A formula to help reduce Scope 3 emissions in the chemical industry
Value chain emissions make up about 75% of the average chemical company’s total carbon footprint. Transparency, partnership, and innovation could be the keys to reducing them.
David Yankovitz
Robert Kumpf
Kate Hardin
Ashlee Christian
The momentum for corporate environmental transparency continues to accelerate globally, as countries across the world enact more rigorous requirements for greenhouse gas (GHG) emissions reporting. Regulators in the European Union, Turkey, Nigeria, and Brazil are requiring some companies to disclose the full scope of their footprint, including value chain emissions that occur upstream and downstream of the company’s operations (Scope 3). Other governments including New Zealand, the Philippines, Singapore, and Taiwan are considering the same.1
Because about 75% of the average chemical company’s carbon footprint comes from its Scope 3 emissions,2 one intent of the regulations is to encourage stakeholders across the value chain to track, report, and cut emissions to meet reduction targets. These emission disclosures are meant to inform investors and capital markets of material financial risk. So, even though the US Securities and Exchange Commission (SEC) did not include Scope 3 in their final rule,3 more comprehensive greenhouse gas disclosures appear to be growing more common globally.
According to Deloitte analysis of 250 publicly traded chemicals companies, more than half are already reporting on their Scope 1 and 2 emissions.4 So far, the number of chemical companies reporting Scope 3 emissions has lagged at around 30%,5 likely due to the challenges in tracking emissions outside of the reporting company’s control (figure 1).
The relatively lower levels of Scope 3 reporting in the chemical industry are consistent with the reporting trends in other sectors (figure 2).
Opening the door to these inquiries may not be a legal requirement everywhere, but a failure to respond to requests like these from key customers or shareholders could lead to reputational risk, loss of investor confidence, or loss of business loyalty.
That’s because the pressure for reporting is coming as much from stakeholders and customers as it is now from regulators. With retail brands asking for more transparency about the products they put on their shelves, the chemical industry, in particular, is being inundated with requests for transparency on carbon footprint, ingredients, and more.
Those in the chemicals industry who take the lead on supporting Scope 3 reporting, on the other hand, can benefit by identifying the key sources of their value chain emissions and working strategically to simultaneously lower those emissions and create value for their company.
What starts as a process of identifying the main sources of Scope 3 emissions, could be the beginning of a transformation in how companies operate and make decisions. Many chemical companies can follow a similar pathway to tracking and reducing their Scope 3 emissions (figure 3), but individual strategies will likely differ. This is because each company’s emissions can vary widely by scope and category. Similarly, a company’s visibility into its value chain and influence on its value chain can vary. These factors can strongly impact which strategies could be most effective for a given company to use to reduce its emissions.
As companies embark on their reporting processes, collaboration and partnerships among companies, industries, and other stakeholders could be vital for enabling the creation of new business models, infrastructure, industry standards, and business ecosystems. Additionally, public-private partnerships are expected to continue to be important in the research and development phase. Those that do this well may find the rewards of their efforts go far beyond the initial business drivers.
Embracing sustainability as a strategic positioning can be a key differentiator in a market that is increasingly moving toward cleaner, greener, more sustainable products, and practices. Chemical companies should consider building roadmaps tailored for their business to track and reduce Scope 3 emissions through innovation and collaboration.
