Scope 1, 2, and 3 Emissions: An Accountant’s Guide

Scope 1, 2, and 3 emissions are the three categories the Greenhouse Gas Protocol (GHG Protocol) uses to classify a company’s greenhouse gas (GHG) footprint. Scope 1 covers direct emissions from sources the company owns or controls. Scope 2 covers indirect emissions from purchased energy. Scope 3 covers all other upstream and downstream emissions across the value chain. Together, the three scopes give finance leaders and auditors a structured, comparable framework for measuring, managing, and reporting a company’s full carbon footprint.

Why Scope 1, 2, and 3 Emissions Matter to Finance Teams

Emissions accounting has moved from the sustainability department onto the CFO’s agenda. Regulatory requirements, lender covenants, customer contracts, and investor questionnaires all increasingly demand auditable GHG data. Understanding the GHG Protocol framework is now a baseline competency for controllers and CFOs at mid-market companies, not just Fortune 500 sustainability teams.

The stakes are real:

• California’s SB 253 (Climate Corporate Data Accountability Act) requires companies with more than $1 billion in annual revenue doing business in California to report Scope 1 and 2 emissions by November 10, 2026, with Scope 3 reporting anticipated to begin in 2027.
• The SEC’s March 2024 climate disclosure rule was adopted, stayed by the Eighth Circuit, and never took effect. The SEC stopped defending it in March 2025 and proposed to rescind it in full in May 2026. As of September 2026, that rescission remains a proposal awaiting a final vote, and the underlying rule is not in force. Companies with significant EU exposure still face GHG reporting obligations regardless of SEC action.
• The EU’s Corporate Sustainability Reporting Directive (CSRD) now applies to large non-EU companies with EU-generated net turnover above €450 million after the 2026 Omnibus I package raised thresholds and streamlined requirements.

Even absent a specific mandate, lenders, private equity sponsors, and large customers routinely ask for GHG inventories as part of due diligence. Having clean, defensible emissions data already prepared is a competitive advantage.

Scope 1 Emissions: Direct Sources Your Company Controls

Scope 1 emissions arise from combustion, processes, or releases at sources owned or controlled by the reporting company. If your company burns the fuel or runs the equipment, the resulting GHG emissions are Scope 1.

Common Scope 1 sources include:

• Stationary combustion: Natural gas or fuel oil burned in furnaces, boilers, and generators on-site.
• Mobile combustion: Gasoline or diesel consumed by company-owned vehicles and equipment.
• Process emissions: CO2 released during chemical or physical manufacturing processes (common in cement, steel, and chemical production).
• Fugitive emissions: Refrigerant leaks from HVAC and refrigeration systems, methane leaks from gas pipelines or storage.

For most service-sector companies, Scope 1 emissions are relatively modest, dominated by vehicle fleets and any on-site natural gas use. For manufacturers, Scope 1 can be the largest category.

Measurement approach: Activity data (gallons of fuel burned, pounds of refrigerant added) multiplied by published emission factors, typically from the EPA or IPCC. The calculation is relatively straightforward and auditable.

Scope 2 Emissions: Purchased Energy

Scope 2 emissions are indirect emissions from the generation of electricity, steam, heat, or cooling that the company purchases and consumes but does not produce itself. The emissions physically occur at the power plant or utility, but the GHG Protocol assigns them to the purchasing company because the company’s consumption drives the demand.

The GHG Protocol requires companies to report Scope 2 under two methods:

• Location-based method: Uses the average grid emissions intensity for the region where the energy is consumed. This reflects the actual mix of power sources (coal, natural gas, wind, solar) serving the local grid.
• Market-based method: Uses emission factors from contractual instruments such as renewable energy certificates (RECs), power purchase agreements (PPAs), or supplier-specific rates. If a company purchases 100% renewable electricity through a PPA, its market-based Scope 2 can be near zero.

Pending change to watch: The GHG Protocol’s in-progress Scope 2 revision (final standard expected no sooner than end of 2027) proposes requiring hourly matching and regional deliverability for market-based claims. Under this proposal, a clean-energy purchase would only count toward Scope 2 reduction if the electricity is generated in the same grid region and time period in which it is consumed. Companies that rely on older, annual REC purchases should monitor this development closely.

Scope 3 Emissions: Value Chain Footprint

Scope 3 emissions are all indirect GHG emissions not included in Scope 1 or Scope 2 that occur in the upstream or downstream value chain as a result of the company’s activities. They are defined across 15 categories in the GHG Protocol Corporate Value Chain (Scope 3) Standard.

