Scope 1, 2 and 3 Emissions:
A Plain-English Guide for Australian Businesses

Q: Is Scope 3 reporting mandatory under AASB S2?

Yes. Scope 3 reporting is mandatory under AASB S2, with one transitional concession: entities are granted one year of relief from Scope 3 disclosure in their first mandatory reporting period. From the second reporting year onwards, Scope 3 must be disclosed for all material categories, with a documented explanation of any excluded categories. There is no permanent exemption.

Q: Can I offset Scope 1, 2 or 3 emissions with carbon credits?

Carbon credits do not reduce the gross emissions you disclose under AASB S2. The standard requires gross Scope 1, Scope 2 and Scope 3 emissions to be reported separately, in tCO2-e, regardless of any credits used. Credits, if surrendered, are disclosed separately in the Metrics and Targets section so that gross emissions and credit usage are both visible to readers. This is a deliberate design choice — it prevents emissions claims from being obscured by offsetting.

Scope 1, 2 and 3 emissions are the three categories that the GHG Protocol uses to organise every greenhouse gas a business is responsible for. Scope 1 covers what you burn or release directly. Scope 2 covers the electricity you buy. Scope 3 covers everything else in your value chain, from suppliers upstream to customers downstream.

Under AASB S2, Australian entities in the mandatory climate reporting net must measure and disclose all three. This guide explains what each scope means, how it is measured, and where it sits in your AASB S2 disclosure.

What Are Scope 1, 2 and 3 Emissions?

The terms Scope 1, Scope 2 and Scope 3 come from the GHG Protocol Corporate Standard, the global framework that defines how organisations measure greenhouse gas emissions. The three scopes exist to prevent double-counting and to make emissions data comparable across businesses, industries and countries. Every emission your business is responsible for falls into exactly one scope, depending on where it occurs and how directly your business controls it.

AASB S2, the Australian mandatory climate disclosure standard, adopts the GHG Protocol categorisation in full. When you disclose your emissions under AASB S2, you disclose them by scope. This means understanding the boundaries between Scope 1, Scope 2 and Scope 3 is not optional — it determines what numbers appear in your annual report and what assurance scrutiny they receive.

The shorthand most practitioners use: Scope 1 is what you burn, Scope 2 is what you buy, Scope 3 is what flows through your value chain. The sections below break each one down with definitions, examples and the measurement methods Australian businesses are expected to use.

Scope 1: Direct Emissions From Sources You Own or Control

Scope 1 emissions are direct greenhouse gas emissions from sources that your business owns or controls. They are released into the atmosphere by activities happening on your sites, in your vehicles, or in equipment under your operational control. Because you directly control these sources, Scope 1 emissions are usually the most accurate and least disputed numbers in your AASB S2 disclosure.

Stationary combustion — Burning fuels in boilers, furnaces, kilns, generators and on-site power plants. Natural gas, diesel, LPG, coal and biomass all fall here.
Mobile combustion — Fuel burned in vehicles, forklifts, ships, aircraft and other mobile equipment your business owns or leases. Includes diesel and petrol used in fleet vehicles and field equipment.
Fugitive emissions — Unintentional releases — refrigerant gas leaks from air-conditioning and cold storage, methane from gas distribution networks, and venting from oil and gas operations.
Process emissions — Greenhouse gases released by industrial chemical or physical processes, including cement calcination, steel production, aluminium smelting and chemical manufacturing.

Scope 1 emissions are measured by multiplying activity data — litres of diesel burned, tonnes of cement produced, kilograms of refrigerant lost — by published emissions factors. In Australia, the National Greenhouse and Energy Reporting (NGER) determination publishes the factors used for AASB S2 reporting. For most businesses, Scope 1 is the smallest part of the total footprint by volume, but it is the most scrutinised because direct control means direct responsibility. See our carbon accounting methodology guide for the full measurement framework.

Scope 2: Indirect Emissions From Purchased Energy

Scope 2 emissions are the indirect greenhouse gas emissions from electricity, steam, heat and cooling that your business buys and consumes. The emissions are physically released at the power station, not on your premises — but your demand is what drives them, so the GHG Protocol assigns them to your business. For most office-based and service-sector Australian businesses, Scope 2 is the largest single emissions category they can directly influence.