Understanding the challenges of Scope 3 disclosure
For the average chemical producer, upstream and downstream Scope 3 emissions account for 50.3% and 25.8% of total emissions, respectively.6 Notably, just three categories make up 65% of total Scope 3 emissions: Category 1 includes emissions from purchased goods and services, such as feedstocks; Category 11 includes emissions resulting from using a product, such as fertilizers or refrigerants; and Category 12 includes emissions occurring at the end of a product’s life when it’s landfilled, incinerated, or recycled.7
A chemical company’s emissions percentages can vary widely across scopes and categories depending on a company’s business model and where it sits in the value chain. For instance, an integrated company whose internal operations span petrochemicals to polymers may have a relatively larger Scope 1 emissions profile because more of the value chain is within the company’s direct ownership or control. In contrast, a more specialized polymer manufacturer may have significantly more Scope 3 emissions because it operates along a smaller part of the product’s value chain. Similarly, producers of refrigerants or fertilizers may have a higher percentage of Scope 3 emissions in the use of sold products (Category 11), while producers of specialized materials further downstream may have more of their Scope 3 emissions concentrated in purchased goods and services (Category 1).8
Tracking and reporting Scope 3 emissions is a challenge for companies across industries but can be especially difficult for the chemical industry for several reasons.
1. Complex value chains: The chemical industry is both heterogeneous and global, spanning thousands of products, processes, suppliers, and customers (figure 5). There are more than 42,000 individual chemicals in US commerce, and the number can go up to 150,000 or more at a global level.9 Moreover, each step in the value chain can involve numerous suppliers, transporters, and customers. This can make collecting accurate and specific data directly from suppliers up the value chain and customers down the value chain difficult and costly.
2. Lack of accurate and specific data: Because many companies are still not tracking their Scope 3 emissions, it is currently very difficult to calculate the full carbon footprint of a specific product from cradle to grave. Instead, many companies use industry-average data or input-output databases to estimate emissions (figure 7). Even those companies that are tracking their Scope 3 emissions may use different data formats and measuring procedures. This lack of data standardization can further complicate data collection and analysis.
3. Limited resources: The SEC estimates that its new Climate-Related Disclosure Rules would increase annual compliance costs for companies by US$197,000 to US$739,000 on average in the first 10 years.10 This rule only requires the disclosure of Scope 1 and 2 emissions when they are material to the company. The disclosure requirement for Scope 3 emissions would likely increase compliance costs even further. To reduce these costs, many companies may need to make trade-offs between more accurate and specific Scope 3 emissions data, which can be cost- and time-intensive, and industry-average data, which may not be as specific or accurate but is relatively less costly. This can be especially true for small- and medium-sized companies that have limited resources.
4. Lack of industry-specific guidance and standardized calculations: In addition, due to the existing data gaps along the value chain, companies must select from multiple calculation methodologies for each Scope 3 category (figure 6). However, each of these calculation methods requires certain assumptions to be made since emissions are not currently tracked consistently across products. These assumptions introduce further uncertainty into a company’s final carbon footprint estimates.
Many companies estimate emissions based on industry averages, but since chemicals are part of the global market, regional differences can introduce additional complexity. For example, China produces propylene using naphtha in steam crackers and propane in propane dehydrogenation plants,11 while the US produces propylene with ethane in steam cracker plants.12 So, the carbon footprint can differ significantly by region, process, and feedstock. What complicates calculations further is that many companies don’t know where or who their suppliers are beyond tier 1 or tier 2, which may lead to inaccurate assumptions and, ultimately, inaccurate estimates.
The GHG Protocol is an internationally accepted suite of standards for measuring and disclosing emissions and has become the most recognized approach for companies across industries and regions.13 However, the GHG Protocol does not include industry-specific guidance for the chemical industry. A number of organizations have stepped in to try to fill that gap, such as the World Business Council for Sustainable Development, Together for Sustainability, and Science Based Targets initiative (SBTi). But currently, the lack of granularity in the existing chemical industry guidance can create uncertainty, allowing for inconsistent interpretations and estimations in certain circumstances.
As chemical companies transition toward more sustainable solutions, the guidance for tracking and calculating emissions can become even more difficult to apply. For instance, companies are currently exploring how alternative feedstocks, such as bio-based materials, recycled materials, and captured carbon dioxide, could be used as potential replacements for fossil-based sources in the chemical industry. However, each of these alternatives requires further calculation guidance. For instance, the industry is also investigating mass balancing methods to help ensure the traceability of recycled feedstocks into new goods, allowing accurate accounting of the volume of recycled materials used in manufacturing plants and how they are assigned to products. And guidance surrounding advanced recycling is still being developed.14
Those chemical companies that are reporting their Scope 3 emissions are mainly focused on upstream emissions, even though there are several relevant categories in the downstream segment (figure 7). This occurs for several reasons.
