Carbon Accounting Explained: Scope 1, 2 and 3, and Where It's Mandatory

Carbon accounting is how a company measures the greenhouse gases it is responsible for and converts them into one comparable unit: tonnes of carbon dioxide equivalent (tCO2e). It sits underneath every climate disclosure, from SECR in the UK to ISSB and CSRD internationally. Get the carbon numbers wrong and every report built on top of them is wrong too.

This guide covers what carbon accounting is, the methodology behind it, the bodies that set the standards, the real difference between Scope 1, 2 and 3, how that split changes by sector, and where carbon accounting is now legally mandatory.

Key takeaways. Carbon accounting measures a company's greenhouse gas emissions and reports them as tonnes of CO2e across Scope 1, 2 and 3. The methodology comes from the GHG Protocol, and every figure is built from activity data multiplied by a published emission factor. It is now mandatory under a fast-growing set of carbon regulations, from UK SECR to ISSB, CSRD and California. The right carbon accounting software turns this from an expensive consultancy project into a repeatable, audit-ready process.

Why carbon accounting became a board-level task

Three forces moved this from a voluntary exercise to a requirement:

  • Regulation. UK SECR already requires roughly 11,900 large companies to report energy and carbon every year.7 ISSB standards are being adopted across dozens of jurisdictions,8 and CSRD still applies to large EU companies from FY2027.9
  • Assurance. Disclosures increasingly need third-party assurance, which means every figure has to trace back to a source.
  • Finance. Lenders, investors and large customers now ask for emissions data before they commit capital or award contracts.

Who sets the standards

Carbon accounting is not one rulebook. It is a stack of standards written by different bodies, each handling a different layer. Regulators then point to these standards rather than reinventing them.

Body What it sets Why it matters
GHG Protocol (WRI & WBCSD) The Corporate Standard and the Scope 3 Standard The foundation. Defines Scope 1, 2, 3 and the 15 Scope 3 categories. Almost every regulation and framework builds on it.1
IPCC Global Warming Potential (GWP) values Sets how non-CO2 gases convert to CO2e, so methane and others can be added into one number.3
ISO 14064 Quantification and verification standard The international standard for measuring and verifying an organisation's GHG inventory.2
PCAF Financed Emissions Standard The method banks and investors use for Scope 3 category 15, their portfolio emissions.4
ISSB (IFRS Foundation) IFRS S1 and S2 The global disclosure baseline. IFRS S2 requires emissions measured using the GHG Protocol.8
DEFRA / DESNZ UK emission factors (annual) The official UK conversion factors used to turn activity data into emissions.7

The practical point: the GHG Protocol is the common language underneath all of it. Learn it once and the same logic carries across SECR, ISSB, CSRD and the rest.

The three scopes, in plain terms

The GHG Protocol splits emissions into three scopes based on who controls the source.1

Scope 1, direct emissions. Sources you own or control: company vehicles, gas boilers, on-site furnaces, refrigerant leaks.

Scope 2, purchased energy. Indirect emissions from the electricity, heat and steam you buy. You do not burn the fuel, the power station does, but the emissions are counted as yours because you used the energy.

Scope 3, everything else in the value chain. Upstream and downstream: purchased goods, business travel, commuting, waste, the use of your sold products, and, for a bank, the emissions of everything it finances.

Figure 1. Typical split of a corporate carbon footprint. Scope 3 usually dominates.
10% 15% 75% Scope 1 Scope 2 Scope 3 (value chain)

For a typical company, Scope 3 is around 75% of the total. It is also the hardest to measure, because the data sits outside the business, with suppliers and customers.

The methodology: how a carbon number is actually built

Every figure in carbon accounting comes from the same equation:

activity data × emission factor = emissions

Activity data is what you did: litres of diesel, kWh of electricity, tonnes of waste, miles flown, pounds spent with a supplier. The emission factor converts that activity into tCO2e. In the UK the standard factors are published every year by DEFRA and DESNZ.7

40,000 L diesel×2.51 kgCO2e / L=100,400 kgCO2e=100.4 tCO2e

Activity times factor, then divided by 1,000 to convert kilograms into tonnes. That same three-step sum is every row in the table below.

Different gases, one unit. Emissions are not only CO2. Methane and nitrous oxide matter too, so they are converted to CO2e using IPCC Global Warming Potentials. Methane counts as roughly 28 times, and nitrous oxide roughly 265 times, the 100-year warming of CO2.3 That is how a mixed set of gases becomes a single comparable figure.