Upstream Scope 3 Categories (Categories 1-8)

1. Purchased goods and services
2. Capital goods
3. Fuel- and energy-related activities (not in Scope 1 or 2)
4. Upstream transportation and distribution
5. Waste generated in operations
6. Business travel
7. Employee commuting
8. Upstream leased assets

Downstream Scope 3 Categories (Categories 9-15)

1. Downstream transportation and distribution
2. Processing of sold products
3. Use of sold products
4. End-of-life treatment of sold products
5. Downstream leased assets
6. Franchises
7. Investments

For many companies, Scope 3 represents the largest share of total GHG emissions. CDP’s analysis of corporate disclosures has found that value chain emissions average roughly 75% of a company’s total footprint, and higher in retail and consumer goods (industry statistic, not a codified rule). A technology company’s biggest Scope 3 category might be Category 11 (use of sold products) if its hardware consumes electricity in customer operations. A professional services firm’s largest category is typically Category 6 (business travel) or Category 7 (employee commuting).

Why Scope 3 Is Hard to Measure

Scope 3 requires data from entities outside the company’s direct control: suppliers, logistics providers, customers, and employees. Companies typically rely on a combination of primary data (supplier-specific emissions factors collected directly) and secondary data (spend-based proxies or industry averages from databases). Data quality varies widely, and materiality thresholds guide which categories companies must prioritize.

The GHG Protocol Scope 3 revision underway in 2026 is introducing a requirement for mandatory disaggregation of emissions by data type (primary vs. secondary), giving stakeholders greater visibility into inventory quality. The final Scope 3 standard is not expected before 2027.

GHG Accounting Principles: What Makes an Inventory Defensible

The GHG Protocol’s corporate standard is built on five principles that accountants will recognize as analogous to financial reporting concepts:

GHG Principle	Parallel in Financial Reporting
Relevance	Materiality
Completeness	Completeness assertion
Consistency	Consistent application of accounting policies
Transparency	Disclosure and footnotes
Accuracy	Measurement reliability

A defensible GHG inventory requires documented methodology, clear boundary setting (organizational and operational), traceable activity data, and consistent year-over-year treatment. These are the same properties that make an audit go smoothly.

Organizational Boundary Approaches

The GHG Protocol offers two methods for setting which operations to include:

• Equity share approach: Include emissions proportional to ownership stake.
• Control approach: Include 100% of emissions from operations the company controls (either financial control or operational control).

The choice of boundary materially affects total Scope 1 and 2 figures. Companies should select an approach, document the rationale, and apply it consistently.

The Assurance Picture for GHG Emissions

The growing regulatory and investor demand for GHG data has created parallel demand for third-party assurance. Finance and audit teams need to understand how this differs from a financial statement audit.

The International Auditing and Assurance Standards Board (IAASB) issued ISSA 5000 in November 2024, the first comprehensive global standard specifically designed for sustainability assurance engagements. ISSA 5000 is effective for periods beginning on or after December 15, 2026 (early application permitted).

Two levels of assurance are available:

• Limited assurance: The practitioner performs inquiry and analytical procedures sufficient to conclude that nothing came to their attention indicating material misstatement. This is roughly analogous to a review engagement.
• Reasonable assurance: More extensive procedures that provide a higher level of confidence, analogous to an audit. California’s SB 253 moves companies to limited assurance on Scope 1 and 2 in the near term.

Modus provides audit and assurance services for clients navigating the growing complexity of sustainability reporting, including readiness assessments and GHG data quality reviews.

2026 Regulatory Landscape: What Finance Leaders Need to Track

Emissions reporting requirements are layered, overlapping, and still evolving. Here is the current state as of September 2026:

United States

• SEC climate disclosure rule: The SEC voted on March 27, 2025 to end its defense of the 2024 rule, then proposed to rescind it in full on May 29, 2026 (published in the Federal Register June 3, 2026, with a 60-day comment period). A final rescission requires a further Commission vote and is not expected before late 2026 or early 2027. The rule remains stayed, and mandatory federal GHG disclosure for public companies is not currently in effect.
• California SB 253: Companies with $1B+ revenue doing business in California must file Scope 1 and 2 by November 10, 2026. Scope 3 disclosure and assurance requirements are expected in 2027.
• California SB 261: Biennial climate risk reports for companies with $500M+ revenue; enforcement delayed pending Ninth Circuit appeal.

