Scope 2 Emissions: Market-Based and Location-Based Emissions Calculation

The GHG Protocol categorizes emissions from the production of purchased energy for a company under Scope 2. What kind of data should a company collect, what are the differences between market-based and location-based calculations, and what emission factors should it use?

The GHG Protocol’s calculation guidelines require a company to divide its emissions into three categories: Scope 1, 2, and 3. This guideline also applies to reporting under the Corporate Sustainability Reporting Directive (CSRD). Scope 2 covers indirect emissions resulting from the production of energy a company purchases.

Scope 2 emissions are divided into four subcategories:

• Purchased electricity,
• Heat,
• Steam, and
• Cooling.

Therefore, a company needs to collect data on the amount of each type of energy it uses annually, where it purchases this energy, and select the appropriate emission factor to calculate its emissions. The most common units for energy consumption data are kilowatt-hours (kWh) or megawatt-hours (MWh).

According to the GHG Protocol, a company must calculate its Scope 2 emissions in two ways:

• Market-based, and
• Location-based.

Both methods use the same energy consumption data, but the emission factors differ. What are the practical differences between these two approaches?

📍 Location-Based Emissions Calculation

Location-based calculations determine the actual emissions generated from the energy a company uses. This method uses the average emission factor of the local electricity grid or other energy networks. It reflects the electricity available in the grid and the emissions generated from its use, regardless of whether the company has a renewable or standard electricity contract.

In other words, even if a company has a wind power contract, the electricity it uses is actually a mix of different types of electricity produced by various energy companies supplying the grid.

Typically, location-based calculations use country-specific average emission factors for electricity or other energy networks. Companies must also calculate emissions from heat, steam, and cooling both location- and market-based. It is important to ensure that the emission factor used reflects not only the electricity produced in the country but also accounts for the impact of imported electricity.

Thus, the geographic location of the company’s facilities directly determines the emission factor used in location-based calculations.

The type of energy contract does not affect the result of location-based emissions calculation.

🎯 Market-Based Emissions Calculation

Market-based Scope 2 emissions calculation reflects the company’s choices and their impact on the size of emissions.

Unlike location-based calculations, the emission factor in market-based calculations depends on the type of energy contract the company holds.

For example, the market-based emission factor for renewable solar power is exactly 0 kgCO2e/kWh, while the emission factor for coal-powered electricity might be 0.4 kgCO2e/kWh.

Companies should obtain the emission factors used in market-based calculations directly from their energy providers. For instance, electricity companies must legally disclose the emission factor of the electricity they produce openly to customers on their websites or electricity bills. Companies should use these supplier-specific emission factors in market-based calculations.

If a company uses renewable electricity, it should verify the origin of the electricity using the Guarantees of Origin system used in Europe. This allows the company to use the emission factor for renewable electricity in its calculations. Certificates are obtained directly from the electricity company.

❓ What if a company does not know its energy provider, cannot find the correct emission factor on the energy company’s website, or cannot verify the origin of renewable electricity?

In such cases, the company should use the residual-mix emission factor. The residual mix accounts for electricity consumption and production that is not certified for origin. In Finland, for example, the Energy Authority announces the annual residual mix emission factor.

GHG emissions should be reported in two ways

Once a company has calculated its Scope 2 emissions both location- and market-based, the overall result of the company’s total emissions calculation must also be reported in two ways. In other words, although the emissions in categories 1 and 3 do not need to be calculated both location- and market-based, the total result of the scope emissions combined must still be reported in these two ways.

Choosing Scope 2 emission factors requires precision

Choosing emission factors for Scope 2 calculations requires precision. For example, calculating emissions from energy use in company-specific emissions calculations and product-specific lifecycle assessments (LCA) involves different methods. This difference is best illustrated when selecting emission factors for renewable electricity.

In product-specific LCAs, the emission factor for purchased renewable solar power should account for the lifecycle emissions of the solar panel, including manufacturing and raw materials used. Therefore, the emission factor for renewable solar power is not 0 but, for example, 0.02 kgCO2e/kWh.

In company-specific emissions calculations, the emission factor for purchased solar power in Scope 2 would be 0, as there are no emissions during the production phase. However, company-specific emissions calculations must also consider lifecycle emissions, categorized under Scope 3 “Fuel- and energy-related activities” (upstream category 3).

Therefore, when selecting emission factors, ensure they are suitable for company-specific calculations. Additionally, confirm that the emission factor corresponds to the correct calculation method, whether location-based or market-based.

How to identify a Scope 2 emission source?

It is important to remember that not all activities related to electricity, heat, steam use, and cooling fall under Scope 2. For example, energy produced by the company itself, whether renewable or fossil production, falls under Scope 1, where the company’s direct emissions are calculated.

Additionally, attention should be paid to which Scope 2 category each emission source should be placed in. For example, if electricity used for heating a property is recorded as a heating expense in the company’s financial accounting, it should be considered purchased electricity in Scope 2 emissions calculations, not heat. The same applies to steam and cooling. Purchased heat includes, for example, district heating purchased directly as heat.

Utilize results for emission reductions and business development

Scope 2 emissions often constitute the second-largest share of a company’s total emissions, right after Scope 3 emissions. Therefore, companies have significant opportunities to influence these emissions by switching to renewable energy or improving energy efficiency. Examining Scope 2 emissions also allows companies to explore innovative energy solutions and achieve cost savings.