Activity-Based vs. Spend-Based: How to calculate your Scope 3 emissions

Calculating your Scope 1, 2 and 3 greenhouse gas (GHG) emissions is an integral part of assessing your company’s environmental impact and sustainability performance. The results can steer your emission reduction strategy or kick-start your emission reduction activities. Additionally, your Scope 1, 2 and 3 calculations are an important part of European regulations and initiatives like the Corporate Sustainability Reporting Directive (CSRD) and the Science Based Target initiative (SBTi).

Scope 1 emissions are emissions from your own operations, Scope 2 emissions are the indirect emissions from purchased energy, and the Scope 3 emissions cover all indirect emissions that occur in a company’s value chain from both upstream and downstream activities. These emissions can be complex to quantify. This is because the relevant data needed is out of your control and therefore difficult to obtain. The data can also be complex due to the inclusion of several suppliers and/or customers.

The theory behind the GHG protocol for calculating your Scope 1, 2 and 3 GHG emissions is straightforward: you multiply the quantity of an activity by the associated emission factor to get your GHG-emissions.

Since Scope 1 and 2 emissions are under your direct control, data on these should be easily obtainable from your own data systems. The complexity of Scope 3 comes from identifying and collecting the data on all activities upstream and downstream in your value chain. For Scope 3 it is also key that activities are categorised under the correct impact category, of which there are 15.

There are two primary methods to calculate the emissions in Scope 3: the activity-based approach and spend-based approach. In this article, we will discuss the differences, when and how to use the methods, and whether you can use them separately or in harmony with each other.

The activity-based approach calculates emissions based on the actual activities or processes in the value chain that contribute to your Scope 3 emissions. This is a detailed approach and therefore requires data collection on all activities in your value chain, including, but not limited to, the volume of purchased raw materials, up- and downstream transportation modes and distances, waste streams and waste processing, and the end-of-life treatment of your sold product(s).

The activity-based approach allows for a highly detailed breakdown of your Scope 3 emissions sources and provides detailed insights into the environmental impacts of your value chain. This approach requires extensive data collection for each of the 15 impact categories included in Scope 3.

Since this is a precise approach, it is suitable for industries or businesses with complex value chains. The challenge lies in collecting all the relevant data points throughout the value chain, but once the data is collected and the emissions are calculated the outcome is highly accurate.

The spend-based approach is an alternative approach that serves as an indirect way to calculate your Scope 3 emissions. With the spend-based approach you are not calculating emissions from specific activities, but instead you calculate the emissions based on money spent on a good or service.

This simplification of the methodology decreases the complexity of data collection, as it is usually easier to obtain data from your internal procurement or supplier data systems than it is to gather data from all activities up- or downstream in your value chain. The spend-based approach offers an outcome when activity-based data is difficult or impossible to obtain from suppliers.

The outcome of a spend-based Scope 3 calculation offers a high-level overview of your emissions, which is useful for identifying environmental hotspots.

Additionally, there are three considerations regarding the emission factors for the spend-based approach that you should keep in mind:

1. The emissions factors are based on market averages. This entails that the outcome of the calculations will not reflect the specific characteristics of your products or company.
2. The spend-based emissions factors are subject to inflation and exchange rates. This increases complexity when you have suppliers from different countries with a variety of currencies and inflation rates.
3. If prices increase because your suppliers increase their prices (outside of inflation), your spending will go up, resulting in higher emissions. This logic also applies the other way around, if you find a supplier that offers a lower price, on paper your environmental impact will decrease, while the actual environmental impact of your product has not changed considering all other factors being equal.

In general, the activity-based calculations require more resources in terms of budget and time but provides a more accurate calculation of the emissions in your value chain. The spend-based emissions are easier to calculate and are valuable for an initial assessment of your environmental hotspots.

Naturally, this translates into the efforts required for data collection. As with Scope 1 and 2, the Scope 3 data points are in-house in procurement or supplier data systems, when using the spend-based approach. The activity-based approach, on the other hand, requires engagement with actors in your value chain to obtain relevant data. This gives you more precise data but costs more time and effort. If you aim to accurately calculate your Scope 3 emissions, but you realise that activity-based data is challenging to obtain, the GHG protocol allows you to mix methods. To combine the spend-based and the activity-based methods, the most suitable calculation approach should be selected for all material scope 3 categories. Some categories can be assessed both with an activity-based and a spend-based approach. For other categories, only one specific type of calculation approach can be applied.

The choice between activity-based and spend-based calculations for Scope 3 GHG emissions depends on the specific needs, data availability, resources, and objectives of your company. While activity-based calculations offer a granular and accurate perspective, spend-based calculations provide a simplified and indirect estimation. Ultimately, many companies use a combination of both methods to achieve a comprehensive understanding of their environmental impact and make informed decisions to reduce their carbon footprint throughout the value chain.

If you have any questions or are interested in a conversation about the practicalities of Scope 3 calculations, Ecomatters is happy to support and is open for a sustainable collaboration. Get in contact with us for more information.