The Difference Between Location and Market Based Scope 2 Emissions

Carbon accounting is a method to inventory, calculate, and report an organization's greenhouse gas (GHG) emissions. Since almost every company uses electricity from their local power utility, Scope 2 emissions from purchased electricity are an important part of every organization's carbon footprint. According to Greenhouse Gas Protocol, the international standard for carbon accounting, there are two methods to calculate Scope 2 GHG emissions from electricity: location-based and market-based.

What's the difference? And which should you use? We'll try to quickly define them and explain here.

What are Location-Based Scope 2 Emissions?

Location-based Scope 2 emissions are emissions calculated based on the average emissions intensity of a local power grid. Let's use a business located in California with one office building in Los Angeles as an example. In LA, the local electricity grid is operated by Southern California Edison (SCE). Every building and customer connected to the grid pays SCE their monthly utility bill, and SCE provides them with electricity.

Under the location-based method, if that California business is calculating its Scope 2 emissions, it will use an emissions factor for the average carbon or GHG intensity of the LA power grid (in kg of CO2e per kWh), and multiply that by its power consumption to calculate Scope 2 emissions from purchased electricity.

kWh of electricity used  x  Local grid emissions factor
= Location-based Scope 2 CO₂e GHG Emissions

The point of the location-based method of calculating Scope 2 GHG is that everyone in the same power grid is equal. We're all using the same electricity from the same generation sources, so we should all calculate our emissions based on the average emissions intensity of that local power grid. No one gets special treatment, and everyone shares the emissions footprint of the electricity grid pro rata based on the amount of power they consume.

A big industrial facility might consume far more electricity than a neighborhood barber shop, but on a CO2e per kWh basis, they should treat the emissions from their energy consumption the same.

Location-based Scope 2 emissions calculations use the local emissions intensity of the power grid

What are Market-Based Scope 2 Emissions?

Market-based Scope 2 emissions are emissions calculated based on a specific purchase contract or agreement for energy. In this example, that same California business is still connected to LA electricity grid. However, in this case, the business decides it wants to contact a renewable energy developer and contract to "buy" clean energy (RPA) or renewable energy credits (RECs) directly from that third party. Even though the business is still connected to the LA grid, receiving and consuming electricity from SCE, the market-based method lets the business to claim the emissions of the renewable energy. Instead of using an emissions factor for the grid, the business can claim "net zero electricity."

kWh consumed  x  Contract source emissions factor
= Market-based Scope 2 CO₂e GHG Emissions

Unlike the location-based method where everyone on the grid is treated as an average customer, the market-based method focuses on the individual organization and its contractual activity in the energy marketplace. Location-based emissions calculations don't factor in instruments or contracts, and instead assigns the local grid average emission factor to all offsite electricity usage, regardless of where it comes from.

Location or Market-Based Scope 2 Method - Which Should You Use?

Since carbon accounting should focus on accuracy, your first instinct might be to choose a market-based Scope 2 emissions calculation, because its more specific to your company. However, generally we counsel against using market-based Scope 2 measurements, and instead suggest you calculate Scope 2 emissions using the location-based method. Here's why:

Electrical energy on a grid is undifferentiated and undifferentiable with respect to its origin. Even if your organization voluntarily purchases renewable energy credits (RECs) or other instruments, these contracts do not fundamentally change or reduce your organization's emissions, nor do they disconnect you from the grid unless you've specifically (and rarely) gone off-grid with your own managed power generation. RECs, renewable energy purchases, and other carbon credits can be accounted for in your organization's carbon offset inventory, but this should be assessed separately as a different inventory line item, not factored into how you calculate Scope 2 emissions from purchased electricity.

In most modern electricity grids, including the United States, Canada, Germany, and elsewhere, purchasing or installing renewable energy does not disconnect you from the local electricity grid. Instead, the electricity your renewable energy system generates is sold or fed back into the grid, often via net metering. You still consume and use grid electricity (unless your renewable energy system is powering an on-site batter or energy storage that's discharging), and everyone on the grid shares in the incremental clean energy benefit for your system.

In effect, your renewable energy system is reducing the carbon intensity of the overall grid, which is ultimately accounted for in the grid's aggregate, average emission intensity factor. The one you can use for your location-based Scope 2 calculation.

Location-based Scope 2 emissions calculations is the more accurate, credible method compared to a market-based Scope 2 approach

Your Next Steps With Carbon Accounting and Emissions Calculations

Today, thousands of companies, including Amazon, Apple, Google, Levi's, Netflix, Unilever, Walmart, and many more all practice carbon accounting and emissions measurement across Scope 1, 2 & 3. Being able to transparently calculate and reduce your emissions is an important indicator for brand reputation and environmental responsibility.

Whether you and your company's new to carbon accounting or have been doing it for years, carbon accounting can difficult, time-consuming work, particularly when it comes to Scope 3 emissions. Working with sustainability experts at hundreds of organizations, we've spent years developing flexible, comprehensive, and easy-to-use carbon accounting software, tools, and methods to help sustainability teams collect data easier, engage stakeholders, do more with less, and understand their full emissions footprint.

We wish you all the best as you continue your carbon accounting journey. If we can be helpful at all (at any step in your process), please get in touch. A central part of our mission and work here at Brightest is enabling better data-driven decision-making (and actions) that help fight and mitigate climate change.