The growing importance of scope 3 greenhouse gas emissions from industry

Direct emissions, e.g. through the combustion of fossil fuels, are those that occur at an establishment. Indirect emissions occur in the supply chain of the establishment in question, i.e. covering all steps in the production of the goods and services delivered to the establishment [1]. When evaluating specific measures or technologies to reduce greenhouse gas (GHG) emissions, the most effective action should consider the potential to address both direct or indirect emissions [2, 3]. Different expert communities have developed a bewildering diversity of terms for indirect emissions, as listed in table 1, which is both a testimony to their importance and an opportunity for a more consistent terminology to ease communication. Among corporations [4–7] and cities [8, 9], the GHG Protocol is a widely accepted standard that defines how to assess direct emissions (scope 1), as well as emissions associated with the supply of electricity, heat, and cooling (scope 2) and value-chain emissions not related to the (direct) purchase of energy (scope 3) [10, 11].

In national and international climate policy making, there is no consistent practice of taking scope 2 or 3 emissions into account, despite the appreciation of the importance of treating emissions embodied in trade [12]. In the contribution of Working Group III on climate change mitigation to the fifth assessment report (AR5) of the Intergovernmental Panel on Climate Change (IPCC) [13], scope 3 emissions were for the first time taken into account in the analysis of drivers and trends on a national level (chapter 5). In the accounting for carbon emissions, it is common to distinguish between production-based and consumption-based emissions inventories. Production-based inventories allocate emissions to the countries where the emissions occur or, in the case of emissions in international waters and airspace, to the country where the owner of the vessel resides. Consumption-based inventories allocate emissions occurring in the production of goods to the countries where the final consumer of the goods resides. In its assessment of consumption-based emissions, which include scope 3, the IPCC relied on newly developed multi-regional input–output models (MRIOs) [12, 14, 15]. Similar consumption-based indicators have been derived from MRIOs for water [16, 17], materials [18, 19], metals [20], land use [16, 21], biodiversity threats [22] and many other indicators, which are commonly labelled under the popular 'footprint' term [2]. MRIOs represent the global value chains (GVCs) connecting production-based emissions to consumption, yet the intricacies of GVC are only now receiving research attention [23, 24], with a focus on economic issues such as trade in value added (TiVA) rather than GHG emissions.

In the sector chapters of the IPCC AR5 report (Ch.7–11), indirect emissions from electricity production were uniformly reported and allocated to sectors [13]. These scope 2 emissions were prominently discussed in the buildings and transportation chapters but received less attention in the sector chapters on energy, industry, and agriculture, forestry and other land use (AFOLU). Decision makers in companies and cities understand that their mitigation and other actions influence scope 3 emissions and perceive some power over those emissions [25]. Policy options can be broadened by including measures that address scope 3 emissions [26]. In its analysis of mitigation options in the sector chapters, the IPCC-WGIII did address scope 3 emissions only sporadically, even where trade-offs along the life-cycle were well understood, like in the comparison of transportation modes. The risk of not addressing the different scopes of emissions is potentially inefficient or misguided policy. Trade-offs may not be sufficiently captured, e.g., between the direct emissions from combustion engine vehicles and the indirect emissions of electric vehicles in power stations and battery factories [27]. Mitigation in one sector may cause emissions in another sector. At the same time, opportunities may be overlooked, such as reducing electricity use or creating products requiring less energy-intensive materials [28].

If the IPCC did account more systematically for indirect emissions, what would such an accounting look like? How would this such an accounting be achieved? What are the issues that a more complete analysis of indirect emissions would address?

Scope 1 is sufficient to understand where emissions occur. The rationale for considering scopes 2 and 3 is that users of electricity and steel also have an opportunity to reduce emissions associated with electricity generation and steel production by using these inputs more efficiently or replacing them with other inputs that cause lower emissions. Conversely, they may increase those emissions, e.g. by replacing a gas stove with an electric one. The hesitation to use scopes 2 and 3 in emissions accounting is that my scopes 2 and 3 emissions are the scope 1 emissions of the power-plant and steel factory, respectively—accounting for them as both here and there implies a double counting. One hence must understand, as the IPCC implicitly does with its consideration of emissions from power generation, that accounting for scopes 2 and 3 emissions is an accounting for emission reduction opportunities. There is a shared responsibility along the supply chain for these emissions, which previous analyses have interpreted as partial responsibility [29–31], but which we count as both parties being responsible.

