Category 2 Capital Goods Scope 3 emissions – The best calculation guidance

Calculating Scope 3 Emissions GHG Category 2 Capital Goods

Category description – Category 2 Capital Goods includes all upstream (i.e., cradle-to-gate) emissions from the production of capital goods purchased or acquired by the reporting company in the reporting year. Emissions from the use of capital goods by the reporting company are accounted for in either scope 1 (e.g., for fuel use) or scope 2 (e.g., for electricity use), rather than in scope 3.

This guidance page for Category 2 Capital Goods serves as a companion to the Scope 3 Standard to offer companies practical guidance on calculating their scope 3 emissions. It provides information not contained in the Scope 3 Standard, such as methods for calculating GHG emissions for each of the 15 scope 3 categories, data sources, and worked examples.

Overview – Category 2 Capital Goods

Category 2 Capital Goods refer to a specific classification within capital goods, a broad category encompassing durable assets used by businesses to produce goods or services. These goods are essential for the operation and expansion of a business, serving as long-term investments rather than short-term expenses. Category 2 Capital Goods typically include machinery, equipment, vehicles, and other tangible assets that facilitate production processes but have a shorter lifespan compared to Category 1 Capital Goods.

Here’s an overview of Category 2 Capital Goods:

Definition and Classification:

  1. Capital Goods: Capital goods are tangible assets used by businesses to produce goods or services. They are distinguished from consumable goods by their longevity and role in the production process.
  2. Category 2 Classification: Capital goods are often categorized based on their lifespan, with Category 2 referring to assets that have a medium-term lifespan compared to Category 1, which includes long-term assets like buildings and land.

Characteristics:

  1. Durability: Category 2 Capital Goods are durable assets designed to withstand regular use over an extended period but typically have a shorter lifespan compared to Category 1 assets.Category 2 Capital Goods
  2. Utility in Production: These goods are essential for the production process, directly contributing to the creation of goods or services by a business.
  3. Depreciation: Like all capital assets, Category 2 Capital Goods undergo depreciation, losing value over time due to wear and tear, technological obsolescence, or market fluctuations.
  4. Investment: They represent significant investments for businesses, requiring substantial financial outlay upfront but offering long-term returns through increased productivity and efficiency.

Examples:

  1. Machinery and Equipment: This includes manufacturing machinery, assembly line equipment, packaging machines, and other industrial tools necessary for production processes.
  2. Vehicles: Trucks, vans, forklifts, and other vehicles used for transporting raw materials, finished goods, or employees within the production facility or to external locations.
  3. Tools and Instruments: Hand tools, power tools, precision instruments, and other equipment used by workers to perform tasks related to production, maintenance, or quality control.
  4. Technology and Software: Computer systems, software applications, and technological infrastructure used to automate processes, manage operations, or analyze data for decision-making purposes.

Importance:

  1. Enhanced Productivity: Category 2 Capital Goods play a crucial role in enhancing productivity and efficiency within a business, allowing for faster production cycles and higher output levels.
  2. Competitive Advantage: Investing in modern, efficient capital goods can provide a competitive edge by reducing costs, improving quality, and enabling innovation in products or processes.
  3. Capacity Expansion: These assets enable businesses to expand their production capacity, meet growing demand, or enter new markets by investing in additional machinery, equipment, or technology.
  4. Risk Management: Upgrading or replacing Category 2 Capital Goods can mitigate risks associated with equipment breakdowns, technological obsolescence, or changes in market demand.

Considerations:

  1. Cost-Benefit Analysis: Businesses must conduct thorough cost-benefit analyses before investing in Category 2 Capital Goods to ensure that the benefits in terms of increased productivity or cost savings outweigh the initial investment and ongoing operational costs.
  2. Maintenance and Upkeep: Proper maintenance and timely upgrades are essential to prolong the lifespan and optimize the performance of Category 2 Capital Goods, reducing the risk of downtime and costly repairs.
  3. Technological Advancements: Rapid advancements in technology may render certain capital goods obsolete sooner than expected, necessitating careful consideration of the asset’s lifespan and future market trends.
  4. Regulatory Compliance: Businesses must comply with regulations and standards governing the use of capital goods, particularly regarding safety, environmental impact, and industry-specific requirements.

Conclusion:

Category 2 Capital Goods form a vital component of business investment, facilitating production processes, enhancing productivity, and driving economic growth. By understanding their characteristics, importance, and considerations, businesses can make informed decisions regarding the acquisition, maintenance, and utilization of these essential assets to achieve long-term success and competitiveness in the marketplace.