AASB S2 requires Scope 2 emissions to be reported using two methods, and most assurance providers expect to see both. The location-based method uses the average emissions intensity of the electricity grid in your region — for Australia, this is the National Electricity Market (NEM) grid factors published annually by the Clean Energy Regulator. The market-based method uses emissions factors specific to the electricity you have contractually procured, including GreenPower, Power Purchase Agreements and surrendered Large-scale Generation Certificates (LGCs). The two methods can produce very different numbers, which is the point — they let stakeholders see both the grid you sit on and the procurement decisions you have made.

Most Australian businesses already have all the data they need for Scope 2 — it sits in twelve months of electricity bills. The difficulty is not measurement but documentation: assurance providers will ask for invoice-level evidence, meter data where available, and proof of any renewable energy contracts. Building this audit trail from the first reporting year onwards saves rework later.

Scope 3: All Other Indirect Emissions in Your Value Chain

Scope 3 emissions are all indirect emissions, other than purchased energy, that occur in your value chain — both upstream from your suppliers and downstream from your customers. Examples include the manufacturing of goods you buy, business travel, employee commuting, transport and distribution of products, and the use and disposal of products you sell. For most Australian businesses, Scope 3 is by far the largest part of the total footprint, often accounting for 70 to 90 per cent of overall emissions.

Scope 3 is harder than Scope 1 and 2 for one reason: the data does not live in your business. Supplier emissions, freight emissions and product-use emissions all sit in other organisations’ systems, and gathering them requires deliberate engagement with the value chain. AASB S2 acknowledges this difficulty by granting a one-year transitional relief — Group 1 entities are not required to disclose Scope 3 in their first mandatory reporting period. From the second year onwards, Scope 3 disclosure is expected, and there is no permanent exemption.

The GHG Protocol divides Scope 3 into fifteen categories — eight upstream and seven downstream. Not every category is material to every business. Industry-specific compliance considerations heavily influence which categories matter most. AASB S2 requires entities to assess which categories are material to their operations and disclose those, with a clear explanation of any categories excluded and why. The table below lists all fifteen categories so you can identify which apply to your business.

The 15 Scope 3 Categories

Cat.	Category Name	What it covers
1	Purchased goods and services	Emissions from making the goods and services you buy. Usually the single largest upstream category for most businesses.
2	Capital goods	Emissions from manufacturing long-lived assets you purchase: machinery, vehicles, IT equipment, buildings.
3	Fuel and energy-related activities	Upstream extraction, production and transport of fuels and electricity you consume in Scope 1 and 2.
4	Upstream transportation	Freight, logistics and distribution of goods you buy, paid for by you or by suppliers on your behalf.
5	Waste generated in operations	Emissions from treatment and disposal of waste produced by your business.
6	Business travel	Air, rail, road and accommodation emissions from employee work travel.
7	Employee commuting	Emissions from employees travelling to and from work, including remote-work energy use.
8	Upstream leased assets	Emissions from assets your business leases from others, where they are not already in your Scope 1 or 2.
9	Downstream transportation	Freight and distribution of products you sell, after they leave your control.
10	Processing of sold products	Emissions from further processing of intermediate goods you sell to other businesses.
11	Use of sold products	Emissions released when customers use the products you sell. For energy-using products this is often the largest downstream category.
12	End-of-life treatment of sold products	Disposal, recycling or incineration emissions from products you have sold.
13	Downstream leased assets	Emissions from assets you own and lease to others.
14	Franchises	Scope 1 and 2 emissions of franchisees, where they are not consolidated into your reporting.
15	Investments	Financed and insurance-associated emissions. Primary category for banks, insurers and investment managers.

How Each Scope Is Disclosed Under AASB S2

Under AASB S2, all three scopes are disclosed in the Metrics and Targets section of the climate-related financial disclosures, which sits inside the annual report. Each scope is reported in tonnes of carbon dioxide equivalent (tCO2-e), broken out separately and not netted against each other. Gross emissions are disclosed regardless of any carbon credits the business has purchased — credits, if used, are disclosed separately further down the report.

