Scope 2 Emissions: Location-Based vs. Market-Based Carbon Accounting Methods

For organizations working to decarbonize their operations, there is a viable tension between sourcing clean energy locally or regionally through utilities and power purchase agreements (which can be more difficult, costly, and time-consuming) versus sourcing through Renewable Energy Certificates (RECs) and virtual power purchase agreements (VPPAs), which is often a quantity-over-quality scenario and more expeditious choice. But which is the correct one?

When it comes to taking responsibility for Scope 2 emissions, there are many questions that remain. For instance, how should organizations measure these emissions in the first place? What are the implications of that choice for carbon reduction goals? Moreover, will organizations adhere to specific protocols or choose to disrupt global standards? In this article, we’ll take a look at the options and compare the two approaches of measurement—location-based and market-based carbon accounting.

Recapping Scope 2 Emissions

Scope 2 emissions are the greenhouse gasses (GHG) given off when an organization purchases and uses energy sources like steam, heat, cooling, or electricity. According to standard definitions provided by the Environmental Protection Agency (EPA), Scope 2 emissions occur or take place at the location where they’re generated, but they are accounted for wherever they are actually used.   

Scope 2 emissions represent indirect emissions sources–meaning those sourced by an organization from other parties, including utilities and independent suppliers of electricity–and the organization in question puts that energy to use in other ways like manufacturing or standard operations.

In terms of calculating the carbon imprint of Scope 2 emissions, the Greenhouse Gas Protocol provides two options for measurement: location-based and market-based accounting.

What is Location-Based Accounting?

The location-based method of carbon accounting calculates carbon emissions based on the carbon intensity of the local grid area where the electricity usage takes place. According to CDP, location-based accounting is: “A method to quantify Scope 2 GHG emissions based on average energy generation emission factors for defined locations, including local, subnational, or national boundaries.”

For location-based accounting purposes, the local energy grid is considered the geographical location (in particular the electricity grid region) where the energy usage takes place.

What is Market-Based Accounting?

On the other hand, the market-based method for carbon accounting calculates new carbon emissions totals based on the energy sources that organizations have chosen to purchase in advance or in retrospect to offset consumption, whether based on monthly utility bills or more frequent reporting like hourly carbon accounting

Most often, pre-defined energy usage is defined in energy contracts or instruments like Renewable Energy Certificates (RECs). According to the EPA, RECs are a pivotal piece in accounting for energy usage because they “assign ownership to renewable electricity and grid use.” They are also a standard legal instrument for measuring and tracking renewable energy usage in many localities.

How the GHG Protocol Plays a Role in Scope 2 Emissions

The Greenhouse Gas Protocol is a comprehensive global standard for greenhouse gas accounting and reporting. Many internationally-recognized programs and policies filter through the GHG platform in order to better and more accurately report on Scope 2 emissions, regardless of the type of organization or business that produces them.

Over the past decade alone, over 90% of Fortune 500 companies report using the GHG Protocol in their energy and Scope 2 emissions accounting efforts. This widespread adoption means that the GHG Protocol is a key indicator in global energy accounting procedures. 

Implications of the GHG Protocol

The Greenhouse Gas Protocol includes some of the world’s most widely used carbon accounting standards. These policies extend to corporate energy use protocols, guidance for cities and municipalities, mitigation efforts, and governmental or regulatory policies. Overall, the collective goal of the GHG Protocol is to help organizations meet and satisfy their renewable energy goals

Although the most current GHG standards measure Scope 2 emissions on an annual basis, newer methods and tools, such as higher frequency accounting, are aiming to measure Scope 2 emissions on a continual basis. 

As Stanford lecturer Alicia Seiger points out in regards to the SEC’s latest climate-related disclosure requirements, the reduction or “zeroing out” of Scope 2 emissions would make an enormous impact on global energy reporting without interfering with Scope 3 emissions reporting. But to ensure that this worthy goal becomes a reality, organizations must be ready for long-term commitments as the GHG Protocol evolves. Such commitment is bolstered by investing in the right tools and platforms to measure energy consumption and production more accurately.

Which Accounting Measurement is Best for Your Organization?

When comparing options for Scope 2 emissions measurement, organizations have two choices: location-based or market-based. The question then becomes, which one is most appropriate for a specific company in a particular energy usage context?

Many experts in carbon offset research allude to the inherently flawed nature of market-based emissions reporting. These conclusions, like those made in the Carbon Offset Guide, are based on the fact that a market-based process “allows an organization to report Scope 2 emissions based upon a financial transaction that does not alter its physical consumption of energy or the emissions physically associated with its operations or assets.”

As a result, even future GHG Protocols could look different than how they appear today based on changing methods for accurate and precise Scope 2 emissions reporting. 

In contrast, the World Resources Institute has the following to say about location-based marketing methods.

“The location-based method reveals what the company is physically putting into the air, and the market-based method shows emissions the company is responsible for through its purchasing decisions. Both pieces of information tell an important story about the company’s carbon footprint and carbon reduction strategy.”

It’s important to note that the GHG Protocol Scope 2 guidance recommends a dual reporting structure, in which Scope 2 emissions are calculated using both market-based and location based accounting processes in tandem. 

New Guidance is On the Way

Many leading energy experts cast doubt on the effectiveness and validity of RECs, going so far as to say that they mislead companies on accurate emissions reporting. Because RECs allow companies to basically “cancel out” a portion of their emissions, tangible changes in energy usage aren’t always required. This implies that organizations could (either intentionally or unintentionally) be entirely off-course when it comes to satisfying renewable energy goals.

As a result, steps are currently underway to release updated guidance on accounting and reporting standards for Scope 1, Scope 2, and Scope 3 emissions. This new guidance comes on the heels of the SEC’s new disclosure initiatives, in conjunction with other governing bodies like the European Commission. 

Measure Better with Cleartrace

Navigating the carbon emissions accounting process can be cumbersome, particularly as your business or organization grows to meet new requirements and global renewable energy standards. As GHG protocols and energy accounting practices evolve, it’s critical to have a platform that you can trust with your carbon footprint.  

For both energy suppliers and energy buyers, Cleartrace provides clear, verifiable proof of where you are in your emissions tracking journey.

Request a Cleartrace demo today.