In the corporate world, scopes 2 and 3 GHG emissions are evaluated using process-based life-cycle assessment (LCA) [11, 32]. On a macro-scale, input–output analysis (IOA) has become widely employed to quantify emissions embodied in trade and carbon footprints through the allocation of production-emissions to consumption [12, 33, 34]. The approaches are structurally equivalent. The most important differences are in the scope and resolution. LCA can capture specific production conditions and inputs, such as the choice of a company of electricity supplier, while IOA reflects the average of a specific industry sector in the chosen country. IOA more easily avoids double counting of emissions at the macro level by allocating production-emissions only to final demand (consumption that does not produce any market based output), whilst LCA is often used to quantify the quantity of emissions along various stages of the supply chain [35, 36]. Scope 3 may address upstream emissions related to the inputs to production, downstream emissions related to the use of the products produced, as well as emissions related to commuting of employees [11]. According to the organization environmental footprint guidelines of the European Commission [37, 38], the inclusion of upstream emissions is mandatory while the inclusion of downstream emissions is optional. In the context of this paper, scope 3 refers to upstream emissions only.

The objective of this study was to provide a global picture of scopes 1–3 emissions of sectors, using the sector classification of the IPCC mitigation report, the life-cycle perspective of LCA, and the macro-economic coverage of IOA. Despite the large number of consumption-based accounting or carbon footprint studies, no study that we know of has employed the LCA framing (impacts per unit of product output) to the measure of output at the economy-wide level in IOA because of the double counting issues [29]. The total 'embodied' impact of industrial production will indeed be greater than the total emissions in the economy. This double counting reflects the reality that there are several leverage points at which emissions can be reduced; a coke producer can install CO₂ capture equipment, a steel producer can move to a direct-iron reduction process not requiring coke, a construction firm can move to build wood-frame instead of steel-frame buildings and a housing company can refurbish an existing building instead of replacing it with a new building. All those companies have the power to avoid the emissions caused by the production of coke.

Our approach traces the flow of embodied carbon through the economy and can be used to identify which sectors have the most influence over the full supply chain of emissions. Gallego and Lenzen [29] have proposed a method of shared responsibility that can also be used to identify the influence of sectors over the supply chain while at the same time avoiding the double counting. Their method is one of allocating responsibility according to a subjectively determined distribution among consumers and producers; it does not calculate scope 2 and upstream scope 3 emissions.

By quantifying both upstream and direct emissions, our approach answers the question: what is the scope of sectors to influence CO₂ emissions directly or indirectly through changes in their supply chain? We apply a Leontief demand-pull model to industrial production, as well as final demand, using a global, MRIO model. Consumption-based emission accounts focus on the indirect emissions of final consumers; this study addresses the indirect emissions of producers. We introduce the carbon flow table to display the sector origin of scope 3 emissions and hence the interconnectedness of the different sectors. We find that the industry sector dominates scope 3 emissions and investigate whether splitting up the industry sector would provide further insights.

The analysis was conducted with the EXIOBASE 3.4 MRIO model, describing the world economy disaggregated into 200 products produced and consumed in 43 countries and six aggregate regions, covering a time series from 1995 to 2015 [39, 40]. Product-by-product symmetric input–output tables were used. CO₂ emissions from combustion were treated like production factors in a Leontief demand-pull model, as is common for carbon footprint calculations [3, 41]. Other emissions were not addressed because CO₂ from land use change is difficult to ascribe to products in the input–output table and the emissions of methane, nitrous oxide and other GHGs are more uncertain and were not available for the most recent years. Results for estimated GWP₁₀₀ GHG emissions are provided in the supporting information available online at stacks.iop.org/ERL/13/104013/mmedia.

This work used a simple endogenization of the consumption of capital goods, which is the same in magnitude as the augmentation approach described by Lenzen and Treloar [42]. It assumes that each economy has one uniform capital product, the production of which is described by the current year's gross fixed capital formation vector of final demand. We normalized the gross fixed capital formation vector and multiplied it by the consumption of fixed capital required for the production each product to obtain a flow matrix of products required to replace the capital consumed by production processes in the given year. Net capital formation was calculated as the difference between gross fixed capital formation and the consumption of fixed capital by each country, and retained in the final demand, so that the total output vector x remained unchanged. The consumption of fixed capital was set to zero, so that total inputs to production also remained unchanged. See supporting information for more details. The largest impact of the inclusion of capital was on the carbon footprint of services, in particular real estate services, the rental of machinery and equipment, and public services like education and health care.

