Feature: US power utilities begin adding Scope 3 emissions to climate goals

With a supermajority of major US electric companies now working towards net-zero goals, a new set of first movers are evolving their climate ambitions to include Scope 3 – the largest portion of the power sector's total carbon emissions.

Scope 3 emissions, or those generated by a company's indirect impacts across its value chain, accounted for 75% of the power sector's total emissions in 2019, according to S&P Global data. Most utilities' net-zero goals don't currently include Scope 3, which is hardest category of emissions to quantify and reduce, and instead pertain exclusively to Scope 1 and 2, or the emissions directly associated with a company's operations and energy use. But that appears to be changing.

In February, for instance, both Dominion Energy and Duke Energy expanded their net-zero goals to include Scope 3 emissions stemming from purchased power, their gas distribution systems and consumption by natural gas customers.

For a company like Dominion, whose large gas distribution business comprises a substantial portion of its total emissions, the expanded commitment is significant. In 2019, Dominion's Scope 1 emissions were 34.4 million mt CO2e while its Scope 2 emissions were less than 100,000 mt CO2e, and Scope 3 emissions were 26.6 million mt, the company said in its 2021 climate report.

For Duke, which said that its new goals were now targeting "certain Scope 3 emissions," the category represented about 33% of all its associated emissions, according to the company's 2020 sustainability report.

Sempra, which owns SDG&E and SoCalGas in California and Oncor in Texas, similarly has aims to cut Scope 3 emissions to zero by 2050, recognizing that "being a leader in a net-zero future includes measuring and reducing emissions across the energy value chain," the company says.

"I do think we will see a lot more of them setting scope 3 goals," said Dan Bakal, senior program director of climate and energy at Ceres, a climate-focused investor network. "You need some utilities to break the ice, and that now has happened," he said.

With the ice now broken, others are working to fall in line. In its latest Sustainability Report, PSEG said that it has partnered with consultants to conduct a comprehensive Scope 3 emissions assessment, who found that 77% of its Scope 3 emissions – about 12.2 million mt in total – stems from consumer use of its products.

Southern Company has stated similar aims, saying that while its net-zero goal presently only includes Scope 1 emissions, it is "also committed to working with partners and customers to reduce upstream and downstream emissions," the company says on its websites.

While utilities still don't know exactly how to achieve Scope 3 goals, they recognize there is no alternative, considering dire international climate forecasts and pressure from big investors, Bakal said.

But there may be more than meets the eye with Scope 3 goals, precisely because there is not a clear path to address these emissions, said Sharon Allan, chief strategy officer with the Smart Electric Power Alliance. Just because a company is considering its Scope 3 emissions does not mean it is further along in meeting its carbon reduction goals.

"Right now, while it's a noble goal, there's a lot of things that still have to be unpacked in Scope 3 emissions," Allan said.

The power sector's drive to grapple with Scope 3 may also be accelerated by the Securities Exchange Commission's newly proposed climate disclosure rules, which were unveiled March 21.

If adopted, the SEC would require publicly traded companies and international companies operating in the US to annually report Scope 1 and 2 greenhouse gas emissions. Additionally, companies would be required to report Scope 3 emissions if deemed "material" to their business and if they have emission reduction goals.

"That will likely add another layer of accountability, said Bakal.

Although the proposed rules wouldn't cover privately held companies that don't fall under SEC jurisdiction – a large and growing segment of the economy – the measure would be a historic win for the Biden administration's climate agenda. It would be the first effort by US financial regulators to standardize climate change reporting in annual reports and other public documents.

"Depending on the framing of that, it will provide a methodology and consistency of approach among utilities," Allan said.