To manage against the goals of the Paris Agreement, oil companies like Chevron must factor scope 3 emissions into their capital planning process.

Investors are wielding their power to push portfolio companies into action on climate. This even extends to producers of fossil fuels, some of whom want to be seen as part of the solution, rather than a lost cause. The CA100+, an investor initiative with over $32 trillion under management, is probably the most visible of these efforts, and has resulted in headlines regarding its ability to get concessions from those companies whose products drive global warming.

Reflecting finite climate limits in corporate strategy

Much of their work has surrounded the setting of targets in order to align with the Paris agreement, which was to limit warming to “well below 2ºC” while aiming for 1.5ºC. As it is the cumulative amount of emissions released into the atmosphere that determines ultimate warming experienced, this implies a hard cap on the total amount emissions that can be released in aggregate over the long term for a given warming outcome – “the carbon budget”.  As we have already released a huge amount of carbon dioxide, these limits are increasingly strict – a recent IPCC report put the budgets at 420 gigatonnes of CO2 for a 66% chance of keeping warming to 1.5C and 580 gigatonnes for a 50% chance[1], compared to annual emissions estimated at 41.5 gigatonnes in 2018[2]. Accordingly, the use of oil, gas, and coal will need to peak and fall in absolute terms, and soon.

Given that climate change and fossil fuel demand trends are global, this then raises the issue of how individual companies can do their part and show that they are pulling in the same direction as the rest of the world.

Scope 1 and 2 emissions are a fraction of the whole

Some fossil fuel producers have tried to do this through setting targets relating to the emissions from the extraction process. Chevron is one such example, having set targets to cut its methane and flaring intensity 25-30% by 2023 and announcing that it will link these outcomes to executive pay. Others have set targets relating to their scope 1 and 2 emissions, which include emissions released in operations and in electricity purchased in the supply chain.

However, these cannot deliver Paris “alignment.”  For fossil fuels, by far the majority of their lifecycle emissions – 85% or more for a barrel of oil – are incurred when they are burned, which is categorised as scope 3.

Clearly, intentions to reduce scope 1 and 2 emissions are welcome, like any efforts to control pollution. But they cannot be considered the whole answer in themselves when they ignore so much of the problem.

Extending to scope 3 – but still assuming unchecked growth

Other companies have included scope 3 in their relative emissions intensity targets (like Shell, Repsol and Total), where they would cut total life cycle emissions per unit of energy sold. But, as we have explored in Scope for Improvement[3], even these targets do not square the circle. Each of these companies still plans to get bigger in absolute terms – how can the industry be seen as Paris compliant, when it is collectively assuming fossil fuel production far in excess of its limits? Any fossil fuel producers that are planning to lower output are welcome to put their hands up at this point.

Connect the micro to the macro

Companies argue that they should not include scope 3 emissions in their target setting as it is not up to them what consumers do with their products (although they probably have an inkling of what they will be used for). We believe the importance of scope 3 is not to allocate fault, but to allow a link to the carbon budget. By including the full lifecycle emissions of fossil fuels, we can see how much would fit into a given budget and hence the limits on their use. Companies do not have to claim responsibility for all the emissions associated with their projects, but they can’t ignore them.

That does not necessarily mean that companies have to set targets by reference to scope 3 emissions, although it may be an option if properly formulated. We have repeatedly argued that for a fossil fuel producer to be truly “Paris compliant,” its capital planning must incorporate these absolute physical limits, and its competitive position amongst all the other producers jostling to take part of that budget. In other words, a commitment not to sanction projects that don’t fit into a fixed budget when also factoring in other possible supply options.

Companies might do this in two ways. Firstly, through comparing the carbon budget in tonnes of CO2 to the total CO2 of its projects. Alternatively and more commonly, it might compare its potential production volumes to the demand/supply pathways implied by models that are based on particular climate outcomes to assess which of those potential projects would be the most economic options in that demand pathway. The former is closer to the fundamentals of our climate and avoids “gaming” the system by cherry-picking friendly scenarios, but the latter is easier to apply in practical terms and reflects more of the economic aspects of our energy system.

The importance of climate scenario analysis

Even those companies who have rejected goal setting for emissions from their products recognize that climate constraints impact the capital planning process.

In its most recent climate report, Chevron rejects adopting “targets associated with the use of [its] products…”[4] including changing its “portfolio[] to align with a possible future energy mix…”  Clearly, Chevron is not currently seeking to align its portfolio with the Paris Agreement.

Nonetheless, Chevron contends that it is mitigating transition risk through its strategy of being “among the most efficient producers…”.[5]  Even if Chevron is unwilling at this stage to conform its capital planning to climate constraints, this focus demonstrates that climate risks cut to the heart of capital planning decisions and are therefore a proper focus for investors.

There are different rationales as to why it is important to consider if capital is being allocated to projects that might appear economic today, but would be uneconomic in a climate-constrained, lower demand world. These relate to the different viewpoints and perspectives among both investors and fossil fuel producers.

Firstly there is the issue of risk management regardless of climate intent. A “well below 2ºC” outcome may not be an investor’s or company’s base case, but it might be the actual outcome (particularly since it is the stated international commitment). A company that had invested in assets that turn out to be “stranded” will deliver poor returns compared to one that had sought to align itself with a low-carbon outcome in this case. The implications should be considered and incorporated into investment analysis accordingly, and companies will wish to demonstrate their resilience to investor audiences.

Secondly, there may be a desire to contribute to the aims of the Paris Agreement. Companies which are facing challenges to their social licence to operate and keen to show that they are compliant with a low-carbon outcome will need to understand which of their project options this would end up precluding investment in. On the investor side, there is the portfolio viewpoint to consider – if they own interests in numerous companies across different sectors of the economy, it is no good if their fossil fuel stocks outperform while the effects of climate change cause widespread harm elsewhere. Given the enormous scope of different potential impacts from climate change, investors may decide that they cannot diversify this away and hence mitigation is the only rational economic option.

An absolute carbon budget underpins the whole climate issue, so it is not surprising that the full lifecycle of emissions are considered, particularly for companies where vast majority of a company’s emissions comes from the use of its products.

Robert Schuwerk, Executive Director Carbon Tracker North America and Andrew Grant, Senior Analyst at Carbon Tracker  – with editing from Dan Cronin and Joel Benjamin

[1] IPCC, Special Report on Global Warming of 1.5ºC, October 2018

Available at


[3] Carbon Tracker, “Scope for Improvement”, January 2019.

Available at

[4]  Chevron, Update to Climate Change Resilience: A framework for decision making, (2019).

[5]  Id.