Scope 3 | Categories 1 and 2: Purchased goods and services and capital goods

Scope 3 emissions are a consequence of the activities of the organization but occur from sources not owned or controlled by the organization. Scope 3 emissions are classified into 15 categories representing an organization’s upstream and downstream value chain activities. Please refer to Overview of Scope 3. In this blog, we will discuss Category 1 & 2 of Scope 3 emissions.

Both category 1 and category 2 relate to procurement activities in the value chain. However, category 1 considers goods or services not included in the other upstream scope 3 categories, and category 2 considers only capital goods.

Category 1: Purchased Goods and Services

Category 1 includes all upstream (cradle-to-gate) emissions from the production of products purchased or acquired by the reporting company in the reporting year. Products can be both tangible goods and intangible services. This category excludes emissions covered in other upstream Scope 3 categories (e.g., transportation, waste).

Summary of Category 2: Capital Goods

Category 2 covers all upstream (cradle-to-gate) emissions from the production of capital goods purchased or acquired in the reporting year. Capital goods are final products with an extended life used by the company to manufacture a product, provide a service, or store and deliver merchandise. Examples include equipment, machinery, buildings, and vehicles.

Organizations typically classify their purchases into two categories:?production-related?procurement and?non-production-related?procurement.

Production related procurement, or direct procurement consists of purchased goods that are directly related to production of an organization's product including:

• intermediate goods (eg. materials, component parts) that an organization purchases to process. transform, or include in another product. For eg. steel used in manufacturing machinery or cotton used in the production of clothing
• final goods purchased for resale such as Smartphones purchased for employees, cardboard boxes and bubble wraps for shipping products,
• capital goods that are used to manufacture a product, provide a service, or sell, store, deliver, merchandise, such as equipment, machinery, buildings, facilities, and vehicles.
• products or services used in operations like office supplies, IT support, consulting services, janitorial services eg. Legal services for compliance and contract,
• products or services used in maintenance or repairs such as replacement parts, third party maintenance services.

GHGP?Technical Guidance for Calculating Scope 3 Emissions?details four methods to calculate emissions for categories 1 and 2: supplier-specific, hybrid, average-data, and spend-based. The methods are the same for both category 1 and category 2 as the activity of each category is similar.

The calculation method an organization selects depends on two considerations:

1.??? Is the activity significant to scope 3 emissions or is the activity relevant to any of the organization’s business goals?

2.??? What data is available to the organization? Primary or secondary?

Primary data - may be provided directly from suppliers or other value chain partners and include specific activity-related data or actual emissions. Examples include data provided directly from suppliers, purchased records obtained directly from the organization's IT systems or emission factors provided from suppliers.

Secondary data - is general data that is available, such as industry average data. This type of data is used to estimate scope 3 emissions when primary data is unavailable. Examples includes third party data on production of a product, average emission factors based on product or service.

Calculation Methods:

1.???? Supplier-Specific Method: The supplier-specific method is the most accurate method as it uses product-level data provided by the third-party supplier. It collects product-level cradle-to-gate GHG inventory data from suppliers.

Data needed: Requires quantities or units of goods/services and supplier-specific emission factors.

2.???? Hybrid Method: The hybrid method uses a combination of supplier-specific data and secondary data. It Uses a combination of supplier-specific activity data and secondary data.

Data needed: Requires allocated Scope 1 and 2 emissions from suppliers, material and fuel inputs, waste data, and cradle-to-gate emission factors.

3.???? Average-Data Method: Estimates emissions based on the mass or other relevant units of goods/services and industry average emission factors.

Data needed: Requires mass/units of purchased goods/services and secondary cradle-to-gate emission factors.

4.???? Spend-Based Method: Estimates emissions based on the economic value of purchases and applies secondary emission factors. Used when other methods are not feasible.

Data needed: Requires data on amount spent on purchases and secondary cradle-to-gate emission factors.

Additional Considerations:

·?????? Emissions from capital goods should not be depreciated over time but accounted for in the year of acquisition.

·?????? Capital goods are treated as fixed assets in financial accounting and reported in Category 2 to avoid double counting with Category 1.

·?????? If a supplier cannot provide data on some or all items above, the organization may combine the available data with secondary data including:

o?? Mass or number of units of purchased goods or services

o?? Amount spent on purchased goods or services, by product type, using market values

o?? Cradle-to-gate emission factors of the purchased goods or services per unit of mass or unit of product.

o?? Cradle-to-gate emission factors of the purchased goods or services per unit of economic value