Scope 2: Location vs. Market-based Reporting
Scope 2 emissions are defined by the Greenhouse Gas (GHG) Protocol as “indirect emissions from the generation of purchased or acquired electricity, steam, heat or cooling consumed by the reporting company.” For most businesses, these emissions will be relevant to the GHG emissions associated with the generation of purchased electricity.
Scope 2 emissions, according to the GHG Protocol and associated guidance can be calculated using location-based or market-based methodologies.
What is Location-based Reporting?
GHG Protocol: A location-based method that reflects the average emissions intensity of grids on which energy consumption occurs (using mostly grid-average emission factor data).
The location-based methodology calculates Scope 2 emissions using emission factors specific to the sources of electricity production for the grid from which the electricity is purchased. These emission factors can be regional, sub-national or national, and are made up of a statistical average of electricity generation methods supplying the grid, both renewable and non-renewable.
This method means the benefits of renewables supplying the grid are shared by all users of the electricity sourced from that grid. Therefore, choices made by businesses to opt for renewable energy sources cannot be considered, as electricity drawn from the main grid cannot be traced to its origin and is already accounted for in the emission factor. This includes the purchase and surrender of renewable energy certificates such as Large-scale Generation Certificates (LGCs). The second estimation method, market-based reporting, allows these decisions to be factored into Scope 2 calculations.
What is Market-based Reporting?
GHG Protocol: A market-based method that reflects emissions from electricity that companies have purposefully chosen (or reflects their lack of choice).
Market-based reporting derives emission factors from contractual agreements between energy producers and electricity consumers, providing a more accurate representation of an organisation’s efforts to reduce its carbon footprint. Contractual instruments can range from energy attribute certificates, direct contracts, and supplier-specific emission rates. For this reason, the methodology has been widely adopted in sustainability reporting and GHG management practices.
The Scope 2 emissions are calculated by multiplying the residual electricity (electricity not associated with eligible contractual instruments) with a Residual Mix Factor (RMF). The RMF removes the emission benefit of renewable electricity generation from the emission factor used in the location-based method, thereby avoiding double counting of renewable energy.
Table 1: Comparing location-based vs. market-based methods
What Method Should I Use?
Both!
Either method poses unique positives and negatives, and as such the GHG Protocol requires a dual reporting method – whereby both location-based and market-based approaches need to be presented. Dual reporting allows companies to distinguish changes in their choices from changes in the emissions intensity of the grid. When it comes to achieving corporate goals, either method can be selected for tracking, with many businesses opting for more flexible market-based figures.
Location-based emission estimates provide an accurate representation of the actual physical emissions generated, making them useful for comparison across different operations. Market-based approaches, on the other hand, offer a holistic view of a company’s carbon footprint and, together, deliver a well-rounded Scope 2 summary.
For National Greenhouse and Energy Reporting (NGER) purposes, the location-based method is required (when electricity is purchased from the main grid), and market-based methods are currently voluntary. However, there is a likelihood for dual reporting to become more common in Australia once companies begin to submit financial reports compliant with the AASB S2 Climate-related Disclosures standard. As part of this standard for disclosing details on climate risk, companies are required to disclose Scope 2 emissions using the location-based methodology. If companies have entered into eligible contractual agreements for the purchase of renewable energy, they should also disclose Scope 2 emissions using the market-based methodology.
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