What Are Scope 4 Carbon Emissions?

Required reporting standards for carbon emissions have focused on different types or scopes of impact. Though Scope 1 and Scope 2 emission comments are most common to date, more organizations are starting to report on Scope 3 as well. In this article, we highlight a newer concept, Scope 4, which covers how a company’s efforts and products can help to avoid or reduce emission throughout its value chain. Given Scope 4 should be entering the conversation more heavily in months to come, we’ve included examples and issues reporting it.

Origins and Intent of Environmental Reporting Scopes

The Greenhouse Gas Protocol (GHG Protocol) is an organization that provides the guidelines for voluntary reporting greenhouse gases (GHG), including Scope 1 emissions (from company operations), Scope 2 emissions (from a company’s supply chain, including purchased energy) and Scope3 emissions (primarily customer emissions when using a company’s product). More recently, the World Resource Institute (WRI) issued guidance on reporting the emissions of products and services (Scope 4).

The Challenges of Scopes 3 and 4

Disclosure of Scope 3 has been challenging. Estimating what customers are emitting from the use of a product could introduce claims of greenwashing. For example:

• How much do consumers drive, and do they use the eco-mode, drive fast, or take long trips?

• Will a consumer who buys a low-temperature detergent set the wash cycle on cold or hot?

• What aggregate is mixed in with cement, and where is the concrete used?

Ultimately with more downstream information, the estimates and assumptions behind reports must be transparent to satisfy critics. As an analogous situation, many investment analysts say very different things about different subjects, but all typically can explain why they are saying those things in terms of assumptions and data used. Not all may agree with the assumptions and methods, but that is how those estimates have settled out as acceptable.

Scope 4 environmental reporting will have even more room for assumptions and greenwashing risk. Introduced in 2013 by the World Resources Institute, Scope 4 encourages companies to estimate and report avoided emissions as a result of using companies’ products. Although a company may emit GHGs to produce a product (Scope 1 and 2), the product itself can help reduce emissions that otherwise would have occurred.

An oft-cited 2017 survey by the Carbon Disclosure Project (CDP) concluded that over 70% of companies offer services or products that help users reduce emissions. However, little data is available to measure these impacts through a supply chain.  

Companies could use avoided-emissions metrics to set goals, develop sustainability strategies, and engage stakeholders. When reporting Scope 3 emissions, Scope 4 avoided emissions should not be used as an offset. In as much as avoided emissions are important factors in a holistic, life cycle emissions analysis, however, companies may want to couple Scope 4 reporting with their other required reports.

A key issue in measuring life cycle avoided emission claims is assumptions in the analysis. Which fuel mix is a customer using in their operations that consume a product? Is the product being used or applied with best practices for energy efficiency? Assumptions and calculations will have to be transparent to avoid charges of greenwashing. Frequently, third-party experts on various aspects of a product’s life cycle will be employed to lend credibility to reports.

Scope 4 Avoided Emissions Scenarios

Electric vehicles are one example of avoided emissions. The production process generates emissions, but compared to vehicles with traditional internal combustion engines, the EVs will generate lower emissions over their lifetime. Even in this relatively straightforward EV example, it is easy to imagine a wide range of avoided emissions estimates that could complicate measurement and reporting.

Here are additional examples to help present potential issues with measuring Scope 4 avoided emissions.

• Critical metals that, depending on use, can help reduce carbon emissions from power generation downstream.

• Railroads, which greatly reduce emissions relative to other transport options, can get recognition for their sustainability contribution to customer choices—even though rail companies would emit more themselves with higher volume. (e.g., Norfolk Southern).

• Retail companies can assess the environmental impacts of their products from manufacturing, packaging, transportation, usage, and end-of-life disposal. Comparing the impact of an old product to a new product is an example of how avoided emissions could be estimated and discussed.

• Utilities that work with customers on 1) greater efficiency and electrification programs, 2) supporting EV infrastructure, or 3) converting industrial customers can help reduce overall emissions, albeit with a wide range of actual impacts. (e.g., Pacific Gas & Electric).

• Consumer products companies, by measuring the impact of their products (e.g., plant-based beef) across their life cycle, can benefit marketing their products’ sustainability credentials. Estimates of changing customer behaviors, however, add some difficulty to the analysis of avoided emissions.

• The telco/tech sector can encourage digital solutions that reduce emissions and transform systems to reduce electricity consumption. (e.g., Telefonica of Spain). In addition, cloud services could be marketed as more energy efficient than on-premise storage, although they could engender greater energy consuming calculations (AI, crypto).

• Remote work could arguably reduce overall emissions if estimated fairly, but it will require numerous assumptions about driving style and distance. Perhaps a global standard will arise to put Scope 4 estimates on an even footing.

• Recovering material from waste streams or producing products with a lower end-of-life environmental impact will require numerous assumptions on recycling systems, absent an accepted industry standard.

• Financing made available for emission reduction and avoidance projects could be reported but will include numerous assumptions on project success, operating rates, life cycle, etc.

Difficulties of Estimating Scope 4 Emissions

Contemplating the examples given, we can see that measuring Scope 1 - 4 emissions is a complex and challenging process. Companies must account for the emissions from their entire value chains, which often include a vast network of suppliers and partners for which there is little transparency or agreed upon standards and assumptions. Data can be difficult to obtain, incomplete, inconsistent, or heavy on estimates (vs actuals).

Measuring and reporting avoided emissions can require significant expertise and resources throughout the value chain. Peer-reviewed assumptions will likely continue to develop as building blocks in complex, data models on emissions. And the application of best practices in those models will likely need to coalesce around evolving standards, much like international development goals and material topics have and continue to in ESG reporting.

Absent standards on data and data use, charges of greenwashing—reporting inaccurate or incomplete information about emissions—are likely. Companies may inadvertently exaggerate the impact of their sustainability efforts or underreport their emissions, both of which can create a false impression of sustainability.

Conclusion

As Scope 3 environmental reporting becomes more common, perhaps voluntary Scope 4 reports will follow given both focus primarily on downstream activities. They will, however, require the evolution of industry standards on emission assumptions.

In the end, reporting across Scopes 1 - 4 will enable companies to holistically understand their environmental impacts, manage their businesses, and engage with stakeholders. Given the complexities, this will require significant expertise, data, resources, and cooperation across value chains as well as transparency to avoid greenwashing.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.