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

The scopes

Calculating your Scope 1, 2 and 3 greenhouse gas (GHG) emissions becomes 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).

The Scope 1 emissions are the result of your own operations, Scope 2 emissions are the indirect emissions for purchased energy and the Scope 3 emissions encompass all indirect emissions that occur in a company’s value chain from upstream and downstream activities. These emissions can be complex to quantify, since relevant data is not controlled by you, and might be difficult to obtain or complex due to a broad variety of suppliers and or customers.

GHG-methodology

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

Since Scope 1 and 2 are under your direct control, data should be easy to obtain from your own data systems. The complexity in Scope 3 comes from identifying and collecting the data on all your activities upstream and downstream your value chain. For Scope 3 it is also important to include the activities in the correct impact category, of which there are 15. For all three scopes, it is important to allocate the right emission factor to the activity.

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.

Activity-based approach

The activity-based approach calculates the 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 once calculated, 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.

Spend-based approach

The spend-based approach is a simpler approach and an indirect way to calculate your Scope 3 emissions. It is an indirect method because you are not calculating your emissions of specific activities, but you rather calculate the emissions based on money spent on a good or service.

This simplification of the methodology decreases the complexity of data collection, since it is more likely that it is easier to obtain data from your internal procurement or supplier data systems than from activities up- or downstream in your value chain. This offers an outcome when activity-based data is difficult or impossible to obtain from suppliers.

As a result, 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.

Selecting the right approach

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, which gives you more precise data, but costs more time and effort.

If you have the ambition to accurately calculate your Scope 3 emissions, but you realize 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, you need to determine which of the 15 impact categories in Scope 3 are material and which are not. For the material impact categories the activity-based method should be followed. When an impact category is considered immaterial, it is allowed to use the spend-based method.

Selecting the approach is not only a matter of resource but can also depend on your sustainability objectives and where your company currently stands in regard to sustainability initiatives and rules and regulations. For example, with the CSRD in force, companies are required to calculate their GHG-emissions in Scope 1, 2 and 3, if not now, then in the years to come. This entails that your calculation method should be in accordance with this directive. The same logic applies to, for example, the SBTi. If your company has the ambition to be Net-Zero by 2050, your GHG calculations should be in accordance with the requirements of this initiative. On the other hand, if you are just starting with your reduction efforts, the spend-based approach gives a good overview of where to start.

Conclusion

The choice between activity-based and spend-based calculations for Scope 3 GHG emissions depends on the specific needs, 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 are open for a sustainable collaboration. Get in contact with us for more information.

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Eelco van IJken

Eelco van IJken

Senior Consultant

Mart van Assem

Sustainability Consultant

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