European Union

• CSRD post-Omnibus I: Following the February 2026 Omnibus I package, the CSRD scope has been narrowed to companies with more than 1,000 employees and above €450 million net annual turnover. Non-EU companies (including US-based firms) face requirements when they have EU-generated net turnover above €450 million. Separate ESRS for Non-EU Groups (N-ESRS) standards are being developed for fiscal year 2028 reporting.

Global Standard Development

On July 29, 2026, the GHG Protocol and ISO announced a formal merger of the GHG Protocol Corporate Standard with ISO 14064-1 into a single co-branded global standard. A unified public consultation is expected in Q2 2027, with the final standard targeted for Q4 2028. This convergence is a positive signal for companies that currently maintain separate inventories to satisfy different frameworks.

Building a GHG Inventory: Practical Steps for Finance Teams

Starting a GHG inventory does not require specialized sustainability software, though purpose-built platforms help at scale. The foundational steps are familiar to any accountant:

1. Set the boundary. Choose organizational boundary approach (control or equity share) and document it.
2. Identify emission sources. Map Scope 1 sources (combustion, process, fugitive), Scope 2 energy purchases, and material Scope 3 categories.
3. Collect activity data. Pull fuel invoices, utility bills, travel reports, and freight receipts from the same systems used for financial reporting.
4. Apply emission factors. Use current EPA eGRID factors for US electricity, IPCC factors for fuels, and supplier-specific data where available.
5. Calculate and aggregate. Convert activity data to CO2-equivalent (CO2e) using global warming potential (GWP) values from the latest IPCC assessment report.
6. Document and review. Maintain a workpaper trail that mirrors financial close documentation, including data sources, assumptions, and calculations.
7. Obtain assurance. Third-party limited or reasonable assurance strengthens credibility for regulatory submissions and investor reporting.

Modus’s advisory team works with mid-market finance leaders on readiness assessments, internal controls for GHG data, and preparing inventories for third-party assurance.

Related reading: SEC Climate Disclosure Rule: Where It Stands in 2026

Frequently Asked Questions

What is the difference between Scope 1, 2, and 3 emissions?

Scope 1 emissions are direct emissions from sources owned or controlled by the company, such as on-site combustion and company vehicles. Scope 2 emissions are indirect emissions from purchased electricity, steam, heat, or cooling. Scope 3 emissions are all other indirect emissions that occur in the company’s upstream or downstream value chain, including those from suppliers, customers, and employee activities. The GHG Protocol Corporate Standard defines all three scopes and is the most widely used global framework for ghg accounting.

Does every company need to report all three scopes?

Not necessarily. Which scopes a company must report depends on the applicable regulatory regime or disclosure framework. California’s SB 253 currently requires Scope 1 and 2 reporting for companies with over $1 billion in revenue doing business in California, with Scope 3 to follow. The CSRD applies to large companies with significant EU operations. Many companies voluntarily report all three scopes in response to investor and customer requests even when no mandate applies.

Why is Scope 3 the hardest scope to measure?

Scope 3 requires activity data from entities outside the company’s control, including suppliers, logistics providers, and customers. Most companies rely on secondary data (spend-based proxies or industry averages) for a significant portion of Scope 3, which introduces estimation uncertainty. The GHG Protocol’s pending Scope 3 revision is expected to require explicit disclosure of primary versus secondary data sources to give stakeholders better visibility into data quality.

What is the GHG Protocol, and is it a legal requirement?

The GHG Protocol is a voluntary standard developed through a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). It is not itself a law, but it underpins most major regulatory frameworks. California’s SB 253, the EU’s ESRS under CSRD, and the 2024 SEC climate rule (now proposed for rescission) all reference or align with GHG Protocol methodology. Compliance with a GHG-based regulatory mandate therefore effectively requires following GHG Protocol methods.

What is limited vs. reasonable assurance for GHG emissions?

Limited assurance involves the practitioner performing inquiry and analytical procedures and concluding that nothing came to their attention suggesting material misstatement, similar to a review engagement. Reasonable assurance requires more extensive testing and provides a higher confidence level, analogous to a financial statement audit. ISSA 5000, effective for periods beginning on or after December 15, 2026, is the new global standard governing both types of sustainability assurance engagements.

What should mid-market companies do now to prepare?

Companies with $500 million or more in revenue doing business in California or with material EU exposure should begin building a documented GHG inventory now. The foundational steps, setting organizational boundaries, collecting activity data, applying emission factors, and maintaining a traceable workpaper file, draw directly on existing finance and accounting capabilities. Engaging an accounting firm for an early readiness assessment can identify data gaps before reporting deadlines arrive.