Scope 1 and Scope 2 disclosures are subject to mandatory limited assurance from the first reporting year, moving to reasonable assurance over time. Scope 3 disclosures are subject to limited assurance from the second year onwards, after the one-year transitional relief expires. Assurance providers will test the methodology, the source data, the emissions factors applied and the calculation logic — which is why the data trail behind each number matters as much as the number itself.

Group 1 entities — the largest Australian businesses — began reporting for financial years starting on or after 1 July 2024. Group 2 follows from 1 July 2026 and Group 3 from 1 July 2027. Each group’s disclosure must include all three scopes (with the first-year Scope 3 relief applied), assessed against the materiality threshold the entity has set.

Frequently Asked Questions: Scope 1, 2 and 3 Emissions

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

Scope 1 emissions are released directly by your business — fuel burned in your vehicles, gas burned in your boilers, refrigerant leaks from your equipment. Scope 2 emissions are released by someone else when generating the electricity, steam, heat or cooling that you buy. You control Scope 1 sources directly; you influence Scope 2 through your procurement decisions.

Is Scope 3 reporting mandatory under AASB S2?

Yes. Scope 3 reporting is mandatory under AASB S2, with one transitional concession: entities are granted one year of relief from Scope 3 disclosure in their first mandatory reporting period. From the second reporting year onwards, Scope 3 must be disclosed for all material categories, with a documented explanation of any excluded categories. There is no permanent exemption.

Which of the 15 Scope 3 categories matter most?

Materiality is assessed per business, but in practice Categories 1 (purchased goods and services), 4 (upstream transportation), 6 (business travel), 7 (employee commuting) and 11 (use of sold products) are material for most businesses. Manufacturers, logistics businesses and financial services each have different dominant categories — manufacturers and retailers find Categories 1, 4 and 11 dominate, financial services find Category 15 (investments) dominates, and logistics businesses find Categories 4 and 9 dominate.

Do I measure Scope 2 using location-based or market-based methods?

Both. AASB S2 requires Scope 2 emissions to be disclosed under both the location-based method (using the average emissions intensity of the grid in your region) and the market-based method (using factors specific to the electricity you contractually procured, including any GreenPower or LGC surrenders). The two methods often produce different numbers, and that contrast is what stakeholders use to assess the impact of your renewable energy procurement.

Can I offset Scope 1, 2 or 3 emissions with carbon credits?

Carbon credits do not reduce the gross emissions you disclose under AASB S2. The standard requires gross Scope 1, Scope 2 and Scope 3 emissions to be reported separately, in tCO2-e, regardless of any credits used. Credits, if surrendered, are disclosed separately in the Metrics and Targets section so that gross emissions and credit usage are both visible to readers. This is a deliberate design choice — it prevents emissions claims from being obscured by offsetting.

How are Scope 1, 2 and 3 emissions audited?

Scope 1 and Scope 2 disclosures are subject to mandatory limited assurance from the first AASB S2 reporting year, transitioning to reasonable assurance over time. Scope 3 disclosures are subject to limited assurance from the second reporting year onwards. Assurance providers test methodology, source data, emissions factor application and calculation logic. They expect a complete audit trail — invoices, meter data, fuel records, supplier data requests and methodology documentation.

What units are Scope 1, 2 and 3 emissions reported in?

All scopes are reported in tonnes of carbon dioxide equivalent, abbreviated tCO2-e. This unit converts the warming impact of all greenhouse gases — methane, nitrous oxide, refrigerants and others — into a single carbon-dioxide-equivalent number using globally agreed global warming potential (GWP) factors. Reporting in tCO2-e allows direct comparison between scopes and between businesses.

Need help measuring and disclosing your Scope 1, 2 and 3 emissions?

Carbonhalo provides AASB S2 compliance services for Australian businesses preparing their first mandatory climate report. Our team handles the measurement, the methodology and the assurance-ready data trail so you can disclose with confidence.

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Scope 1, 2 and 3 Emissions: A Plain-English Guide for Australian Businesses

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