First, companies tend to have more influence, control, and traceability over their upstream value chain emissions than their downstream value chain emissions. For many upstream categories, companies can directly manage their procurement processes to make gaining access to emissions data relatively easier.
Second, there tends to be more uncertainty around downstream activities. Producers are not always in control of the application a chemical ends up in, how the product is used, or how the product is disposed of at the end of its life cycle—all of which makes tracking downstream emissions harder.
Additionally, downstream emissions are often forecast based on historical data and expectations of future conditions. This shows why it is important to accurately identify and measure downstream Scope 3 emissions to understand the full scale of a company’s carbon footprint and help inform effective strategies for reducing emissions.
To identify sources of Scope 3 emissions, companies should invest early in tools and resources
Measuring and reporting Scope 3 emissions requires time, money, and other resources. Many companies will need to build out new processes, organizational structures, and data systems, and invest in creating new teams, training employees, and implementing these systems.
During the identify phase, many of the steps that companies take are often still internal and may require less collaboration than in subsequent phases. Companies should focus on:
- Building internal resources to own the internal process
- Determining which Scope 3 categories are material to their organization and should be tracked
- Identifying existing internal data that can be used for emissions measurement
- Following guidance to determine the appropriate calculation method and base year
Once companies calculate their Scope 3 emissions, they can begin identifying the largest sources and reducing them. They can also identify areas where reductions may be relatively easier or cheaper to achieve, and begin aligning their business portfolios with their carbon emissions goals.
But, just as the sources of Scope 3 emissions can differ by company, so too can a company’s visibility into and influence over its value chain. Therefore, when it comes to reducing Scope 3 emissions, no single set of strategies would be effective across the entire chemical industry. How a company collaborates with its suppliers, customers, industry organizations, and other groups will likely be determined by the company’s level of visibility into the sources of its Scope 3 emissions and its ability to influence the behavior of relevant stakeholders across its value chain (figure 8).
- High visibility-high influence: A company could have high visibility and high influence if it has good visibility into its product’s value chain and understands where its largest sources of value chain emissions are coming from, and if it has significant influence over the stakeholders that control those emissions. This could be a company with a few known suppliers upstream that is a relatively large buyer from each supplier. Such a company could directly engage with relevant stakeholders. For example, it could mandate suppliers to report emissions, provide suppliers with products or tools to track and reduce emissions, or create competition between suppliers.
- High visibility-low influence: A company could have high visibility and low influence if it knows where its value chain emissions are coming from but has little influence over those stakeholders. This could be a company that has a few known suppliers upstream but is a relatively small buyer from its suppliers or a company that has few customers downstream but relatively low influence over how they use the purchased product. Such companies could partner with other buyers to increase their influence on suppliers through larger contracts with built-in low-carbon targets.
- Low visibility-high influence: A company could have low visibility and high influence if it has hundreds of customers and applications downstream but is large and has established relationships with the same customers across multiple products. In this case, the company’s strategy for reducing Scope 3 emissions across its value chain may primarily involve working with industry groups to set new, low-carbon standards or building alliances with customers and competitors to share information and pilot new solutions.
- Low visibility-low influence: A company could have low visibility and low influence if it has hundreds of suppliers and is a relatively small purchaser from each of them or if it has hundreds of customers and low influence because it holds no buying power. These companies may need to focus on participating in initiatives, associations, and ecosystems that align with their business goals until they can improve visibility into their supply chains.
