Scope

 

The multistakeholder partnership convened by the World Resources Institute and World Business Council for Sustainable Development which comprised of businesses, governments and non-government entities which led to the introduction of the Greenhouse gas (GHG) protocol initiative back in 1998. The aim of this initiative was to cater to GHG accounting and reporting. Under this initiative, GHG emissions were segregated into three separate heads, on the basis of their sources namely Scope 1, Scope 2 and Scope 3 emissions. Scope 1 emissions occur within the vicinity of the industry like emissions from combustion in boilers, furnaces and other inhouse equipment. Scope 2 emissions are due to the purchasing of electricity, heat/steam. In this case the emissions occurred where the electricity/heat/steam was produced and the industry consuming the same was also made accountable. Scope 3 emissions are all other sources which were not accounted for in Scope 1 and Scope 2 but still contributed to the rise in GHG emissions. While Scope 1 is termed direct, Scope 2 and Scope 3 are considered indirect emission sources.

Scope 3 emissions mainly include the emission sources like purchased goods and service, business travel, employee commute, waste disposal, use of sold products, transportation, and distribution etc. Companies have been reporting and addressing the Scope 1 and 2 emissions, as these are the ones on which they have more control on, and are relatively easy to monitor. However, it is the Scope 3 emissions that can provide companies a true understanding of their carbon footprints. By addressing the Scope 3 emissions the companies can easily assess the emission hotspots in their supply chains; identify energy efficiency and cost reduction opportunities; encourage vendors and handhold them to implement sustainability initiatives and others. Environmentalists have proposed that there is a need for the companies to curb their carbon footprints wherever possible and handling Scope 3 emissions is the solution for the problem.

The automotive industry has witnessed a troubled relationship with sustainability. Thus, researchers believe that the automotive sector should play a significant role in achieving the net-zero global emissions by 2050. Mainly, the original-equipment manufacturers (OEMs) are setting out stricter decarbonization targets to address this challenge. Figure 1 shows a Google Trend Analysis shows the search results for the three types of emissions in the Auto and Vehicle segment in the past 12 months in a worldwide context. It clearly shows that this sector has an increased interest in the Scope 3 emissions.

 

Figure 1. Google Trend Analysis on Scope 1, 2 and 3 emissions for Auto vehicle segment

 

The OEMs are the larger corporations controlling capital as well as information flows in the automotive supply chain. They have an indirect control on the suppliers who supply parts for the automobile manufacturing. The direct involvement of OEMs will force the tier 1, tier 2 and tier 3 suppliers in pledging for sustainability. Although these suppliers (83%) have defined sustainability targets, only 7% have implemented the carbon emissions control programmes (Murdoch, 2022).

For the automotive OEMs, Scope 3 emissions account for a large majority of total supply chain emissions, as the downstream activities in this automotive supply chain include every mile by every vehicle sold. However, the monitoring and minimization of Scope 3 emissions across the downstream side of the automotive supply chain is utterly complex which is one major reason why Scope 3 accounting is lagging behind.

In one of the statements for environmental protection, the Swedish car maker Volvo accepts that 95 % of its carbon footprints can be classified as Scope 3 emissions i.e., during the use of its vehicles by the customers. OEMs like Diamler are leading by example in reporting their Scope 3 emissions. In the GHG Protocol, a total of 15 categories have been identified as Scope 3 emission sources. Diamler has identified 13 of these as relevant. Diamler in cooperation with ETH Zurich has been calculating the Scope 3 emissions based on comprehensive systematic considerations and complex computations.

General Motors decided to tackle Scope 3 emissions by directing suppliers to commit to carbon neutrality, social responsibility programmes and sustainable procurement practices. It has joined the race of the automotive OEMs like Japan’s Honda, the first car company to target and publish Scope 3 emissions in 2012, and its contemporary Toyota, which in 2015 announced that it aims to minimize all emissions throughout the life cycle of its cars by 25% by 2030. Other automotive OEMs have made Scope 3 commitments, but implementation is still afar.

In the recent Task Force on Climate-related Financial Disclosures (TCFD, October 2021) it was highlighted that disclosure of Scope 3 emissions needs immediate attention and action.

 

Figure 2: OEM vs Suppliers role in sustainability (Source: Winkler et al. 2020)

From Figure 2 it can be observed that OEMs outperformed suppliers in the level of adoption of sustainability initiatives. Level of adoption is the percentage of OEMs/suppliers mandating and deploying a sustainability initiative. Priority to implement based on impact represents the percentage of experts who define an initiative as one among the top three priorities for automotive organizations (Winkler et al. 2020).

A more detailed analysis of the 15 categories of the Scope 3 emissions is the call of the hour. The OEMs need to take the first step in accounting for the Scope 3 emissions and it would be a bullwhip effect on the rest of the stakeholders in the automotive supply chain. Therefore, it is the Scope 3 emissions which have a huge potential in terms of offering the plausible margin that may in turn help the automotive OEMs to recalibrate and achieve their revised carbon neutrality targets.