The following derivation of Leontief multipliers shows that multipliers applied to intermediate inputs trace the flow of embodied carbon through the economy, counting it at each stage of production. Indirect emissions are the CO₂ embodied in inputs from other sectors [43]. In an input–output system, production of products is described by the production balance in the column of the input–output table, where inputs z_ij are required to produce a volume x_j of products j. The market balance in the row of the input–output table describes the use of product i as intermediate input to produce products j and types of final consumption k, ${x}_{i}=\displaystyle \sum _{i}{z}_{ij}+\displaystyle \sum _{k}{y}_{ik}.$ The emissions embodied in the output of a production process are defined as the sum of the direct emissions occurring in the process and the emissions embodied in the intermediate inputs of the process (figure 1). If m_i is the emissions embodied per unit input i, the direct emissions in the production of j are f_j, and the embodied emissions per unit output x_j are given by m_j (noting that the same emissions can be included in m_i as m_j), we can write the balance of embodied carbon of each individual production process as

$$\begin{eqnarray}&&{f}_{j}+\displaystyle \sum _{i}{m}_{i}{z}_{ij}={m}_{j}{x}_{j}\,\forall \,j.\end{eqnarray} \tag{ 1a }$$

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If ${m}_{i}={m}_{j}\,\forall \,i=j,$ the equation can be written in matrix form as

$$\begin{eqnarray}&&{\bf{f}}+{\bf{m}}{\bf{Z}}={\bf{m}}\hat{{\bf{x}}},\end{eqnarray} \tag{ 1b }$$

where lower-case letters signify vectors and capital letters matrices. The hat indicates a diagonal matrix. Right-multiplying equation (1b) with ${\hat{x}}^{-1}$ and replacing ${\bf{s}}={\bf{f}}\,{\hat{{\bf{x}}}}^{-{\bf{1}}}$ and ${\bf{A}}={\bf{Z}}\,{\hat{{\bf{x}}}}^{-{\bf{1}}},$ i.e. the coefficient matrices, we obtain

$$\begin{eqnarray}&&{\bf{m}}={\bf{s}}{({\bf{I}}-{\bf{A}})}^{-{\bf{1}}}.\end{eqnarray} \tag{ 2 }$$

The logic inherent behind such a calculation is that each sector in an input–output table produces a homogenous good, which has the same cradle-to-gate emissions whether it goes to intermediate or final demand. For a homogenous good, the factor inputs and their associated emissions must be the same.

The embodied flows of carbon across production activities and to final demand are hence obtained as, respectively,

$$\begin{eqnarray}&&{{\bf{E}}}_{{\bf{Z}}}=\hat{{\bf{m}}}{\bf{Z}}\end{eqnarray} \tag{ 3a }$$

$$\begin{eqnarray}&&{{\bf{E}}}_{{\bf{y}}}=\hat{{\bf{m}}}{\bf{y}}.\end{eqnarray} \tag{ 3b }$$

E_Z and E_y are matrices or vectors with the same dimension as Z and y, respectively, and can be read in the same fashion as Z and y, only that they represent the flow of embodied carbon rather than the flow of monetary values (embodied value added). In E_Z, a column indicates that input of embodied carbon in the form of intermediate purchases to a sector, a row indicates the destination. If E_Z, E_Y, and f are combined, we get a carbon flow table displayed in table 2, which can be read like an input–output table, only in units of carbon rather than monetary value.

Table 2.  Table of embodied carbon flows through the world economy. Direct and embodied GHG emissions in an aggregated input–output table describing the world economy in 2015, displaying the production-based accounts of combustion-related CO₂ emissions of IPCC sectors in the last line and the consumption-based accounts of carbon footprints in the last column.

When MRIOs are used, the carbon flow matrix will describe both international trade and domestic trade. The carbon flow matrix can hence also be used to add up emissions embodied in international trade, although this topic is not explored in this work. The calculations presented in this work produce annual carbon flow tables (dimension 9800 × 9800) accounting for up to 200 products produced in and sold to each of the 49 countries or regions. To obtain the presentation in table 2, flows were aggregated across countries and from the 200-product detail to the five IPCC sectors, with the sector aggregation provided in the supporting information. In addition, direct emissions resulting from the fuel combustion by consumers in buildings and cars were added to the buildings and transportation sectors, respectively. End of life emissions are associated with the consumption of waste services, which are reported by industry/final consumer, but not directly allocated to individual products. Downstream emissions can be calculated via the Ghosh model, which could give insight into responsibility down the supply chain, but provides a different policy question to that which we take here [29].

The calculation of E_z includes counting for emissions at multiple stages along the supply chains (e.g. emissions from steel production will be included, as well as the embodied emissions of the use of steel in the car). Just like one sectors' scope 1 emissions are another sectors' scope 3 emissions, the total emissions E_z + E_y are counting each unique emission multiple times in the supply chain. Hence E_z > E_y (or f). As opposed to E_y or f, E_z thus does not sum to the total global CO₂ emissions, but the matrix instead shows the level of emissions that each industry has agency over along the full upstream supply chain. For a discussion of potential misuses of double counting in other applications, the reader is referred to Lenzen [36]. The greater the difference between the sum of E_z and total emissions, the more production activities are involved in the production of a product. The unit of accounting here is the establishment level as defined in the United Nations System of National Accounts. We account output, and hence embodied emissions, at the boundary of an establishment. Of note, if an establishment was disaggregated into multiple stages, then the level of disaggregation would impact the quantity of double counting [36]. Hence the importance of keeping to statistical quantities in the analysis.