Activity Amount Factor (2025, illustrative) Result Scope
Diesel, company fleet 40,000 L 2.51 kgCO2e/L 100.4 tCO2e Scope 1
Natural gas, heating 1,200,000 kWh 0.183 kgCO2e/kWh 219.6 tCO2e Scope 1
Grid electricity 500,000 kWh 0.207 kgCO2e/kWh 103.5 tCO2e Scope 2

Two things trip companies up.

Scope 2 has two methods. The location-based method uses the average grid factor. The market-based method uses the factor of the specific tariff you bought, for example a renewable tariff backed by contractual instruments. Most frameworks want both disclosed.

Factors change every year. The same activity produces a different figure in 2025 than in 2024, because the grid decarbonises and DEFRA updates its data. Clear labelling of which factor year you used is what makes year-on-year comparison valid.

Scope 3: small to report, huge in reality

The GHG Protocol defines 15 Scope 3 categories, split into upstream (things you buy) and downstream (what happens after you sell).1

  • Upstream: purchased goods and services, capital goods, fuel and energy activities, upstream transport, waste, business travel, employee commuting, leased assets.
  • Downstream: downstream transport, processing of sold products, use of sold products, end-of-life treatment, franchises, investments.
CDP found that corporate Scope 3 supply-chain emissions are on average around 26 times larger than a company's own operational (Scope 1 and 2) emissions.5 For most companies, Scope 3 is where the real footprint, and the real risk, sits.

The split changes completely by sector

This is where generic advice fails. The 10/15/75 average tells you almost nothing about your own company. The balance between the three scopes depends on what you actually do.

Figure 2. Indicative Scope 1 / 2 / 3 split by sector. The Scope 3 share is labelled on the right.
Scope 1 Scope 2 Scope 3 Financial services ~98% Automotive ~95% Oil & gas ~88% Food & retail ~90% Technology ~67% Cement & steel ~35% Utilities / power ~13% 0% 50% 100% Indicative patterns for illustration. Actual splits vary by company and methodology.

Financial services is the extreme case. A bank's own offices emit very little. Its financed emissions, the emissions of the companies and projects it lends to and invests in, are on average over 700 times larger than its operational emissions.6 For a bank, carbon accounting is almost entirely Scope 3, category 15.

Oil, gas and automotive are dominated by the use phase. Most of a carmaker's or oil major's emissions happen when the customer drives the car or burns the fuel, not in the factory. Scope 3 often runs 85 to 95% of the total.

Food, beverage and retail carry the footprint in the supply chain, above all in agriculture. Scope 3 is typically 80 to 90%.

Heavy industry is the exception. For cement and steel, chemical process emissions and on-site fuel combustion make Scope 1 dominant, often more than half the total.

Utilities and power generation are Scope 1 heavy, because they burn fuel directly to produce electricity.

Technology sits differently again. Direct emissions are tiny, but electricity for offices and data centres makes Scope 2 unusually significant, alongside Scope 3 from hardware and cloud.

The practical takeaway: before you spend a day collecting data, work out where your emissions actually are. A bank chasing Scope 1 precision while ignoring financed emissions is measuring the wrong 0.2%.

Where carbon accounting is now mandatory

Carbon accounting used to be voluntary. A wave of carbon regulation has changed that across most major economies. The regimes below all rest on the same GHG Protocol scopes, which is why one measurement process, or one piece of carbon accounting software, can serve several of them at once.

Figure 3. When key mandatory regimes begin. Reporting obligations are arriving fast between 2025 and 2027.
2025 UK SECR live.AU + SG begin 2026 California SB 253/261 first reports 2027 EU CSRD firstreporting; CA Scope 3 2028 Singaporenon-STI phase-in 2029 Assurancerules tighten 2030 Reasonableassurance (CA)
Regime Jurisdiction Who reports Status First reporting
SECR UK Quoted companies + large companies (2 of 3: 250+ staff, £36m turnover, £18m balance sheet) Mandatory In force
UK SRS (UK adoption of ISSB) UK Expected to target large and listed companies Endorsement expected 2026 onward
CSRD / ESRS EU EU companies over 1,000 employees and €450m turnover (post-Omnibus) Mandatory FY2027
EU Taxonomy EU Companies in CSRD scope Mandatory With CSRD
ISSB (IFRS S1 / S2) Global baseline Varies by adopting jurisdiction Adopting 2024 onward
California SB 253 US (California) Companies over $1bn revenue doing business in California Mandatory Scope 1 & 2 in 2026, Scope 3 in 2027
California SB 261 US (California) Companies over $500m revenue (climate risk) Mandatory From 2026
ASRS / AASB S2 Australia Group 1 (2 of 3: 500 staff, A$500m revenue, A$1bn assets), phasing to smaller groups Mandatory Group 1 from FY2025
SGX climate rules Singapore Listed issuers (Scope 3 first for STI constituents) Mandatory Scope 1 & 2 from FY2025
HKEX climate rules Hong Kong Main Board issuers Mandatory (phased) From 2025
CSDS Canada Large entities Voluntary initially 2025 onward

