Scope 1, 2, 3 Emissions Explained for Small Business

If you're being asked to report your carbon emissions—whether by customers, in ESG questionnaires, or for sustainability reporting—you've likely encountered the terms "Scope 1, Scope 2, and Scope 3 emissions." These categories sound technical, but the concept is straightforward once you understand the logic behind them.

This guide explains greenhouse gas scopes in practical terms for small and mid-sized businesses, with concrete examples and actionable steps to start measuring your footprint.

Why Emissions Are Divided Into Scopes

The scope framework, established by the GHG Protocol (the global standard for carbon accounting), exists to prevent double-counting and clearly assign responsibility. When every company in a supply chain reports emissions, we need a system that ensures the same emissions aren't counted multiple times.

The scopes divide emissions based on where they physically occur and who has direct control over them. Think of it as layers of responsibility radiating out from your company.

Scope 1: Direct Emissions You Control

Scope 1 includes emissions from sources your company owns or directly controls. These are the easiest to understand because they happen on your property or from your assets.

Company vehicles are the most common Scope 1 source. If your business operates delivery vans, service trucks, or a company car fleet that burns gasoline or diesel, those combustion emissions are Scope 1. The fuel you put in the tank creates emissions when burned, and you directly control that activity.

On-site fuel combustion covers fuel used for heating buildings, operating boilers, powering generators, or running equipment like forklifts or industrial machinery. If you have a natural gas heater warming your facility or propane powering your material handling equipment, those emissions are Scope 1.

Process emissions apply if your manufacturing process creates emissions as a byproduct. For example, a cement manufacturer's chemical reactions release CO2, or a refrigeration system might leak refrigerant gases. These are direct emissions from your industrial processes.

Fugitive emissions include leaks from refrigeration and air conditioning systems, which release potent greenhouse gases like HFCs or CFCs.

For a typical 50-person manufacturing company, Scope 1 might include: three delivery trucks, five forklifts running on propane, natural gas heating for a 20,000 square foot facility, and HVAC refrigerant. That's it—relatively simple to identify and measure.

Scope 2: Purchased Energy

Scope 2 covers emissions from the electricity, steam, heating, or cooling you purchase from utilities. You don't create these emissions directly—the power plant does—but you're responsible for them because you're consuming the energy.

Purchased electricity is by far the largest Scope 2 source for most businesses. Every kilowatt-hour you use created emissions at the generation source (unless your electricity comes from renewables). Your monthly utility bills show exactly how much electricity you consumed.

District heating and cooling, where you purchase heat or chilled water from a central plant, also falls under Scope 2.

Why separate Scope 2 from Scope 1? Because the same emissions shouldn't be counted twice. When a power plant burns natural gas to generate electricity, those emissions are Scope 1 for the utility company. When you buy that electricity, they become Scope 2 for you. The emissions only enter the atmosphere once, but responsibility is shared based on economic activity.

For most small businesses, Scope 2 is often larger than Scope 1, especially if you don't operate many vehicles or use electric heating instead of gas. An office-based company might have minimal Scope 1 but significant Scope 2 from powering computers, lighting, and HVAC systems.

Scope 3: Everything Else in Your Value Chain

Scope 3 is where things get complicated. These are all indirect emissions that occur in your value chain—both upstream (suppliers) and downstream (customers using your products).

The GHG Protocol identifies 15 Scope 3 categories, but not all apply to every business. The most common for SMEs include:

Purchased goods and services covers emissions from producing everything you buy—raw materials, components, packaging, office supplies, professional services. If you're a manufacturer, the extraction and production of your input materials is typically your largest Scope 3 category.

Transportation and distribution (upstream) includes emissions from shipping materials to you from suppliers, and from any third-party logistics providers moving your goods.

Business travel covers flights, rental cars, hotel stays, and employee-owned vehicles used for business purposes (where you reimburse mileage but don't own the vehicle).

Employee commuting accounts for emissions from employees traveling between home and work. This often surprises businesses, but if you employ people, their commute is considered part of your value chain.

Downstream transportation includes shipping products to customers, while use of sold products covers emissions from customers using your products (relevant mainly for fuel, energy-using equipment, or products that require power).

Waste generated in your operations and sent to landfill or for treatment also contributes to Scope 3.

For a small manufacturer, the largest Scope 3 sources are usually purchased materials and upstream transportation. For a services company, business travel and employee commuting often dominate.

What You Actually Need to Measure

Here's the practical reality: most small and mid-sized suppliers are only required to report Scope 1 and 2 emissions. These are called your "corporate carbon footprint" and are what customers request in most ESG questionnaires.

Scope 3 is encouraged, and increasingly expected for larger suppliers, but remains optional for SMEs in most contexts. However, understanding your Scope 3 is valuable because it's often 5-10 times larger than Scope 1 and 2 combined, and it's where your biggest reduction opportunities may lie.

If you're just starting carbon measurement, begin with Scope 1 and 2. These are based on data you already have or can easily obtain.

How to Start Calculating Your Emissions

For Scope 1, gather your fuel consumption data. This comes from fuel receipts (for vehicles), utility bills (for natural gas heating), or supplier invoices (for propane or other fuels). Calculate annual totals for each fuel type, then multiply by emissions factors. The EPA and UK DEFRA publish free emissions factor databases that tell you exactly how much CO2e (carbon dioxide equivalent) is released per gallon, liter, or cubic meter of each fuel type.

For Scope 2, get 12 months of electricity bills. Sum your total kWh consumed. Then multiply by your grid's emissions factor, which varies by location based on how your regional grid generates electricity (coal-heavy grids have higher factors than hydro or nuclear-heavy grids). Your utility may provide this factor, or you can find it through government environmental agencies.

Many online carbon calculators can do these calculations for you if you input your consumption data. Tools like the EPA's Portfolio Manager, Carbon Trust calculator, or business-focused platforms can streamline the process.

For Scope 3, start with spend-based estimates. If you spent $500,000 on raw materials last year, you can apply an industry-average emissions factor per dollar spent to estimate the associated carbon footprint. This isn't as accurate as activity-based calculation (using actual production data from suppliers), but it provides a reasonable starting point and satisfies most questionnaire requirements.

Making the Data Useful

Once you've calculated your baseline footprint, the real value comes from tracking trends and identifying reduction opportunities.

High Scope 1 emissions suggest opportunities in fuel efficiency, fleet electrification, or switching from fossil fuel heating to electric heat pumps. High Scope 2 points to energy efficiency investments or renewable energy procurement. High Scope 3 might indicate opportunities in supplier selection, material substitution, or circular economy approaches.

Many companies find that measuring emissions reveals inefficiencies they weren't aware of. That diesel generator running more than expected, the facility using twice the energy per square foot as industry benchmarks, or the logistics route that's far from optimized—these issues become visible through carbon accounting.

If you're responding to customer ESG questionnaires, having this data ready significantly reduces response time. Platforms like ESG Passport help suppliers organize emissions data alongside other ESG metrics, making it easier to respond to carbon disclosure requests from multiple customers without recalculating each time.

The scope framework might seem bureaucratic, but it serves a real purpose: creating a standardized language for carbon accountability. Once you understand where your emissions occur and how to measure them, you can manage them—and that's increasingly becoming a basic expectation for suppliers in any significant supply chain.