, you can identify hotspots, track progress, and benchmark your performance against industry leaders. By leveraging our ESG software, you can gain valuable insights into your Category 2 emissions, empowering you to make informed decisions, collaborate effectively with suppliers, and ultimately, contribute to a more sustainable future. 

Remember, tackling Category 2 emissions is not just a compliance checkmark, it's an opportunity to unlock innovation, strengthen your brand, and drive long-term business success. Take the first step today and explore how StepChange can help you on your sustainability journey.

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