An interesting article in today's WSJ reports that:
Apple Inc. says it produced 47,430 tons of greenhouse gases in a recent year. The production of its computers and phones by its suppliers, plus their transportation and use by customers, generated an estimated 22 million tons. ...
At issue are so-called Scope 3 emissions, which are mostly greenhouse gases produced by a company’s suppliers and by customers using its products. How to handle these indirect emissions has emerged as a sticking point inside the Securities and Exchange Commission as it deliberates on the new rules. ...
Not including these Scope 3 emissions can paint an incomplete picture of a company’s impact.
As the term Scope 3 suggests, climate change disclosure analysts generally divide a company's emission schedule into 3 categories:
A Scope 1 footprint analysis includes direct emissions of a system or activities; a Scope 2, indirect emissions associated with electricity, heat, and steam purchased to support the system or activities; and a Scope 3, indirect emissions resulting from operations that do not originate at sources owned or controlled by the company, e.g., transportation by suppliers or the use of sold products and services.
Jeff Civins & Mary Mendoza, The Carbon Revolution Answering the Call, 72 Tex. B.J. 272, 274 (2009).
Scope 3 emissions often make up the vast bulk of a company's disclosed emissions. As the WSJ reported:
The 47,430 tons of greenhouse gases Apple emitted in its financial year that ended Sept. 26, 2020, is barely more than the average emissions each year from a Boeing Co. twin-aisle aircraft delivered in 2020, according to The Wall Street Journal’s analysis of the plane maker’s data. Apple’s Scope 3 emissions are 475 times as large.
It strikes me that there a couple of problems with requiring Scope 3 disclosures.
First, requiring companies to include Scope 3 emissions in their disclosures would be extremely costly. Companies would have to gather data from companies in their supply chain. For companies with complex multi-national supply chains would incur expenses that would dwarf the controversial conflict mineral disclosure regime. The Harvard Business Review reports that "Scope 2 emissions [were carved] out of Scope 3 because they are easily measured and allocated to specific companies." In contrast, "the difficulty of tracking emissions from multiple suppliers and customers across multitier value chains makes it virtually impossible for a company to reliably estimate its Scope 3 numbers."
Consider the challenges faced by a manufacturer of car doors. Protocol for Scope 3 reporting requires the company to track all GHG emissions from the processes of its upstream suppliers, including the extraction of metallurgical coal and iron ore, the transport of those minerals to a steel producer, the production of sheet steel from the coal, iron ore, and other inputs, and the transport of that steel to its own production facility. The car-door company must also estimate the GHG impact of downstream activities, including transport of the car door to its customer (the automotive-assembly factory), manufacture of the finished car, transport of the car to a showroom, and operation of the vehicle, for perhaps 15 years, by the end-use consumer.
Estimating all those upstream and downstream emissions—especially for companies with long, complex, and multi-jurisdictional value chains—introduces high measurement error, opening the door to bias and manipulation.
Second, wouldn't disclosing Scope 3 emissions result in confusing double (or more) disclosure?. Suppose Apple has to include the carbon emissions of Supplier One Inc.--a company in its supply chain--in its carbon disclosures. Suppose Supplier One is publicly held, so that it must disclose its carbon emissions. Those emissions would be double counted. Meanwhile, Supplier Two Inc. is in Supplier One's supply chain. Supplier Two is also publicly held. So it's carbon emissions would be disclosed in its 10-K, but if Scope 3 emissions must be disclosed, those emissions would also be counted in Supplier One's and Apple's disclosures. A portfolio holding all three stocks would appear to be emitting way more carbon than it actually is.
This problem needs to be fixed before we have a disclosure fiasco that makes conflict mineral disclosure look like petty cash.
