Executive Summary
California's Air Resources Board (CARB) is finalizing mandatory scope 3 emissions reporting rules as part of its SB 253 rulemaking process, requiring companies to disclose carbon emissions across their entire value chains.
- Scope 3 typically represents 70–90% of a company's total footprint and is where emissions are most often hidden through outsourcing and supply chain restructuring.
- CARB is weighing three approaches: all 15 GHG Protocol categories at once, a sector-based phase-in, or a gradual category-by-category rollout.
- The sectoral approach is the weakest option, as it overlooks asset-light companies like AI and software firms that carry enormous emissions through the use of their sold products.
- The strongest path is a category phase-in built around industry-specific assignments and a 95% emissions coverage threshold, rather than a one-size-fits-all category list.
Every year, companies publish sustainability reports, set net-zero targets, and pat themselves on the back for reducing their direct emissions. And every year, the harder-to-see carbon, the kind buried deep in supply chains, hidden in what customers do with their products, buried in the flights employees take and the goods purchased to keep the lights on, goes largely unexamined.
That’s exactly what California’s Air Resources Board (CARB) is trying to change with its proposed scope 3 emissions reporting requirements as part of its SB 253 rulemaking process. But the way CARB designs this framework will determine whether it becomes a genuine catalyst for climate accountability, or a well-intentioned rule that lets the most important emitters off the hook.
What Is Scope 3, and Why Does It Matter?
For the uninitiated: greenhouse gas emissions are typically divided into three scopes. Scope 1 covers direct emissions from a company’s own operations. Scope 2 covers indirect emissions from purchased energy. Scope 3 is everything else, the entire upstream and downstream value chain.
For most companies, scope 3 dwarfs scopes 1 and 2 combined. In fact, they make up approximately 80% of emissions for most companies. We’re talking about the carbon embedded in the goods you buy, the products you sell, how employees commute, how customers use what you make, and what happens when they throw it away. The GHG Protocol identifies 15 distinct categories, from purchased goods and services (Category 1) to investments (Category 15), and for many companies, getting this picture right is where accountability either lives or dies.
A lot of scope 1 and 2 reductions are achievable by simply outsourcing the emissions-heavy work. If you manufacture overseas, your factory’s smoke isn’t on your books. But it should be, and that’s what scope 3 forces companies to confront.
CARB’s Three Options, and What’s at Stake
CARB is weighing three approaches to how scope 3 reporting gets implemented. Each has meaningful trade-offs, and the stakes are high enough that it’s worth working through them carefully.
Option 1: Broad Applicability. All 15 categories, for all companies, with the ability to exclude de minimis emissions categories with explanation.
This is the most ambitious option, and in terms of data completeness, it’s the most compelling. Requiring every company to at least consider all 15 categories means nothing can be quietly ignored. The act of doing a relevancy assessment, running through proxy data and spend analysis to determine which categories are material, is itself a meaningful exercise that forces companies to understand their emissions profile holistically.
The risk is in the burden. Calculating scope 3 for the first time is not trivial. It often requires new data collection processes, supplier engagement, and specialized expertise. Requiring all 15 categories at once could overwhelm smaller companies and dilute the quality of what gets reported.
A thoughtful middle path: rather than mandating all 15 categories, CARB could adopt the GHG Protocol’s own recommendation that companies disclose enough to account for 95% of their scope 3 emissions. Hitting the 95% threshold naturally forces engagement with the most material categories and puts an emphasis on substance over compliance.
Option 2: Sectoral Phase-In. Start with transportation and industrial sectors, given their outsize share of California’s emissions.
This is the option that sounds reasonable until you think it through. Transportation and industrial sectors are certainly large emitters in aggregate but treating them as the obvious starting point misunderstands how emissions actually flow through the economy.