Indirect versus direct emissions per sector

In 2015, indirect (scopes 2 and 3) emissions from fossil fuel combustion in the supply chains of all sectors totalled 55 Pg CO₂, up from 30 Pg in 1995, growing 83% (figure 2). In comparison, direct emissions have grown by 47% in the same period. In the OECD, direct emissions increased by 4% and indirect emissions by 20%; in non-OECD countries, direct emissions doubled while indirect emissions grew by two-and-a-half fold (figure 3). The increasing importance of supply chain emissions indicates that intermediate producers can have a much greater influence on emissions than before. The industry sector as defined by the IPCC, which includes everything from slaughterhouses to tour operators, had by far the largest indirect emissions of 37 Pg. The building sector indirect emissions were 10 Pg, three times as high as direct emissions. The indirect emissions for the energy sector were about one third as large as the direct emissions, and those of transport were two fifths of direct emissions when driving by consumers is included in the direct emissions. For AFOLU, indirect emissions were almost three times as high as direct emissions, a picture that changes dramatically when emissions of N₂O and CH₄ are included (see SI).

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Direct CO₂ emissions increased by 47% between 1995 and 2015, scope 2 emissions increased by 78%, indicating the increasing importance of modern energy carriers. Scope 3 emissions increased by 84%. The importance of scope 3 emissions increased particularly in the industry sector, but also in buildings, transport, and energy (figure 2). The increases were largest in the developing countries (figure 3; figure S3 for GHGs). The rise of scope 3 emissions was particularly rapid in China's industry sector, although a similar trend appeared in other countries, as the example of Brazil in figure 3 indicates. In OECD countries, the development was different, as both energy sector and industry's scope 3 emissions peaked in 2007 and declined after that. This development, while exposed to more fluctuations, was apparent also in individual countries such as the US and Germany (figure 3). In 1995, the ratios of scopes 3 to 1 emissions were 1.1 for OECD countries and 1.2 for non-OECD countries. By 2015, these had grown to 1.3 and 1.5, respectively. While the growth in importance of scope 3 emissions was most marked in developing countries, it reflects a structural change that happened all over the world.

A flow table of embodied carbon

Rapid growth of indirect emissions

More insight by disaggregating industry

We split the industry sector into extractive industries and material production, manufacturing, and services. In addition, we included food processing and forestry products (lumber) with agriculture and forestry in AFOLU+. This reorganization was motivated by the central role of materials in the industry chapter identified by Allwood and Cullen [28], the overall importance of services to the economy and their unique importance for consumption-based accounts identified by Suh [44], and the role of original equipment manufacturers identified in global supply chains [23]. The move of food processing to AFOLU is justified as dietary change is discussed in AFOLU and has repercussions on the entire supply chain of food. Figure 4 shows that, of the new sectors, materials would have the highest scopes 1 and 2 emissions, while manufacturing would have the highest scope 3 emissions. Services are surprisingly important. The total scope of emissions responsibility of each of the three new sectors would be about the same as those of the buildings sector and larger than transport, which, however, has high direct emissions.

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The carbon flow table (table 3) reveals that emissions associated with materials production became embodied mostly in the products of industry and buildings. Industry produces mostly manufactured products sold to final consumers. Materials were the largest contributor to emissions embodied in manufactured products, in total slightly more important than (embodied and direct) emissions from energy. Services drew most evenly on all sectors for inputs and constituted the largest component of consumption-based emissions, higher than buildings (which include direct emissions from heating and cooking), energy, and manufactured products.

Table 3.  Embodied carbon flow table through the world economy in 2015 following a more detailed sector classification, in which the industry sector was broken up into materials, manufacturing (industry), and services, and the AFOLU + sector includes the processing of food and forestry products.

Manufacturing and construction can contribute to climate change mitigation through material efficiency measures [45]. While consumption-oriented mitigation efforts often focus on activities with high emissions intensities such as mobility and housing [46], new programmes are needed to reduce the carbon intensity of services. A more detailed sector classification in which the industry sector is broken up into different parts would invite the search for such options, which have received surprisingly little attention to date.

The implications of indirect emissions for the IPCC assessment

Emissions embodied in capital goods

Useful for directing further analysis

The EXIOBASE MRIO data used to produce the results is from http://exiobase.eu/. The code to reproduce the results is posted on https://github.com/Hertwich/Embodied_C_IPCC_sectors/.