What are Scope 1, 2, and 3 emissions?

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For centuries, philosophers have opined on the nature of control and the challenge of recognizing what’s in one’s power to change. Solving the problem of climate change—that is, achieving net zero in time to spare our planet the worst effects of a warming climate—will likely require all the wisdom (and strategic action) we can collectively muster. To meet this goal, we will need to minimize the emissions directly under our control. But also, we must reduce the emissions that do not result directly from our own activities. These are known as Scope 3 emissions.

Greenhouse gas emissions are classified into three categories, or scopes. Organizations divide their emissions into these scopes to help them create effective reduction plans.

What are Scope 1 and Scope 2 emissions?

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Andrea Del Miglio is a senior partner in McKinsey’s Milan office; Fernando Perez is a senior partner in the Miami office; Jukka Maksimainen is a senior partner in the Helsinki office; Lucy Pérez is a senior partner in the Boston office; Mark Patel is a senior partner in the Bay Area office; Michel Van Hoey is a senior partner in the Luxembourg office; and Peter Spiller is a partner in the Frankfurt office.

Scope 1 and Scope 2 emissions are relatively straightforward. Scope 1 emissions are greenhouse gases that an organization emits from sources it owns or controls directly. In the case of an airplane manufacturer, this could include the emissions associated with fuel combustion in the planes it produces or the boiler or furnace in one of its corporate offices. Scope 2 emissions are indirect, deriving from an organization’s purchase of electricity, steam, heat, or cooling. With our airplane manufacturer, these include greenhouse gases that are emitted off-site but for which the manufacturer is still solely responsible.

How are Scope 3 emissions different?

Scope 3 emissions, while often harder to categorize, can potentially contribute far more to an organization’s overall carbon footprint than the other two scopes. An organization’s Scope 3 emissions, also known as its life cycle emissions, are those that arise across the value chain, both upstream and downstream. For an airplane manufacturer, for example, Scope 3 emissions include the fuel used to power the airplane once it’s been sold to an airline. They also include the energy used to manufacture the steel that’s used to build the airplane. Scope 3 emissions even include fumes from the cars the manufacturer’s employees use to drive to work every day. Scope 3 emissions can potentially contribute far more to an organization’s overall carbon footprint than the two other scopes (table).

Table

Scope 1, 2, and 3 explained

Direct emissions

Indirect emissions

	Scope 1	Scope 2	Scope 3
Phase of production cycle	During production	Upstream	Both upstream and downstream
Activities	Scope 1 emissions are released when a company manufactures a product or delivers a service.	Scope 2 emissions are released by offsite energy providers when a company makes a purchase.	Upstream, they are released from the activities that a company engages in prior to production, from employee commuting to leased assets to transportation and distribution. Downstream, Scope 3 emissions are released from use or disposal of a product or service.

McKinsey estimates that Scope 3 emissions typically represent around 90 percent of a company’s total emissions, though the figure can vary by industry and company. To achieve their emissions reductions targets, a wide variety of organizations have made Scope 3 emissions a higher priority on their agendas. In this Explainer, we’ll explore how to think about Scope 3 emissions and some ways that companies might reduce them.

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How can organizations across industries reduce Scope 3 emissions?

Regardless of the industry, the reduction of Scope 3 emissions will likely require not only new processes and technologies but also new kinds of collaboration with customers, suppliers, and stakeholders. Ultimately, lower emissions may even require completely new business strategies.

The specifics of how to lower Scope 3 emissions will, of course, depend on the industry. But in general, here are six levers for reducing emissions while capturing new value:

Supplier and customer selection. One way organizations can decrease their upstream Scope 3 emissions is by selecting suppliers that have minimized their own carbon footprints. Dual-mission sourcing, or buying a product that minimizes both cost and carbon footprint, is becoming the standard across corporate procurement teams. For example, Volvo Trucks is designing vehicles made from fossil-free steel in collaboration with a Swedish steel player. Other commercial vehicle companies are investing in green steel, which uses hydrogen in its production process.

Downstream, organizations can encourage customers to reduce emissions while using their products. Heavy-equipment manufacturer Komatsu, for example, has collaborated with its enterprise customers in planning, developing, testing, and deploying zero-emissions mining equipment.
Product specification. Organizations can adjust their product specifications to rely more on lower-emissions materials. Some automotive producers, for example, are replacing metals with plastics in their cars to improve fuel efficiency.
Partnerships. Partnerships focused on new technologies are particularly well suited to creating low-carbon product lines and processes, which in turn can propel decarbonization actions. For example, specialty-chemical company Evonik Industries teamed up with Unilever to develop and scale a new, more sustainable kind of cleaning agent (known as a surfactant) for use in dishwasher detergent.
End-of-life solutions. Recycling and other circular solutions can reduce end-of-life emissions once a product has been purchased. Recycling can also produce raw materials that are suitable for reuse in new products, thereby reducing upstream emissions as well. Danish energy company Ørsted and German steel producer Salzgitter created a partnership to use recycled scrap from end-of-life wind turbines to produce steel for new wind turbines, creating a closed material loop.
Green portfolio strategies. Companies with significant downstream emissions can consider redistributing their portfolio, with a greater emphasis on lower-carbon business segments. Schneider Electric, for example, pivoted from providing hardware to selling energy management solutions.
Value chain integration. Value chain integration is when an organization creates new opportunities for value in the course of its normal production operations. Upstream integration can increase a company’s control over gases emitted prior to production. Downstream integration, after a product is sold, can help control emissions during a product’s use.