Timelines and thresholds move, so always confirm against the current regulator guidance for your jurisdiction. But the direction is one way. What is voluntary today is usually mandatory within a year or two.

What auditors actually check

As assurance becomes standard, the questions that create the most difficulty are not about the total. They are about the trail:

  • Can you show the source of each activity figure?
  • Which emission factor did you use, from which year, and why?
  • Did you use location or market-based Scope 2, and are both disclosed?
  • How did you handle Scope 3 data gaps, and are estimates flagged as estimates?
  • Is this year calculated on the same basis as last year?

A defensible carbon number is not just correct. It is traceable.

Frequently asked questions

What is carbon accounting?

Carbon accounting is the process of measuring a company's greenhouse gas emissions and reporting them in a single unit, tonnes of CO2 equivalent (tCO2e), across Scope 1, 2 and 3.

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

Scope 1 is direct emissions from sources you control, such as fuel and company vehicles. Scope 2 is the emissions from the electricity, heat and steam you buy. Scope 3 is everything else in your value chain, from purchased goods to the use of your sold products, and it is usually the largest of the three.

How do you calculate carbon emissions?

You multiply activity data by an emission factor. For example, 40,000 litres of diesel times 2.51 kgCO2e per litre equals 100.4 tonnes of CO2e. UK emission factors are published each year by DEFRA and DESNZ.

Is carbon accounting mandatory in the UK?

Yes, for large organisations. UK SECR requires quoted companies and large companies to report their energy and carbon every year, and further requirements are arriving through the UK's adoption of ISSB standards.

What is CO2e?

CO2 equivalent (CO2e) is the common unit that lets different greenhouse gases be added together. Gases such as methane and nitrous oxide are converted to CO2e using IPCC Global Warming Potentials.

Which scope is usually the largest?

Scope 3. For most companies it is around three quarters of the total footprint, and CDP data puts supply-chain emissions at roughly 26 times operational emissions on average.

Carbon accounting is structured, repeatable work, not a consultancy project.

The standards are public, the factors are published, and the categories are defined. What most companies lack is a system that captures the activity data, applies the right factor, keeps the audit trail, and produces the figure in the format SECR, ISSB or CSRD requires. EcoLedger's GHG Accounting Platform is carbon accounting software that does exactly that, without a consultant.

See the GHG Accounting Platform

References

  1. GHG Protocol (World Resources Institute & WBCSD), Corporate Accounting and Reporting Standard, and Corporate Value Chain (Scope 3) Standard. ghgprotocol.org
  2. ISO 14064-1, Greenhouse gases, specification for quantification and reporting of GHG emissions and removals.
  3. IPCC, Fifth and Sixth Assessment Reports, Global Warming Potential values (100-year).
  4. Partnership for Carbon Accounting Financials (PCAF), Global GHG Accounting and Reporting Standard for the Financial Industry.
  5. CDP / BCG, Global Supply Chain Report (2024): corporate Scope 3 emissions on average ~26x operational emissions.
  6. CDP, Finance Sector research: financed (portfolio) emissions on average over 700x operational emissions.
  7. UK DEFRA / DESNZ, Greenhouse Gas Conversion Factors (annual). SECR scope per Streamlined Energy and Carbon Reporting regulations. Worked-example factors are illustrative 2025 values.
  8. IFRS Foundation, ISSB jurisdictional adoption profiles: IFRS S1 and S2 adopted or being introduced across dozens of jurisdictions; IFRS S2 requires GHG Protocol measurement.
  9. EU CSRD and the 2026 Omnibus Directive; California CARB (SB 253 / SB 261); AASB S2 (Australia); SGX and HKEX listing rules. Confirm current thresholds and dates with each regulator.
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