Why calculating your company’s carbon footprint matters

With the focus on climate issues and potential policy approaches, businesses need to know their carbon footprint and how they may be affected.

For example, while the average carbon footprint for a company in electric power generation is 97.8% direct emissions (and 2.2% indirect emissions), the average carbon footprint for a company in wholesale and retail trade is only 1.3% direct emissions (and 98.7% indirect emissions).

Emissions sources — the hot spots

While concentrated more heavily in some industries, carbon emissions occur throughout the US economy. Figure 1 displays the breakdown of US energy-related carbon emissions. Industry is responsible for 71% of these emissions, while residential petroleum and natural gas emissions, light-duty vehicles and government functions are responsible for the remaining 29%. Electric power generation accounts for nearly half of industry emissions, or 1,776 of the total 3,756 million metric tons (MMT) of industry emissions. Transportation and manufacturing each account for nearly a quarter of industry emissions.

Figure 1. Household and industry US energy-related CO2 emissions

The carbon footprint of some industries stems primarily from their use of fossil fuels. For other industries, it arises primarily from carbon embedded in the goods and services they purchase from other businesses. Carbon is embedded in the goods and services a company purchases when its suppliers use fossil fuels in the production of those goods and services.

Figure 2 displays the share of industries’ carbon footprints attributable to their direct emissions vs. those embedded in their supply chain. The industry categories of electric power generation, transportation, manufacturing, agriculture, mining and construction have the highest direct emissions share. For the electric power generation and transportation industries, more than 90% of their carbon footprints result from their use of fossil fuels. In contrast, all of the other industry categories have a majority of their carbon footprint embedded in their supply chains. Within each industry, carbon footprints vary from company to company.

Figure 2. Direct emissions and carbon embedded in supply chains (US energy-related CO2 emissions)

Comparing different industries that contribute similar overall amounts of emissions to the economy reveals how varied emissions sources can be. It also illustrates why strategies for addressing emissions need to be tailored to the specifics of each industry and company. For example, while the transportation and manufacturing industries account for similar overall shares of emissions in the economy, Figure 2 shows that their breakdown of direct vs. embedded supply-chain emissions is very different, with transportation incurring 92.8% of its carbon footprint directly and manufacturing only incurring 30% directly.

Notably, the carbon footprint of a company is often segmented into Scope 1, Scope 2 and Scope 3 emissions. This segmentation follows the Greenhouse Gas (GHG) Protocol typically used in ESG reporting. As summarized in Figure 3, Scope 1 emissions are direct emissions and Scope 2 and Scope 3 are indirect emissions. Specifically, Scope 1 emissions are those that occur from sources owned or controlled by a company. Scope 2 emissions are supply-chain emissions related to purchased electricity, steam, heating and cooling for the industry’s own use. Scope 3 emissions are all other supply-chain emissions.

Figure 3. Scope 1, Scope 2 and Scope 3 emissions

Case studies — two hypothetical companies

An examination of two hypothetical companies of the same size ($1 billion in annual sales) but in different industries — the truck transportation industry and the aluminum refining and production industry — further illustrates how greatly carbon footprints can vary based on specific company characteristics.

These two hypothetical companies have economic characteristics and carbon emissions representing the average of their respective industries. The estimates are derived from the EY Carbon Modeling Tool, which includes data and modeling of the economic characteristics and carbon emissions of more than 400 industries, as well as supply-chain modeling. (See the appendix for more details.)

Next steps

The increasing importance of ESG to consumers, employees and investors, as well as the increasing attention policymakers are paying to carbon mitigation policies, makes it more vital than ever for companies to understand their carbon footprint. Knowing the size of a company’s carbon footprint and its composition helps quantify its exposure from ESG reporting and carbon-related policy changes as well as identify potential focus areas for mitigation strategies. Company-specific financial modeling and scenario planning can be a helpful tool as companies work through these issues, engage with consumers, employees, investors and policymakers and prepare for a world with rapidly developing ESG reporting, carbon mitigation policies and environmental challenges.