Companies must improve their internal processes and stakeholder relationships to make progress toward their Scope 3 goals
Once the reporting company has developed an internal process, it can focus on improving its data. To this end, companies can:
- Create an internal dashboard where Scope 3 emissions data gets updated on a regular basis and is shared with teams internally.
- Develop life-cycle assessments (LCAs) or product carbon footprints (PCFs) for their products. However, measurements and calculations of the LCAs and PCFs still need to be standardized across the industry, so companies should work with industry partners toward this goal.
- Devise supplier engagement strategies to encourage or incentivize suppliers to disclose their emissions data.
- Collaborate with industry groups to help promote a common language, improve guidance and frameworks for tracking, and standardize data-sharing practices.
To reduce emissions, chemical companies can start developing procurement, supplier, and customer strategies to influence stakeholders to reduce emissions, such as prioritizing low-carbon suppliers in procurement, creating competition between suppliers to reduce emissions, offering knowledge-sharing workshops for suppliers, conducting customer surveys, or participating in marketing programs to educate the public about recycling. It’s at this point that many companies begin to set Scope 3 emissions targets or make Scope 3 commitments (see “Setting targets, working with stakeholders”). Internally, if they haven’t already, companies can integrate an internal carbon pricing system into their internal emission tracking dashboard.
Setting targets, working with stakeholders
While companies can develop emissions targets internally, many develop targets through SBTi.15 In fact, the number of chemical companies that have announced SBTi targets has increased significantly over the last four years (figure 9). Within the SBTi framework, companies set a Scope 3 target if their Scope 3 emissions account for 40% or more of their total emissions.16 Once committed, a company is required to submit its targets within two years.17 But Scope 3 target-setting lags behind Scope 1 and 2 target-setting. This is partly because the GHG Protocol is still developing sector-specific guidance for the chemical industry, which is expected to be finalized in October 2024.18
Another way for companies to meet their goals is to participate in organizations that advocate for policies that support low-carbon technologies. Many of the more promising decarbonization technologies tend to be policy-enabled, which means they may require government incentives to become economically viable. This support will likely continue to be necessary until these technologies are scaled. Recent policies like the Inflation Reduction Act and the Infrastructure Investment and Jobs Act provide significant support to renewable energy, carbon capture, utilization, and storage, and hydrogen hubs through government funding and incentives. However, additional policies may be needed to support renewable feedstocks and circular solutions.
Innovation and collaboration can help overcome common decarbonization challenges
Innovation will continue to be important as chemical companies meet their emissions goals. In fact, many leaders in the chemical industry have announced targets for 80% to 90% of their research and development budgets to be focused on areas that contribute to sustainability.19 These chemical companies are developing new renewable feedstocks, creating cleaner processes, and redesigning products keeping their end of life in mind. Recent developments in science and technology, such as synthetic biology, electrochemistry, and generative AI, continue to accelerate innovation in the chemical industry.
Despite these ambitions, many of the technologies required for decarbonization (for example, carbon capture, utilization, and storage, clean hydrogen, renewable electricity, and circularity) are not yet fully commercialized, partly because the markets, supply chains, and infrastructure necessary for deployment have not been built out yet (figure 10).
While climate change poses risks, there is no standardized way available to account for these risks because there is no single, universal price on carbon. As a result, chemical companies are expected to make significant investments to reduce emissions, but questions remain about how much of that cost can be passed along.
Without understanding who will bear the cost or what the premium might be for a lower-carbon product, access to capital is a huge hurdle in scaling the technologies and innovations needed. Similarly, because sustainability is often not part of the decision-making process for much of traditional finance, many companies struggle to find adequate financing for these technologies.
Given the inconsistency between climate policies and emissions requirements between jurisdictions, chemical companies can face different requirements in each jurisdiction they operate in. This uncertainty can make it difficult for companies and investors to understand expectations over time as well as comply with different policies across geographies.
