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A carrot approach to reducing carbon emissions
Scope 4 mechanism rewards corporates for avoiding carbon-intensive products
Daphne Li 10 Jun 2022

As environmental, social and governance (ESG) principles become ingrained in the financial world, buzzwords such as Scopes 1 and 2 emissions, once bewildering for many corporate executives, now serve as essential guideposts for daily corporate operations. And as companies step up their decarbonization efforts, another measurement of greenhouse gas (GHG) emissions, Scope 4, is becoming increasingly relevant.

Scope 4 covers emissions that are avoided as a result of the use of particular products. Another definition that has recently emerged focuses on homeworking emissions, prompted by the shift of workplace from offices to homes during the pandemic.

Right now, Scope 4 has not been officially included in major ESG compliance policies. Reporting initiatives such as the Science-based Targets Initiative note that avoided emission does not count towards the targets and belongs to a separate accounting system from corporate inventories.

The officially defined benchmarks, namely Scopes 1, 2 and 3, measure GHG emissions from direct and indirect sources, with the latter two covering indirect emissions from power purchases and value chains respectively.

Positive reinforcement

Scope 4 measurement serves as positive reinforcement, fostering innovation in low-emission products and encouraging big emitters to scale up their transition efforts. It is different from the punitive nature of Scope 1 to 3 measurements where at-risk entities are red-flagged for their high emissions.

The reward mechanism is believed to drive better data transparency, more accurate and scientific methodology, preference for low-carbon products, and a change in consumer behaviour.

Scope 4 was mentioned in a survey by GHG Protocol in 2013 to explore the need for a new standard to quantify avoided emissions. Products that avoid carbon emissions include low-temperature detergents, fuel-saving tyres, energy-efficient ball bearings, and teleconferencing services.

Almost a decade later, the concept has been brought to light again in sustainability dialogues. However, scepticism over the quantifying methodology and data quality in avoided emissions may erode the credibility of the emission measurement and even lead to greenwashing accusations.

Benchmark issue

Other challenges include identifying emission sources and apportioning the impact to different value-chain partners based on their estimated contributions to the company’s product. Corporates also have to establish a reasonable benchmark for comparison in carbon emissions.

Potential issues also include scaling to a product’s market size, cherry-picking products with positive impacts, and the resource-intensive nature of aggregating comparative impacts.

“Avoided emissions are the potential lower future emissions of a product, service or project when compared to a situation where the product, service or project did not exist, or when it is compared to a baseline,” says International Financial Reporting Standards in a comment. “Avoided-emission approaches in an entity’s climate-related strategy are complementary to but fundamentally different from the entity’s emission-inventory accounting and emission-reduction transition targets.”

Another uncertainty over the measurement is the sole focus on omitted emissions but a disregard for the negative impact which is just as common and relevant to the company's product portfolio and climate change strategy.

As governments and corporates continue to crank up pressure on ESG progress, the introduction of a more lucid and credible Scope 4 emissions measurement will supplement the existing evaluation framework, providing a multi-faceted approach to assessing the true impact of decarbonization efforts.  

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