Capital goods are final products that have an extended life and are used by the company to manufacture a product; provide a service; or sell, store, and deliver merchandise. In financial accounting, capital goods are treated as fixed assets or as plant, property, and equipment (PP&E). Examples of capital goods include equipment, machinery, buildings, facilities, and vehicles.

In certain cases, there may be ambiguity over whether a particular purchased product is a capital good (to be reported in category 2) or a purchased good (to be reported in category 1). Companies should follow their own financial accounting procedures to determine whether to account for a purchased product as a capital good in this category or as a purchased good or service in category 1. Companies should not double count emissions between category 1 and category 2. See box 2.1 for accounting for emissions from capital goods.

Box [2.1] Accounting for emissions from capital goods

In financial accounting, capital goods (sometimes called “capital assets”) are typically depreciated or amortized over the life of the asset. For purposes of accounting for scope 3 emissions, companies should not depreciate, discount, or amortize the emissions from the production of capital goods over time. Instead companies should account for the total cradle-to-gate emissions of purchased capital goods in the year of acquisition, the same way the company accounts for emissions from other purchased products in category 1. If major capital purchases occur only once every few years, scope 3 emissions from capital goods may fluctuate significantly from year to year. Companies should provide appropriate context in the public report (e.g., by highlighting exceptional or non-recurring capital investments).

Source: Box 5.4 from the Scope 3 Standard

Calculating emissions from Category 2 Capital Goods

Companies may use the following methods to calculate scope 3 emissions from capital goods:

  • Supplier-specific method, which involves collecting product-level cradle-to-gate GHG inventory data from goods suppliers
  • Hybrid method, which involves a combination of supplier-specific activity data (as available) and using secondary data to fill the gaps. This method involves:
    • collecting allocated scope 1 and scope 2 emissions from suppliers Category 2 Capital Goods
    • calculating upstream emissions of goods by collecting available data from suppliers on the amount of materials, fuel, electricity used, distance transported, and waste generated from the production of goods and applying appropriate emission factors using secondary data to calculate upstream emissions wherever supplier-specific data is not available. Category 2 Capital Goods
    • Average-product method, which involves estimating emissions for goods by collecting data on the mass or other relevant units of goods purchased and multiplying by relevant secondary (e.g., industry average) emission factors (e.g., average emissions per unit of good) Category 2 Capital Goods
  • Average spend-based method, which involves estimating emissions for goods by collecting data on the economic value of goods purchased and multiplying by relevant secondary (e.g., industry average) emission factors (e.g., average emissions per monetary value of goods). Category 2 Capital Goods

Different data types used for different calculation methods

Category 2 Capital Goods

Collecting data directly from suppliers adds considerable time and cost burden to conducting a scope 3 inventory, so companies should first carry out a screening (see Introduction, “Screening to prioritize data collection”) to prioritize data collection and decide which calculation method is most appropriate to achieve their business goals.

Box [1.1] The difference between data specificity and data accuracy
Even though the supplier-specific and hybrid methods are more specific to the individual supplier than the average-data and spend-based methods, they may not produce results that are a more accurate reflection of the product’s contribution to the reporting company’s scope 3 emissions.

In fact, data collected from a supplier may actually be less accurate than industry-average data for a particular product. Accuracy derives from the granularity of the emissions data, the reliability of the supplier’s data sources, and which, if any, allocation techniques were used.

The need to allocate the supplier’s emissions to the specific products it sells to the company can add a considerable degree of uncertainty, depending on the allocation methods used (for more information on allocation, see chapter 8 of the Scope 3 Standard).

Figure 1.2 provides a decision tree to help companies determine the most appropriate calculation method for estimating their category 1 emissions. Companies may use different calculation methods for different types of purchased goods and services within category 1.

For example, they can use more specific methods for categories of goods and services that contribute the most to total emissions.

The choice of calculation method depends on several factors outlined in the Introduction, including the company’s business goals, the significance (relative to total emissions) of goods and services within category 1, the availability of data, and the quality of available data.

See sections 7.3 and 7.4 of the Scope 3 Standard for guidance on assessing data quality.

Category 2 Capital Goods

Note * Companies should collect data of sufficient quality to ensure that the inventory:

  • most appropriately reflects the GHG emissions of the company
  • supports the company’s business goals for conducting a GHG inventory
  • serves the decision-making needs of users, both internal and external to the company.

For more information on how to determine whether data is of sufficient quality, see section 7.3 of the Scope 3 Standard. Source: World Resources Institute

The calculation methods for category 1 (Purchased goods and services) and category 2 (Capital goods) are the same. For guidance on calculating emissions from category 2 (Capital goods), refer to the guidance in the previous section for category 1 Purchased goods and services.

Category 2 Capital Goods

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