To overcome challenges associated with reducing Scope 3 emissions, collaboration and a systems-level approach are required (figure 11). Understanding these relationships, identifying the hurdles, understanding the sequencing of these technologies, and anticipating and mitigating risks are all important to a successful energy transition. However, this will likely require coordination across companies, industries, and systems.
As more companies begin to track and share emissions data, collaboration will likely intensify because of the following:
- Chemical companies could work together to standardize LCAs and PCFs for the entire industry.
- Industry groups can create a common platform to share this data.
- Chemical companies can also begin working with other industries to better understand downstream emissions. This can be done through regular, standardized surveys conducted by an independent third-party paid by an industry association.
Companies may be able to innovate new chemicals or processes through internal research and development, create new business models with low-carbon products or new recycling technologies, or invest in emissions-reduction projects.
But they will likely need to work with industry partners and ecosystems to bring these innovations to market. In this phase, individual company strategies could look different, with some companies willing to take the risk of building a first-of-its-kind technology, whereas other companies may position themselves as fast followers forming strategic partnerships but not yet investing at a large scale.
Moreover, companies can work together to influence stakeholders. For instance, supplier and customer strategies may be expanded or strengthened by partnering with other industry players to increase pressure on suppliers or customers. Additionally, companies can work with associates to establish new low-carbon standards for certain products or processes. In this case, companies may need to collaborate with industry partners or ecosystems to incentivize change. For instance, companies can work with industry associations or coalitions to develop stricter product standards or low-carbon certifications. They can also work with broader ecosystems to incentivize societal change, such as local collaborations to increase recycling rates, or systems change, such as working with local businesses and utilities to increase renewable generation.
Transformation starts to take place when systems, standards, and digitalization come together
In this final phase, standardized tracking methods can help the reporting company internally track its own emissions and the companies in the value chain identify their largest sources of emissions so that they can make their own real-time decisions. For instance, several chemical companies are piloting projects to track real-time emissions data internally using a combination of artificial intelligence and the Internet of Things.20 Eventually, digital integration within a chemical value chain can help provide high-quality emissions data that is auditable, transparent, and dependable. Whether it’s blockchain or an entirely digital product passport, chemical companies across the globe are working to find better ways to track products through their value chains.
At the same time, collaboration, low-carbon standards, and consideration of climate impacts of decision-making should be incorporated into the newly implemented systems. For instance, partners can continue working together to innovate and bring new low-carbon solutions to market; the industry can continue updating more stringent standards for the industry; and ecosystems can grow and strengthen as stakeholders along the value chain work together to build robust infrastructure and successful business models. But to reach this transformation, the chemical industry will need support from digital developments, new innovations, value chain stakeholders, favorable and consistent government policy, and talent.
Chemical companies that lead in Scope 3 reductions may be positioned for a low-carbon future
While not every chemical company is currently mandated to track, report, or reduce its Scope 3 emissions, there is growing pressure from regulators, investors, and downstream customers to do so. Reducing emissions across chemical value chains will be no small feat, but doing so can help companies improve risk management, expand transparency, increase competitiveness, and attract investors.
To successfully track, report, and reduce Scope 3 emissions, chemical companies can follow the Scope 3 decarbonization pathway, but individual strategies should be tailored to their business. However, there are some steps that every chemical company should consider, including:
- Tracking Scope 3 emissions internally and building carbon considerations into purchases and investment decisions
- Reaching out to tier 1 suppliers, customers, and other stakeholders along its product value chain and starting to have conversations on how they can collaborate toward common climate goals
- Actively participating in organizations that are affecting policy, drafting guidance, or developing new standards and certifications
For centuries, the chemical industry has innovated solutions that are rooted in science and increase quality of life. Today, the industry has been tasked with innovating solutions that can support the new green economy. The science and technology necessary to reach net zero by 2050 likely exist. And chemical companies are well-positioned to help lead and innovate toward this goal. But companies should start now to better position themselves for a competitive advantage in the future.