In the following sections, we will explore how organizations in specific industries can work to reduce their Scope 3 emissions.

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How can consumer companies address upstream emissions?

Most consumer goods companies are not on track to meet their own decarbonization targets. Tackling Scope 3 emissions in a more effective, meaningful way could be key to getting back on schedule.

Upstream Scope 3 emissions make up, on average, two-thirds of Scope 3 emissions for consumer goods companies. These emissions are generally driven by the inputs a company uses in its production processes, including ingredients (such as fabric, food, or chemicals) and packaging, such as paper, plastic, or glass—as well as the transportation and distribution of these goods.

Of course, each organization will need to assess how best to decarbonize its own particular value chain. But some commonalities exist within consumer goods subsectors:

Retailers rely heavily on their upstream value chains, which can be highly carbon intensive. Retailers could make progress toward their emissions goals via collaborations with suppliers on decarbonization. Such partnerships could include encouraging suppliers to use renewables rather than plastic packaging, which is derived from fossil fuels through energy-intensive processes.
Much of apparel producers’ emissions derive from textile production and processes. Nylon and polyester, for example, are made from fossil fuels, and processes such as dyeing can be energy intensive. Decarbonization in this industry could include the substitution of conventional textiles for alternative materials, such as organic cotton or recycled polyethylene terephthalate (rPET), both of which can reduce emissions by up to 50 percent.
Meat and dairy, which are central to Western diets, account for almost half of all product-related Scope 3 emissions. Food-processing companies can decrease their upstream emissions by working with suppliers to reduce the emissions intensity of these products. A European dairy company, for example, has been implementing a farm-by-farm decarbonization approach, resulting in a decrease in emissions of up to 50 percent compared with its peers.

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What is green logistics? How could it contribute to reducing Scope 3 emissions?

Most organizations generate a significant portion of their Scope 3 emissions from supply chain and logistics activities, particularly from the combination of road and ocean freight. Any holistic path to net zero will need to address them.

Most global shippers and providers are already shifting toward greener shipping practices, which means using as few resources and as little energy as possible to move goods. And more than seven in ten of those recently surveyed said they would be willing to pay more for green shipping products. McKinsey estimates that demand for green logistics could reach an estimated $350 billion in 2030.

Here are a few actions some companies are already taking to shift toward green logistics:

Reducing the distances traveled—starting with a network redesign. One American food and agriculture company’s network footprint analysis reduced emissions by 18 percent by consolidating 53 sites into seven. Load and routing improvements, such as minimizing “empty miles” where vehicles travel without cargo, could reduce unnecessary miles as well as costs simultaneously.
Decarbonizing warehouses—by reducing overall energy demands and working toward emissions-neutral, self-sufficient operations with closed-loop systems. The Dutch logistics company GLS is operating its first self-sufficient, emissions-free warehouse in Essen.
Shifting or mixing transport modes—to achieve cost and carbon reductions. Road freight is more than five times more energy efficient than air freight, and rail and ocean shipping are up to 20 times more efficient still. One oil and gas player with a large truck fleet that traveled long distances made huge carbon and cost-efficiency gains by loading hundreds of its freight containers onto diesel trains. From an emissions perspective, that’s the equivalent of taking more than 60,000 cars off the road per year.

Logistics organizations are also exploring longer-term solutions. The Danish group Maersk plans to use green fuels for its ocean shipping; 26 of its vessels have been commissioned to run on green methanol. Companies are also developing collaborative partnerships to accelerate shipping decarbonization, such as the one between Maersk and French shipping company CMA CGM.

How are semiconductor organizations pursuing Scope 3 decarbonization?

Every step of semiconductor manufacturing, from wafer production through packaging, requires fossil fuels and generates emissions. Semiconductors are ubiquitous in modern technology; as organizations in a wide variety of industries attempt to minimize their Scope 3 emissions, many are looking upstream to semiconductor companies and their emissions-heavy operations.

As a result, semiconductor companies are working hard to decarbonize their own Scope 3 emissions. Intel, for example, has said it will achieve net zero in its global operations by 2040 and has targeted 100 percent use of renewable electricity as an interim milestone for 2030.

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