Consider the technology sector. A software company has no factories, no fleet, no manufacturing. Its scope 1 and 2 footprint might be relatively modest. But what about Category 11, use of sold products? The computational demands of AI systems, for instance, are staggering. The upstream energy consumed by customers using large language models is a scope 3 liability that would never surface under a sectoral framework focused on traditional heavy industry.
Or think about what scope 3 actually reveals about the global economy. When American consumers buy goods manufactured in China, those factory emissions get attributed to China’s carbon footprint in national inventories. But in reality, we are the demand. Those are our scope 3 emissions. A framework that lets asset-light companies avoid scrutiny because they don’t fit the traditional “industrial” profile misses this entirely.
Scope 3 reporting exists precisely because scope 1 and 2 can be gamed. Emissions can be outsourced, restructured, and relocated to look better on paper. The sectoral approach creates an incentive structure where companies outside the flagged industries have no reason to look harder at their value chains, and that is a significant blind spot.
Option 3: Category Phase-In. Begin with the most commonly reported categories (business travel, purchased goods and services, fuel and energy-related activities, employee commuting, waste) and expand over time.
This option balances ambition with feasibility, and it’s the most workable path. But only if it’s implemented thoughtfully.
The reason certain categories get reported most often isn’t because they’re the most important. It’s often because the data is easiest to obtain. Business travel and employee commuting show up everywhere because employees submit expense reports and companies can pull payroll zip codes. Those are low-lift data problems.
However, the categories where most companies’ emissions actually lie, purchased goods and services (Category 1), upstream and downstream transportation (Categories 3 and 9), and use of sold products (Category 11), are consistently harder to quantify and typically where the biggest numbers hide.
A category phase-in only generates useful data if CARB avoids treating every company identically. The most material categories vary dramatically by industry. For a manufacturing company, Categories 1, 3, and 11 are likely to dominate. For a professional services firm, Category 1 and business travel are more relevant. For an AI company or cloud services provider, Category 11 could be the single largest line item on the entire emissions inventory.
The right implementation of Option 3 would have CARB do the homework upfront: identify, by sector, which two or three categories are most material, and assign companies within those sectors an industry-specific starting set. Add two categories per year thereafter until the 95% threshold is reached.
A blanket phase-in that starts everyone with the same categories produces data that’s easy to collect but poorly correlated with actual impact, and that defeats the purpose.
The Bigger Picture
Wherever CARB lands, the passage of robust scope 3 reporting requirements marks a meaningful inflection point. Sustainability reporting is moving from voluntary to mandatory, from narrative to numeric, and from approximate to auditable. Companies that have been treating their sustainability disclosures as a communications exercise are about to discover that the rules of the game have changed.
The companies that will fare best aren’t the ones scrambling to achieve the minimum. They’re the ones that have already internalized scope 3 thinking as a strategic tool. Understanding where your emissions sit in the value chain isn’t just about regulatory compliance. It’s about identifying where your supply chain is most exposed to carbon pricing risk, which suppliers are likely to face cost pressure as carbon regulations tighten globally, and where product design changes could reduce long-term liability.
California has always been a bellwether. What CARB designs here will be studied and eventually replicated. The framework it chooses will either set a genuine standard for what meaningful corporate carbon accountability looks like, or it will give companies another compliance exercise to manage around.
The goal should be the former. A 95% threshold applied intelligently, with industry-specific phase-ins and a clear path to full disclosure, would set that bar. Anything less risks letting the most consequential emissions stay in the shadows where they’ve always been.
About FSI’s Scope 3 Services
FSI Consulting helps companies meet California's SB 253 scope 3 requirements with a practical, materiality-first approach. Rather than treating all emission categories equally, we begin with a scope 3 relevancy assessment to identify where your largest sources of emissions actually lie, then focus your time and resources on getting the data quality right where it matters most. The result is a disclosure you can stand behind: rigorous and defensible where it matters most.
Marisa Flower
Sustainability Director
Ethan Krohn
Sustainability & GHG Emissions Manager