A Deep Dive on Scope 2 Emissions: Location-Based & Market-Based Methods

Emissions are classified into scopes for differentiating between direct and indirect emissions of a business and for more accurate measurement and reporting. Scope 2 emissions are all greenhouse gas emissions released into the atmosphere from purchased electricity, steam, heating, and cooling. Scope 2 does not include fuel consumption as that typically happens on-site. They are considered indirect emissions because they occur physically at the location of generation outside of a reporting organization’s control or ownership (in many cases the electricity generator or the utility company). The GHG Protocol carved Scope 2 emissions out of Scope 3 indirect emissions because they are easily measured and allocated to specific companies, whereas Scope 3 is not. 

The majority of our clients’ scope 2 includes purchased electricity, which represents the most significant emissions reduction opportunities for clients. Examples of reduction opportunities include implementing energy efficiency measures, participating in green power markets, installing onsite renewables, procuring unbundled RECS/EACs, and utility voluntary renewable programs. 

The two methodologies recommended for accounting scope 2 emissions are the market-based approach and the location-based (grid-based) approach, which are outlined in detail below. 

Calculating scope 2 emissions

While the emissions calculations for scope 2 do involve complex math, the hardest part is typically the data acquisition, coverage, and accuracy. The GHG Protocol provides two methods for tracking Scope 2 emissions: the market-based method and the location-based method. Scope 2 Guidance by the GHG Protocol now recommends the dual reporting of both methods side by side when accounting for scope 2. Additionally, most companies may just be beginning to report market-based emissions as this is a relatively new methodology, and therefore should be sure to consult experts and the published guidance accordingly. 

For both the location-based and market-based methods, emissions are calculated by multiplying the purchased electricity by appropriate emission factors.

Differentiating between Location- and Market-Based emissions factors: 

Location-based method:

This method of calculation reflects the average emissions intensity of the local electrical grid in which the energy consumption occurs. 

Location-based methods solely consider the carbon intensity in the grid within the location where your physical operations are located and do not factor in any contractual agreements you might have: for example, location-based will not include any renewable energy credits (RECs) you may be able to claim or any other renewables you might be externally sourcing. 

*uses grid average emission factors data: e-Grid subregion emission factors, which divide the U.S. into different regions approximating grid distribution. This is based on the electrical grid and not off of arbitrary state and city boundaries.

The only way to reduce location-based emissions is to simply reduce overall energy usage, or potentially increase on-site renewable generation used directly on the premises of your firm. 

Market-based method:

Reflects emissions associated with electricity suppliers that companies have purposefully chosen, thereby also highlighting a company’s lack of choice to use less carbon-intensive resources. They are emissions associated with electricity a company might be purchasing, which is different from the electricity that is generated locally.

This secondary method of calculating emissions is associated with the same total energy consumption that is referenced while calculating location-based emissions. After calculating scope 2 emissions with both methods, you do not sum the totals together, rather, they are reported separately, side by side to tell two different stories about the same scope 2 activity data. 

It is preferable to use higher precision emissions factors wherever possible and applicable with market-based calculations as outlined in the GHG Protocols Hierarchy of emission factors. 

Contractual instruments included within Market-Based methods: 

• RECs
• GOs
• Direct Contracts 
• Supplier-specific emission rates 
• The residual mix  

These instruments must meet the scope 2 quality criteria outlined by the GHG protocol. If your contracts do not meet the GHG protocol quality criteria, the reporting company can still report on these contracts separately in their ESG/sustainability report to provide transparency, but cannot use them within scope 2 emissions calculations. 

The residual mix: The mix of energy generation resources and associated attributes such as greenhouse gas emissions in a defined geographic boundary left over after contractual instruments have been claimed, retired, or canceled. 

Essentially, residual mix factors are location-based grid average emission factors, but with all REC certificates and other electricity attributes within the market boundary removed, which can result in the residual mix calculation being more greenhouse gas intensive. For companies without any contractual instruments, the residual mix should be used as an emissions factor for the market-based calculation. Whatever consumption is left over after contractual energy consumption is accounted for will need to be multiplied by the residual mix. If residual mix factors are not available for a region, then standard grid-average factors should be used. 

*The U.S. uses Green-e Residual mix factors and due to residual mix factors being a newer concept, published factors do not cover all regions at the moment. 

Why should an organization track its scope 2 emissions?

Although carbon accounting is complex, there are several reasons to shoulder the extra time and costs associated with conducting a carbon inventory. The built environment is responsible for around 70% of all greenhouse gas emissions (38% from buildings and 32% from industry). 73% of emissions are from energy consumption, highlighting the need for increased integration of energy and sustainability, as well as the relevancy of scope 2 emissions accounting as this scope primarily deals with electricity consumption. 

Opportunities with scope 2 accounting: 

• Reduce energy use: energy conservation, efficiency upgrades, or supply switches to lower carbon electricity 
• Financial savings 
• Benchmarking from year to year on improvements made by energy conservation measures and against peers 
• Choosing better physical locations for future building sites:
  • Calculating scope 2 provides a deeper understanding of grid emissions factors highlighting that some areas of the U.S. have “dirtier” energy mixes or more carbon-intensive grids than other locations. 
• Increase customer loyalty/satisfaction: low emissions of goods and services are valuable to consumers 
• Improve stakeholder relations 
• Transparency in sustainability reporting 

Resources: 

The Greenhouse Gas Protocol has released extensive scope 2 guidance : 

GHG Protocol Scope 2 Guidance 

Other resources:

Climate Registry Scope 2 FAQs

Green-e Energy Summary of WRI Scope 2 Guidance