In the realm of carbon accounting, Scope 2 emissions play a pivotal role, representing indirect greenhouse gas (GHG) emissions associated with purchased electricity, heat, steam and cooling.
To effectively manage and report these emissions, organisations often turn to two distinct methodologies: location-based and market-based reporting. Let's dissect the nuances of these approaches within the context of Scope 2 emissions to understand their differences and implications.
Reminder: What is Scope 2?
The concept of the three Scopes was invented by the Greenhouse Gas Protocol to address the need for a comprehensive, standardised and holistic approach to accounting for greenhouse gas (GHG) emissions.
Each scope covers a distinct category of emissions, and understanding these scopes is essential for effective carbon accounting and emission reduction efforts.
Scope 2 emissions encompass indirect greenhouse gas emissions that result from the generation of purchased energy used by the reporting entity. These emissions occur outside the organisation's operational boundaries but are associated with its energy consumption.
Examples of Scope 2 emissions include:
Emissions from electricity and heat purchased from external sources, such as utilities
Emissions from purchased steam or chilled water
In a nutshell, Scope 2 emissions reflect the environmental impact of an organisation's energy consumption and are often significant for organisations that rely heavily on electricity or heat from external sources.
Location-based vs market-based reporting
Location-based reporting
Location-based reporting calculates Scope 2 emissions based solely on the average emissions intensity of the grid where electricity is consumed, regardless of the source. It provides a straightforward assessment of emissions associated with energy consumption without considering the origin of the electricity. Under this approach, Scope 2 emissions are calculated using emission factors specific to the geographical region where energy is consumed. The emissions intensity of the electricity grid is the primary determinant, regardless of whether renewable or fossil fuels power the grid.
Market-based reporting
Market-based reporting, in contrast, incorporates the purchase of renewable energy certificates (RECs) or other instruments to offset emissions associated with electricity consumption. It allows organisations to account for the environmental attributes of the energy they consume, reflecting efforts to support cleaner energy sources. By procuring renewable energy, organisations effectively "green" their electricity consumption, reducing the carbon footprint associated with purchased energy.
Considering location-based and market-based reporting
The location-based method is often required as mandatory when disclosing emissions, as it provides a more common comparator and examines an organisations actual impact on the grid. Market-based reporting is better to inform action, but is essentially, it is optional if the organisation has the data.
To make matters more complex, many companies’ GHG inventories will include a mix of operations globally, some where the market-based method applies and some where it does not. In this case, according to the Greenhouse Gas Protocol, companies shall account for and report all operations’ Scope 2 emissions according to both methods.
In a nutshell, this means that if you have no market-based data at all, you should carry out location based-based reporting. If you have some market-based data across your sites, you report both, and for specific areas where you have only the location-based data, you report the same value in the market-based space as well.
In summary, the benefits and pitfalls of each approach include:
Location-based reporting:
Pros: Simplicity and ease of implementation, providing a standardised approach to Scope 2 accounting.
Cons: May not accurately reflect efforts to support renewable energy or incentivise clean energy investments.
Market-based reporting:
Pros: Reflects organisations' commitment to sustainability through renewable energy procurement.
Cons: Requires additional tracking of renewable energy purchases and complexity in emissions calculations.
In conclusion, while both methodologies offer insights into emissions associated with purchased energy, each have positives and negatives depending on organisational priorities, control over energy procurement and environmental sustainability goals. Ideally, a “dual reporting approach” should be taken, which consists of both location- and market-based reporting when the data is available.
More information
Several resources are available when it comes to exploring location-based and market-based reporting, for example:
The Greenhouse Gas Protocol: Offers guidance and resources on Scope 2 accounting methodologies, including both location-based and market-based approaches.
CDP: Provides a platform for organisations to disclose and manage their Scope 2 emissions, including guidance on market-based reporting and renewable energy procurement.
SECR: Includes recommendations on a dual reporting approach, which includes market-based and location-based reporting methods being used.