What Is Scope 3? Understanding Indirect Emissions and Their Regulatory Impact

Until recently, Scope 3 emissions were often seen as a distant or optional part of carbon accounting. Only a handful of companies actively measured them, given the complexity involved. That is changing. Scope 3 is now an important part of emerging climate disclosure frameworks. Several jurisdictions already require reporting, and many others are moving in that direction. As regulations tighten and supply chain expectations grow, most companies will eventually need to address their full value chain emissions.

What Is Scope 3?

Scope 3 refers to indirect greenhouse gas (GHG) emissions that occur outside an organization’s direct control, but across its value chain. It is one of the three emission scopes defined by the Greenhouse Gas Protocol, a widely used framework for carbon accounting.

What Does Scope 3 Cover?

Upstream Activities (before goods or services reach the company):

• Purchased goods and services

• Capital goods

• Fuel- and energy-related activities not included in Scope 1 or 2

• Upstream transportation and distribution

• Waste generated in operations

• Business travel

• Employee commuting

• Upstream leased assets

Downstream Activities (after the company sells its products or services):

• Downstream transportation and distribution

• Processing of sold products

• Use of sold products

• End-of-life treatment of sold products

• Downstream leased assets

• Franchises

• Investments

How Scope 3 Differs from Scope 1 and 2

• Scope 1 refers to direct emissions from sources owned or controlled by the company, such as fuel combustion and company vehicles.

• Scope 2 includes indirect emissions from purchased energy, including electricity, steam, heating, and cooling.

• Scope 3 covers all other indirect emissions that occur throughout the full value chain.

In many industries, Scope 3 accounts for the largest share of emissions, often exceeding 70% of a company’s total carbon footprint.

Why Scope 3 Matters

• Scale: Scope 3 often represents the majority of emissions.

• Transparency: Environmental, social, and governance (ESG) reporting and investor demands increasingly focus on full emissions disclosure.

• Responsibility: Reducing Scope 3 requires cooperation with suppliers, logistics partners, and even customers. Companies that ignore Scope 3 risk providing an incomplete picture of their climate impact.

Where Is Scope 3 Reporting Mandatory?

Scope 3 reporting is already required in several jurisdictions, and momentum is building globally. It is now mandatory in the EU, California, and is being introduced in Australia. Other countries encourage or require it under specific conditions, particularly when emissions are deemed material. The table below summarizes the current regulatory landscape:

What Are the Penalties for Non-Compliance?

Failure to report Scope 3 emissions can lead to financial penalties, operational consequences, and in some countries, even criminal charges. Below is an overview by region:

Key Takeaways:

• Fines can range from thousands to several million euros or dollars per year.

• Criminal penalties apply in certain EU countries.

• Companies may be barred from tenders or face increased scrutiny from investors.

• Even in regions with safe harbor periods, companies are expected to show real progress or risk losing those protections.

Conclusion

Scope 3 emissions are no longer a secondary concern. With regulatory frameworks tightening and stakeholder expectations rising, organizations must develop robust strategies to understand and address these indirect emissions. What was once considered optional is now a critical part of credible climate disclosure.

Ignoring Scope 3 may save effort in the short term but can lead to financial and reputational consequences in the long term. Taking action now is not only a matter of compliance but also of maintaining trust and market relevance.